Bullwhip Effect

Posted in Operations & IT Articles, Total Reads: 8469 , Published on 30 October 2010
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Bullwhip Effect also known as whiplash effect is a phenomenon observed in forecast driven distribution channels. It is basically the amplification of the demand variance up the supply chain, from the customer to factory, as demand information passes back through the supply chain. The issues associated with bull whip effect are excess inventory, quality problems, increased raw material costs, increased shipping costs, lost sales and lost customer service.

 

Bullwhip

The example given below can help us in understanding the Bullwhip Effect better

Company X produces widgets for sale on the open market

Customer demand for Company X’s widgets become stagnant

Retailers offer a sale promotion to boost sales of Company X widgets

Retailers fail to notify manufacturers of sales promotion

Company X assumes that the demand for widgets has increased

Company X increases inventory to allow for increased manufacturing of widgets

Company X notifies part suppliers of increased demand

Suppliers increase inventory to meet demand.

 

Therefore distorted information along the supply chain caused the inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and other problems which are associated with the Bullwhip Effect.

 

The major causes of Bullwhip effect are

1. Demand Forecast Updating

Demand forecast updating refers to the situation where demand is non-stationary and one uses past demand information to update forecasts.

2. Rationing Gaming

The rationing gaming refers to the strategic ordering behavior of buyers when supply shortage is anticipated.

3. Order Batching

When fixed order cost is nonzero, ordering in every period would be uneconomical, and batching of orders would occur.

4. Price Variations

Price variations refer to non-constant purchase prices of the product.

 

Bullwhip effect as seen in a traditional supply chain:

 

bullwhip SCM

 

Impact of Vendor Managed Inventory on causes of Bullwhip effect:

 

bw

 

 


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