19.04.

2007 1
Erkan BAYRAKTAR
Baheehir University, stanbul
Kazm SARI
Beykent University, stanbul
Impact of Forecasting on the Bullwhip
Effect
19.04.2007 2
Impact of Demand Forecasting on
the Bullwhip Effect
Introduction
Previous Studies
Our Study:
Winters Method (Triple Exponential Smoothing)
for demands with linear trend and seasonality
Simulation Model
Design of Experiment
Analysis of Simulation Ouput
Conclusion
19.04.2007 3
The Bullwhip Effect
The bullwhip effect represents the phenomenon
where orders to supplier tend to have larger
variance than sales to the buyer (i.e., demand
distortion) and this distortion propagates upstream
in an amplified form.
19.04.2007 4
Retailers Orders to Wholesaler
Increasing Variability of Orders up the Supply Chain (Lee et al. 1997b)
19.04.2007 5
Decrease Profitability
Decrease Customer service
rate
Increase Lead Time
Increase Transportation cost
Increase Inventory cost
Increase Production cost
High Bullwhip Effect Performance
Measurement
(Chopra et al. 2001, p.363)
19.04.2007 6
Metters (1997) studied the impact of the bullwhip
effect on profitability by establishing an empirical
lower bound on the cost excess of the bullwhip
effect. Results indicate that the importance of the
bullwhip effect to a firm greatly depending on the
specific business environments and eliminating the
bullwhip effect can increase product profitability by
10-30%.
19.04.2007 7
Causes of the Bullwhip Effect
(Lee et al. 1997a, 1997b)
Demand forecasting
Order batching
Price fluctuation
Rationing and shortage gaming
19.04.2007 8
1. Previous Studies: Moving Average
Chen et al. (2000a):
Correlated Demand AR(1) pattern
Order-up-to inventory control policy
As the lead time (L) increases, the bullwhip ratio
also increases
As the number of observations used in the
moving average (N) increases, the bullwhip ratio
decreases
19.04.2007 9
2. Previous Studies: Simple
Exponential Smoothing
Chen et al. (2000b):
Correlated demand AR(1) pattern
Order-up-to inventory control policy
The larger the smoothing parameter (), the larger the
bullwhip effect,
Longer lead times (L) lead to larger increase in bullwhip
effect,
A retailer facing a longer lead time, L, must use a smaller
smoothing parameter (), in order to reduce the bullwhip
effect
19.04.2007 10
3.Previous Studies: Douple
Exponential Smoothing
Chen et al. (2000b):
Demand with a linear trend
Order-up-to inventory policy
Smoothing parameters , , and lead time have a
significant impact on the bullwhip effect,
Larger the smoothing parameters, the larger the
bullwhip effect,
The increase in variability (bullwhip effect) does
not depend on the magnitude of the linear trend.
19.04.2007 11
Winters Method (Triple
Exponential Smoothing) for
Demands with Linear Trend &
Seasonality
A Simulation Study
19.04.2007 12
Design Of Experiment
The purpose of the design of experiment is to
analyze the impact of :
Smoothing parameters (, , ),
Lead time (L),
Strength of the seasonality,
on the bullwhip ratio.
19.04.2007 13
Independent Variables
Smoothing parameters
Alpha (0.01, 0.25, 0.50),
Beta (0.01, 0.25, 0.50),
Gamma (0.01, 0.25, 0.50),
Lead time
Low ( 1 week ),
Medium (3 weeks),
High (5 weeks),
Strength of seasonality
Low seasonality
Medium seasonality
High seasonality
19.04.2007 14
Demand Types
Demand generator
snormal() noise
season
t)]
52
2
( sin [season
t) slope base ( Demand
t
+

+
+ =

30
15
5
SEASON
100 2 1000 Low
Seasonality
100 2 1000 Medium
Seasonality
100 2 1000 High
Seasonality
NOISE SLOPE BASE DEMAND TYPE
19.04.2007 15
1000
1200
1400
1600
1800
2000
2200
2400
0 10 20 30 40 50
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
0 10 20 30 40 50
1300
1400
1500
1600
1700
1800
1900
2000
2100
2200
0 10 20 30 40 50
High Seasonality Medium Seasonality
Low Seasonality
Demand types with
different strength of
seasonality that is used in
simulation analysis
19.04.2007 16
Simulation Study: Supply Chain Structure
Consist of two members:
one retailer and one manufacturer,
In each period, t, the retailer observes his inventory
position and places an order, q
t
, to the manufacturer
After the order is placed, the retailer observes and
fills customer demand for that period, denoted by D
t
Any unfilled demand is backlogged
There is a fixed lead time between the time an order
is placed by the retailer and when it is received at the
retailer
19.04.2007 17
Simulation Study: Forecasting Technique
It is assumed that retailer uses the winters (triple
exponential smoothing) method to forecast demand
which is formulated as
n= 1,2...s
F
t+n
: forecast at period t+n,
L
t
: level component of demand at period t,
T
t
: trend component of demand at period t ,
S
e
t+n-s
: seasonality index for the same period in previous year,
(Abraham and Ledolter, 1983, p.170)
s n t
e
t
t
e
n t
S n T L F
+
+
+ = ) (
19.04.2007 18
Simulation Study: Forecasting Technique
s - 1 t
1
1
1 t
e
1 1
t
s - 1 t
1 t
1 t
S ) 1 ( S
) 1 ( ) (
) ( ) 1 (
S
+
+
+
+
+ +
+
+
+
+ =
+ =
+ + =



t
t
t t t t
t
e
L
D
T L L T
T L
D
L
(Abraham and Ledolter, 1983, p.170)
19.04.2007 19
Simulation Study: Ordering Policy
We assume that the retailer follows a simple order-
up-to inventory policy in which order-up-to point is
estimated from the observed demand as
: Forecasted demand over L periods
L : lead time + review period ( 1 )
: standard deviation of the demand over L periods
z : is a constant chosen to meet a desired service level,
L
t
L
t t
z D S

+ =
L
t
D

L
t

19.04.2007 20
Dependent Variable
Dependent variable in the design of
experiment is the bullwhip ratio which is
the ratio of variance of the orders placed by
the retailer to the manufacturer to the variance
of the demand observed by that retailer,
Bullwhip Ratio = Var(q) / Var(D)
19.04.2007 21
Simulation Output Analysis
The length of the simulation run is 520 weeks.
First 156 weeks are used to estimate the initial
parameters for the forecasting model,
To reduce the impact of random variations,
ten replicates were conducted for each
combination of the independent variables.
19.04.2007 22
Simulation Output Analysis
Simulation Output Analysis indicates that
bullwhip ratio significantly influenced by
the
Smoothing Parameters (, , ),
Lead Time,
Strength of the seasonality.
19.04.2007 23
Multiple Range Test
19.04.2007 24
Interaction Effect
Between Smoothing
Parameters &Lead
Time
19.04.2007 25
Interaction Effect
Between Smoothing
Parameters &
Seasonality
19.04.2007 26
Further Analysis of Gamma Parameter
Bullwhip Ratio for Various Levels of Gama
In order to better understand the influence of the
gamma parameter on bullwhip ratio we further
make an analysis for various levels of gamma
under different conditions.
19.04.2007 27
Further Analysis of Gamma Parameter :Bullwhip
Ratio for Various Levels of Gamma
Est i mat ed Mar gi nal Means of Bul l whi p Ef f ect
Gama
, 91 , 81 , 71 , 61 , 51 , 41 , 31 , 21 , 11 , 01
E
s
t
i
m
a
t
e
d

M
a
r
g
i
n
a
l

M
e
a
n
s
17
16
15
14
13
12
11
Although, generally increasing values of gamma() increases the
bullwhip ratio, in some points at the medium level of gamma( )
the bullwhip ratio is smallest, not at small values of gamma ()
parameter
Duncan
a, b
120 2, 3621
120 2, 3736
120 2, 3866
120 2, 4154
120 2, 4177
120 2, 4702
120 2, 4831
120 2, 5469
120 2, 6271
120 2, 7147
, 110 , 872 , 372 1, 000 1, 000 1, 000
Gama
, 31
, 21
, 41
, 11
, 51
, 61
, 01
, 71
, 81
, 91
Si g.
N 1 2 3 4 5 6
Subset
Natural logarithm(Ln) transformation is made to
the dependent variable
19.04.2007 28
Conclusion
While seasonality gets stronger, the bullwhip effect goes
down.
Intuitively, it can be said that the bullwhip effect is compensated by
the variability generated by the seasonality.
The impact of gamma ( ) parameter on the bullwhip ratio is
minor when compared with the other smoothing parameters
Increase in lead time (L) leads to an increase in the bullwhip
ratio,
but when alpha () and beta () parameters are chosen small, this
increase is very small when compared with higher values of alpha (),
and beta ()
19.04.2007 29
Conclusion...
Choosing alpha (), and beta () parameter small is
important in order to reduce the bullwhip ratio,
especially when the lead time (L) is long or/and
strength of seasonality is low.
The impact of the gamma( ) parameter on the
bullwhip ratio is different form the alpha () and
beta () parameters. While smaller alpha () and beta
() lead to smaller bullwhip ratio, for the gamma( )
parameter, small and high values lead to larger
bullwhip ratio, but medium values of gamma( )
lead to smaller bullwhip ratio.
19.04.2007 30
Future Area of Research
Assess the impact of bullwhip effect on the
performance measures of the supply chain
(e.g., total cost of the members, total chain
cost, service level of chain members, and
service level of the chain).
Investigate other techniques of time series
analysis for seasonality.
19.04.2007 31
Thank you...
19.04.2007 32
References
Chopra, S., Meindl, P., 2001. Supply Chain Management, Prentice-Hall,
New Jersey
Chen, F., Z. Drezner, J.K. Ryan and D. Simchi-Levi, 2000a. Quantifying
the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting,
Lead Times and Information, Management Science, 46, 436-443
Chen, Y. F., J. K. Ryan and D. Simchi-Levi, 2000b, The Impact of
Exponential Smoothing Forecasts on the Bullwhip Effect, Naval Research
Logistics, 47, 269-286.
Lee, H., Padmanabhan, V. and Whang, S., 1997a. Information Distortion
in a Supply Chain: The Bullwhip Effect, Management Science, 43, 546-
558
Lee, H., Padmanabhan, V. and Whang, S., 1997b., The Bullwhip Effect in
Supply Chains, Sloan Management Review,38, 93-102
Metters, R., 1997. Quantifying the Bullwhip Effect in Supply Chains,
Journal of Operations Management,15, 89-100
19.04.2007 33
19.04.2007 34