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Supply Chain
1
The bullwhip effect - Small changes can
reverberate through a supply chain,
causing huge swings of inventory and
production levels.
DOWNSTREAM UPSTREAM
Consumer Sales
Order Quantity
200
150
100
50
0
Order Quantity
Retailer's Order
Order Quantity
200
150
100
50
0
Order Quantity
2
Order Quantity
Wholesaler's Order
200
150
100
50
0
Order Quantity
Order Quantity
Manufacturer's Order
200
150
100
50
0
Order Quantity
Sterman’s Experiment
Variability in the amplified order is attributable
to the irrational decision making of the
participants
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What causes the Bullwhip Effect?
However…
Rational behaviour of the participants
within the supply chain infrastructure
causes the Bullwhip effect
Hence,
In order to control the supply chain, the
focus needs to be on modifying the
chain’s infrastructure, rather than the
decision maker’s behaviour
4
Demand Forecast Order Batching
Demand Forecast
Updating
Updating
What causes the Bullwhip
Effect?
Price Fluctuation Rationing & Shortage
Gaming
Upstream Downstream
5
Demand Forecast Order Batching
Updating Order Batching
What causes the Bullwhip
Effect?
Price Fluctuation Rationing & Shortage
Gaming
Periodic Ordering
Companies place orders in bulk either weekly/monthly
Order Batching
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Companies normally accumulate demand &
place orders in batches
Push Ordering
Order Batching
Overall,
If order cycles were evenly spread out, the bullwhip
effect would be minimised
But, more often than not, order cycles overlap, mostly
at the beginning of the month, compounding the
bullwhip effect
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Forward Buying
Forward Buying
8
Forward Buying
Pitfalls
9
Rationing & Shortage Gaming
When demand for a product exceeds
supply, manufacturers ration products to
customers
Knowing this, customers exaggerate their
real needs when they order
They place duplicate orders with
multiple suppliers, buy from the first one that
can deliver, and then cancel all duplicate
orders
Eliminate Gaming in
Stabilise Prices Shortage Situations
10
Demand
Avoid Forecast
Multiple Break Order Batches
Updating
Demand Forecast
WhatUpdates
causes the Bullwhip
Effect?
Stabilise Prices Eliminate Gaming in
Shortage Situations
Avoid Multiple Demand Forecast Updates
11
Avoid Multiple Demand Forecast Updates
12
Avoid Multiple Demand Forecast Updates
Information Visibility
Initiatives:
13
Avoid Multiple Demand Forecast Updates Efficient Consumer Response (ECR)
14
Devise strategies for smaller batches or
more frequent replenishment
Large order batches/Low order frequencies result
from:
Break Order Batches
15
Reduce forward buying by reducing the
frequency & level of wholesale pricing
16
Eliminate Gaming in Shortage Situations
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Eliminate Gaming in Shortage Situations
In Summary…
18
The Bullwhip Effect in the
Supply Chain
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