Bullwhip Effect

The bullwhip effect is the uncertainty caused from the distorted information flowing up and down the supply chain.

 The bullwhip effect is a short hand term for a dynamical phenomenon in supply chains. It refers to the variability of order rates to increase as they pass through the echelons of a supply chain towards producers and raw material suppliers.

 The bullwhip problem refers to the tendency of replenishment orders to increase in variability as one moves up a supply chain. As smooth final customer demand patterns are transformed into highly erratic demand patterns for suppliers the information in the chain gets distorted.

Variability in the Supply Chain

Symptoms of the bullwhip effect

Excessive inventory Poor forecasts Insufficient capacities Unavailable products Long backlog Costly shipments Overtime for the labour

Causes of the bullwhip effect

Promotional sales Volume and transportation discounts Demand forecast Long lead times Inflated orders

Measuring the bullwhip effect

Having studies about the bull whip effect, it is important to take some measures regarding the performance of the bullwhip effect. A simple metric that often results naturally from an analysis of how the bullwhip effect is generated is also called variance ratio which can be seen below. Indeed this is by far the most common bullwhip measure in the literature. Bullwhip = Variance(orders)/Variance (demand)

 A bullwhip measure equals to one; implies that the order variance is equal to the demand variance, or in other words there is no variance amplification. A bullwhip larger than one indicates that the bullwhip effect is present (amplification); where as bullwhip smaller than one is referred to as a smoothing, meaning that the orders are smoothed (less variable) compared to the demand pattern.

 Moreover it is also important to measure the net stock since this has a significant impact on customer service. (The higher the variance of the net stock, the more safety stock required. Thus to measure the performance of the bullwhip another metric which can be looked at is as follows NS(Amp)=Variance(Net stock)/Variance(Demand)

Bargaining and Negotiations

Good negotiation actually either gets you to the point where you can bargain or better yet get you to the point where you dont need to bargain at all. Bargaining is what people typically think of as haggling, point counterpoint or pushing back and forth in what many people look at as a zero sum game. Most people look at point counter point as being all that negotiation involves. What I want, what Im unwilling to give up and what Im willing to trade in order to get what I want.

 Negotiation is a broader communication between two people that involves what influences the other side and what drives them

 In negotiation theory, the best alternative to a negotiated agreement or BATNA is the course of action that will be taken by a party if the current negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. BATNA should not be confused with the reservation point or walkaway point.

References
On Replenishment Rules, Forecasting and the Bullwhip Effect in Supply Chains By Stephen M. Disney, Marc R. Lambrecht