If You Don't Want to Get Hit by the Bullwhip, Examine Your Forecasting Technique

In supply chain management circles, "Inventory" continues to be the single issue driving discussions among managers around the water cooler. In fact, "Inventory Management and Planning" was listed as the #1 concern for senior decision makers, as reported by Crimson & Co.'s list of top supply chain concerns for 2011.

On this topic, one of the ideas discussed in class this week was the bullwhip effect, and Supply Chain Managers have been looking for ways to manage their inventory in a way that can minimize its impact on inventory levels throughout the supply chain. The consequences of the effect can be severe. It results in each level of the supply chain retaining additional safety stocks in order to be prepared for anticipated demand. This can also lead to inefficient production and/or excessive inventory. And if a supplier fails to meet production quotas, this can also result in contractual penalties.

The effect can be minimized in a supply chain if there is a good system of information sharing among the members, which translates to coordinated action. To further minimize the bullwhip effect, supply chain managers have sought to reduce uncertainty, variability, and lead time in placing orders. (While these sort of strategies can all have broad effects on reducing inventory cost, a paper published in the International Journal of Information Technology & Decision Making argues that it is more variability in lead time, rather than mean lead time, that affects inventory policy and total supply chain cost.)

One way to demonstrate the bullwhip effect is a simulation generally called the "beer game". (For fun, play the beer game here!) This simulation, which takes the form of a simplified beer supply chain, consists of a single retailer, a single wholesaler who supplies the retailer, a single distributor who supplies the wholesaler, and a single factory with unlimited raw materials that brews beer and supplies the distributor. To further simplify things, each component in the supply chain has unlimited storage capacity, and there is a fixed supply lead time and order delay time between each component.

Some new research has taken inspiration from this simple game and created a series of much more complicated simulations in order to try and explain which factors affect the magnitude of the bullwhip effect the most. "Supply Chain Networks With Multiple Retailers: A Test of the Emerging Theory on Inventories, Stockouts, and Bullwhips" (.pdf) published in the Journal of Business Logistics, shows:

"that particular supply chain networks have an impact on the bullwhip effect. Furthermore, the impact of supply chain networks on the bullwhip effect is moderated by the demand forecasting technique used. Finally, supply chain networks, forecasting techniques, and their interactions are found to influence on-hand inventory levels and stockout rates for firms within the supply chain. Results also suggest that no one particular type of supply chain network dominates in terms of dampening the bullwhip effect, lowering on-hand inventory levels, or reducing stockout rates. The optimal network depends on the forecasting technique used and other supply chain factors."

What I found most interesting in the article's conclusion was that eliminating forecasting eliminated a bullwhip effect in the supply chain. I also noted that the article concludes that, "when a proper forecasting technique is used, adding retailers to a supply chain does not mitigate the bullwhip effect; however, when using last-period forecasting, adding retailers helps to alleviate the bullwhip effect."

Questions for Discussion:
Based on our class discussions of the Bullwhip Effect, were any of the conclusions of this last article surprising to you?

Further, if you did play the Beer Game, did you see evidence of the bullwhip effect in your simulation? (I will admit: I did, and I was not only aware of the bullwhip effect but consciously trying to avoid it)

Finally, based on what we know about this subject, what is your intuition as to the most effective way to mitigate a bullwhip effect as a supply chain becomes increasingly complex?