Tuesday, February 12, 2013

Dampening the Bullwhip

Proctor and Gamble coined the term Bullwhip as a result of the behavior of suppliers and consumers of Pampers diapers. In the case of the diapers, despite an almost constant demand,  P&G found an amplification of the order of variability upstream. As the study of SCM has evolved, the empirical evidence of the existence of the bullwhip problem has become compelling in most industries. The article by Gletzel et al talks about the widespread implications of the effect during the economic downturn of 2008.

 Amongst others, the causes of the Bullwhip effect are known to be error in demand forecasting, order batching, price fluctuation, rationing and shortage gaming. Supply Chains function in a way analogous to control systems, wherein the information from the downstream (sales) acts as a feedback to the manufacturing processes upstream. It is empirically seen and complex simulation using mathematical models tend to indicate the effect can’t completely be done away with . However, the effect itself can be dampened by collaboration and effective sharing of real-time information. For supply chain mangers, the optimization problem of taming the bullwhip is indeed the dominating operations strategy for avoiding undesirable costs.

The two levers at the operational level for the managers are replenishment quantity and replenishment frequency. Optimal decisions for these levers essentially need to information sharing (at the right granularity), planning and partnership between the stakeholders in supply chain. Research at Hewlett Packard indicates effective partnerships and information sharing (of forecast models) as the key success factors in supply chains. However, information sharing is not devoid of its inherent risks and hence both Tibco and HP emphasize the importance of security and governance in mitigating risks involved in information sharing.

Imagine the world in which the power of forecasting and information enables the data sharing of a click on an eCommerce website or an additional footfall in a Walmart to change production levels in the manufacturing facility half way around the world. Will this make companies resistant to any bullwhip? Perhaps, not. But, might it reduce the impact of the business cycle?

  1. "The McKinsey Quarterly." Building a Flexible Supply Chain for Uncertain times. N.p., n.d. Web. 12 Feb. 2013.
  2. Lee, Hau L., V. Padmanabhan, and Seungjin Whang. JSTOR. N.p., n.d. Web. 12 Feb. 2013
  3. "So Why Do We Call It a 'Supply Chain' Anyway?" IndustryWeek Home Page. N.p., n.d. Web. 12 Feb. 2013.
  4. http://wwwis.win.tue.nl/~wvdaalst/LOGgames/papers/scmcpntools.pdf
  5. https://lirias.kuleuven.be/bitstream/123456789/122826/1/0502.pdf
  6. http://www.fhi.sk/files/katedry/kove/ssov/VKOXI/Kuncova.pdf
  7. ftp://h18013.www1.hp.com/pub/services/manufacturing/info/effective_collaboration.pdf
  8. http://www.tibco.com/multimedia/wp-optimizing-the-supply-chain-ecosystem_tcm8-2461.pdf

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