Tuesday, February 12, 2013

How to control Bullwhip Effect in Inventory Management

After reading the article “Building a flexible supply chain for uncertain times”, I am interested in bullwhip effect, especially how to avoid this effect in inventory management. Bullwhip effect will cause serious inventory excess if it is not well-controlled. In this blog, I will explain the bullwhip effect, its causes and some constructive solutions according to my reading.

Bullwhip effect was first found by logistics executives of P&G. When they studied a product of diaper, they found that although the demand of diapers remained constant, the orders increased significantly from retailers to suppliers. This phenomenon was called bullwhip effect. The reason why this happened is that when retailers made order to purchase diapers, they always gave a larger order than what they really needed in order to avoid some emergencies. The wholesalers and the suppliers did the same thing. So the orders were magnified level by level.[1]
In order to avoid bullwhip effect, we must know what causes bullwhip effect. The “beer game” gives us the answer. There are four causes of bullwhip effect: Demand forecast updating, Order batching, Price fluctuation and Rationing and shortage gaming.[2]

"Bullwhip effect" is the characteristics of the supply chain inventory management. Thus, traditional inventory management methods are not good solutions to this problem. Only by adopting innovative supply chain inventory management approach, can this problem be solved. There are four measures each focusing on one cause to reduce the bullwhip effect: Sharing Information, Improving Operation, Stabilizing Price and Establishing Strategic Partnerships.

First, bullwhip effect at each stage of the supply chain is caused by applying demand according to order rather than customers’ demand. And the only need of supply chain is to meet the needs of end customers. If the retailers share point of sale (POS) data with other members of the whole supply chain, the members can respond to changes of the actual customers’ requirement quickly. Therefore, the implementation of sharing POS data in the supply chain, which helps to gain more accurate predictions at each stage of the supply chain, can reduce variability of demand forecast and reduce the bullwhip effect. Second, improving operations, shortening lead time and reducing ordering bulk can reduce the bullwhip effect. These actions need some information systems to support them. Third, developing appropriate pricing strategies can encourage retailers to order small quantities and reduce the advanced purchasing behavior to reduce the bullwhip effect. Fourth, the establishment of the strategic partnership can build up mutual trust, share information to match the supply and demand of each stage of the supply chain well, thus reduce transaction costs.

Bullwhip effect is a big topic in inventory management. I just look into a tip of the iceberg. Nowadays the E-business is developing rapidly. How to reduce the bullwhip effect in the supply chain of this new business is a critical question.

[1] http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf
[2] https://www.google.com.hk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=10&cad=rja&ved=0CKgBEBYwCQ&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.,d.dGY


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