Cracking the 'Bullwhip Effect'

Procter & Gamble first introduced the concept of the ‘bullwhip effect’ in the 1990s to explain increasing order behavior of Pamper diapers between the customer and the supplier. There were fluctuations in orders that P&G was receiving from the wholesalers and this was intriguing because even though the variability in demand among babies was small, there was a marked variability in demand from retailers. The main reasons for the cause of bullwhip effect were identified as follows:-

     1)Demand Signal Processing- Companies use forecasting to determine capacity planning, production scheduling, material requirement and inventory control.One section of the supply chain updates its demand forecast, but this is only seen by its immediate neighbor in the chain, and not by the chain as a whole.

2   2)Order Batching- It is necessary to accommodate seasonal demand or delivery pricing structures. Retailers and distributors tend to order greater quantities at a time. For example, if a company places order monthly, supplier will face erratic downstream orders, since there will be a spike in a month and no demand orders in the rest of the month.

3   3)Price Fluctuations- Price fluctuations are generally resulted by “forward buy” arrangements between a company and its supplier. When retailers take the initiative to offer sales promotions to their customers or when vendors offer different price discounts, orders may vary and the bullwhip effect can occur.

4   4)Shortage Gaming- If a demand of a product exceeds its supply, shortage gaming occurs. As a result of insufficient amount of the product, supplier rations the product between downstream members. After that, downstream members place demand orders that exceed their needs to finally reach their actual needs. After shortage time passes, placed demand orders will be canceled since they were inflated. Shortage gaming causes the bullwhip effect because the actual demand variance is amplified as we moved from the customer to the supplier.

So how can we crack the bullwhip effect?

Companies need to gather real-time product data and eliminate the distortion and uncertainty of data in the supply chain. One way is for the retailers to share the sales information with the manufacturers and distributers.The business link between Walmart and P&G is a good example of this. This was a revolutionary step resulting from the new Walmart ideology that it did not matter what competitors might thereby learn about the business so long as the Walmart relationship with their suppliers grew stronger thus resulting in a better service for customers. P&G now take the consumer information from Walmart at point of sale and decide how much stock to deliver to the stores so as to ensure consumer demands are satisfied. It is P&G’s responsibility to keep Walmart shelves full through a Vendor Managed Inventory (VMI) strategy. Walmart uses Radio Frequency Identification (RFID) technology to track shipments, time deliveries and keep inventories; thus making the supply chain more efficient.

Some other ways to minimize the ‘bullwhip effect’ and increase business performance:-

• Minimize the cycle time in receiving projected and actual demand information.
• Establish the monitoring of actual demand for product to as near a real time basis as possible.
• Minimize or eliminate information queues that create information flow delays.
• Eliminate incentives for customers that directly cause demand accumulation and order staging prior to a replenishment request, such as volume transportation discounts.
• Minimize incentivized promotions that will cause customers to delay orders and thereby interrupt smoother ordering patterns.
• Offer your products at consistently good prices to minimize buying surges brought on by temporary promotional discounts.

References

http://www.supplychain-forum.com/documents/articles/ACF62.pdf

Ertek, G., Eryılmaz, E. (2008) “The bullwhip effect in supply chain: Reflections after a decade” . CELS 2008, Jönköping, Sweeden.