A Company’s inventory management strategy is one of the key
factors responsible for its success and failures. Inventory can be physical in
case of tangible goods and nonphysical in terms of airline bookings, hotel, hospital
beds etc. Fluctuation in demand leads to overstocking and under-stocking of
goods. The bullwhip effect is a phenomena observed due to such variability in
demand.
In the bullwhip effect, the demand variation amplifies as
you move along the supply chain from the consumer end to the raw material
provider’s end. It is difficult for suppliers to adjust production in response
to varying demand. This phenomena is observed in all industries and it occurs
because demand is based on forecasting and not the actual consumer demand.
Bullwhip effect mainly occurs due to:
·
Demand is perceived differently by managers at
different check points in the supply chain
·
Many times a slow or inefficient ordering
process causes variability in the system
·
Fluctuation in prices due to promotions and
seasonal discounts
·
Natural disasters which creates disruption in
flow of goods and other services
·
False increase in demand due to shortage of a
particular product
·
Lead time is an important factor to calculate
safety stocks. It is caused due to physical delays as well as gaps in
information [1]
In order to deal with the bullwhip effect, companies need to
analyze which factors affect consumer demand and inventory consumption. Corrective
measures like Point of Sale (POS) system and just in time delivery management reduce
variability in the system. This prevents building up of excess inventory and promotes
information flow throughout the supply chain. Stakeholders can keep track of
the actual demand using the order information from the POS system and place
orders to the suppliers accordingly. Spikes in demand can be avoided by using Computer Aided Ordering (CAD) instead of batch ordering. Eliminating factors
which cause clients to delay orders, like seasonal and volume discounts can
help create systematic ordering patterns. Also, implementing CPFR (Collaborative,
Planning, Forecasting and Replenishment) can result in a well-managed inventory
and less “out of stock” situations.
Walmart, a giant retailer brand, started using RFID (Radio
Frequency Identification) technology to combat the bullwhip effect. It placed
RFID tags on all goods which helped the suppliers keep track of the inventory
levels in real time. 7- Eleven is one of world’s largest franchiser and
operator of convenience stores. The stores are smaller in size as compared to
Walmart and have been designed to meet the needs of individual neighborhood.
Owing to smaller space, inventory management is a major issue for them. They
have formed strategic alliances with neighboring suppliers and use forecasting
methods to better manage their inventory.[3] The Barilla Company, a major pasta
producer in Italy provided discounts to its customers if they ordered truckload
of goods. The promotional offer increased a lot of variability and created
random demand patterns. As a result, the supply chain costs outweighed the
benefits from shipping truck load of goods.Hence, the question arises as to how
create a right balance between the benefits of wholesale discounts and bullwhip
effect.
[1] http://johanneswoe.wordpress.com/category/inventory-control/bullwhip-effect/
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