Show
AbstractConsider a series of companies in a supply chain, each of whom orders from its immediate upstream member. In this setting, inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions. This paper claims that the information transferred in the form of “orders” tends to be distorted and can misguide upstream members in their inventory and production decisions. In particular, the variance of orders may be larger than that of sales, and the distortion tends to increase as one moves upstream—a phenomenon termed “bullwhip effect.” This paper analyzes four sources of the bullwhip effect: demand signal processing, rationing game, order batching, and price variations. Actions that can be taken to mitigate the detrimental impact of this distortion are also discussed. Visit this collection for free access to more articles showcasing the evolution of INFORMS over the past 25 years. 1. This initiative was engineered by Kurt Salmon Associates but propelled by executives from a group of innovative companies like Procter & Gamble and Campbell Soup Company. See: Kurt Salmon Associates, “ECR: Enhancing Consumer Value in the Grocery Industry (Washington, D.C.: report, January 1993); and F.A. Crawford, “ECR: A Mandate for Food Manufacturers?” Food Processing, volume 55, February 1994, pp. 34–42. 2. J.A. Cooke, “The $30 Billion Promise,” Traffic Management, volume 32, December 1993, pp. 57–59. 3. J. Sterman, “Modeling Managerial Behavior: Misperception of Feedback in a Dynamic Decision-Making Experiment,” Management Science, volume 35, number 3, 1989, pp. 321–339. 4. Sterman (1989); and P. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday/Currency, 1990). 5. For a theoretical treatment of this subject, see: H.L. Lee, P. Padmanabhan, and S. Whang, “Information Distortion in a Supply Chain: The Bullwhip Effect,” Management Science, 1997, forthcoming. 6. M. Millstein, “P&G to Restructure Logistics and Pricing,” Supermarket News, 27 June 1994, pp. 1, 49. 7. V. Carroll, H.L. Lee, and A.G. Rao, “Implications of Salesforce Productivity, Heterogeneity and Demotivation: A Navy Recruiter Case Study,” Management Science, volume 32, number 11, 1986, pp. 1371–1388. 8. Salmon (1993). 9. P. Sellers, “The Dumbest Marketing Ploy,” Fortune, volume 126, 5 October 1992, pp. 88–93. 10. P. Kotler, Marketing Management: Analysis, Planning, Implementation, and Control (Englewood Cliffs, New Jersey: Prentice Hall, 1997). 11. R.D. Buzzell, J.A. Quelch, and W.J. Salmon, “The Costly Bargain of Trade Promotion,” Harvard Business Review, volume 68, March–April 1990, pp. 141–148. 12. Sellers (1992). 13. Ibid. 14. Lee et al. (1997). 15. L. Lode, “The Role of Inventory in Delivery Time Competition,” Management Science, volume 38, number 2, 1992, pp. 182–197. 16. Personal communication with Hewlett-Packard. 17. K. Kelly, “Burned by Busy Signals: Why Motorola Ramped up Production Way Past Demand,” Business Week, 6 March 1995, p. 36. 18. Rory J. O’Connor, “Rumor Bolsters IBM Shares,” San Jose Mercury News, 8 October 1994, p. 9D. 19. M. Reid, “Change at the Check-Out,” The Economist, volume 334, 4 March 1995, pp. 3–18. 20. A. Clark and H. Scarf, “Optimal Policies for a Multi-Echelon Inventory Problem,” Management Science, volume 6, number 4, 1960, pp. 465–490. 21. E.K. Clemons and M. Row, “McKesson Drug Company — A Strategic Information System,” Journal of Management Information Systems, volume 5, Summer 1988, pp. 36–50. 22. Millstein (1994). 23. T. Smart, “Jack Welch’s Cyber-Czar,” Business Week, 5 August 1996, pp. 82–83. 24. G. Stern, “Retailers of P&G to Get New Plan on Bills, Shipment,” Wall Street Journal, 22 June 1994. 25. Reid (1995). 26. H.L. Richardson, “How Much Should You Outsource?,” Transportation and Distribution, volume 35, September 1994, pp. 61–62. 27. Z. Schiller, “Ed Artzt’s Elbow Grease Has P&G Shining,” Business Week, 10 October 1994, pp. 84–86. 28. R. Mathews, “CRP Moves Towards Reality,” Progressive Grocer, volume 73, July 1994, pp. 43–44. The different players in the supply chain — including customers, suppliers, manufacturers, and retailers — have limited control over the whole process, but their actions influence everyone else. As these different parties try to respond to demand fluctuations, they create ripple effects throughout the chain. One of these is the bullwhip effect. This phenomenon is named after the movement of a bullwhip, where a small movement of the wrist becomes a much larger, uncontrolled movement at the end of the whip. In a supply chain, the bullwhip effect occurs when each party gradually escalates an initially small spike in demand. Each member of the supply chain overcompensates for this demand with excess product, leading to increased production, inaccurate demand forecasting, and inconsistent inventories. Fortunately, you can mitigate or prevent the supply chain bullwhip effect with the right resources and planning. Let's look at the impact of the bullwhip effect on supply chain management and what you can do about it. What Is the Bullwhip Effect in Supply Chain Management?The bullwhip effect is the distortion of demand and increased volatility that occurs as forecasts and orders move from the retailer up to the manufacturer. When a spike in demand occurs, each party in the supply chain adds additional products to their orders to act as a buffer. When one party does this, it serves the necessary function of ensuring in-stock products. However, when everyone does it, the result is inaccurate forecasting, stock hoarding, overstock inefficiencies, and out-of-stock products later. Combat the bullwhip effect with integrated supply chain solutions from TrueCommerce Example of the Bullwhip Effect in Action
A spike in demand for 15 units a day has ballooned up to 40 units, many of which won't reach the retailer until after the demand spike is done. Manufacturing products takes time, so what happens if, while those items are being made, an early Spring appears? For the retailer, sales of personal heaters would immediately drop. The retailer's forecasts are then affected, and they won't order more units, even though production has increased. Members of the supply chain can compound the bullwhip effect by hoarding stock. When items appear scarce upstream, many buyers will place large orders to buffer their inventory and stay ahead of low stock issues. This almost ensures that upstream sources will experience scarcity followed by increased production, despite only a slight change in demand. As demand moves up the chain, inventory becomes less controllable and difficult to predict, especially since many members of the supply chain don't cooperate as well as they could. All of this amounts to periods of both overstock and low stock and unpredictability throughout the supply chain. Causes of the Bullwhip EffectWhile the bullwhip effect starts with simple demand spikes, many elements contribute to it:
How the Bullwhip Effect Impacts the Supply ChainThe impact of the bullwhip effect on supply chain management is significant and includes:
How to Control the Bullwhip EffectIf you can keep the bullwhip effect to a minimum, you can ensure more predictable and profitable supply chain management. While the bullwhip effect can have a range of influences, it also has several solutions. Here are some tips on how to reduce the bullwhip effect. 1. Increase Transparency Between Suppliers and CustomersThe bullwhip amplifies because supply chain members don't have a full picture of why buyers are increasing demand. Improving visibility across the chain can help everyone see the context of demand changes. Is there an increase in orders because of a discount, seasonal needs, or something else? Members can see what may be causing overreactions and address them before the bullwhip gets out of hand. Some tools that help here include:
2. Start PredictingSmart predictions are key to better understanding demand changes. With a wide range of intelligent inventory software on the market, you can collect data on just about every business element and turn it into valuable, actionable insights for avoiding the bullwhip effect. Predictive analytics use advanced algorithms and calculations to interpret historical trends and current events and generate forecasts of future trends. These programs can range from simple to complex, many using artificial intelligence (AI), but all of them rely on high-quality data. Demand forecasting can be complicated, and predictive analytics can improve this process by pulling in more information. Predictive tools can also help you determine ideal inventory levels and shipping methods. Combining predictive tools like VMI with IoT devices, other data-collection tools, and EDI, means you can significantly improve inventory management. Much of the industry is already getting on board — according to Gartner, over 50% of supply chain organizations will invest in AI and advanced analytics applications by 2024. 3. Encourage Collaboration Between PartnersDifferent members of the supply chain need to work together to avoid feeling the bullwhip effect. Shared information plays a large role here, allowing different entities to collaborate and see more of the supply chain than just the level they control. Collaboration is especially important in increasingly globalized supply chains, where products may cross borders and go through many different businesses. Real-time data and end-to-end visibility are essential. Sending purchase orders, for example, is a far cry from strategic collaboration in which you and your partners work to improve forecast accuracy, strengthen relationships, and prevent disruptions before they occur. Aligning your key performance indicators (KPIs) and other performance measures can help everyone stay on the same page. VMI is foundational for this approach, as it puts the necessary information for working together in one place, and leverages EDI to both push and pull inventory and order data between partners. Robust collaboration is one of the best defenses against the bullwhip effect, which generally comes from disconnected inventory practices. 4. Reduce Lead TimesLong lead times can exacerbate the bullwhip effect, with products arriving far after they're needed and becoming overstock. Reducing lead times across the board and placing orders when demand is high can mitigate bullwhip issues. The factors affecting lead times will vary by the needs of your business, but some strategies to shorten lead times include:
Lead times should be both short and accurate. Even if you can't reduce your lead times much, correctly calculating them can help ensure better order fulfillment and less customer disappointment. 5. Minimize or Address Price FluctuationsIf you frequently run promotions or discounts, you may be disrupting typical buying patterns and have more trouble predicting demand. Evaluate your stance on these promotions and see if they might be causing more interruptions than benefits. You may not need to get rid of them altogether but consider minimizing them or incorporating them more accurately into your predictions and forecasts. Implementing the Right TechnologyThe bullwhip effect can quickly get out of control and hit every part of the supply chain with adverse effects. Visibility and transparency are some of your best resources for fighting the bullwhip effect, and the right platforms can help you find both. Whether you're a seller, supplier, 3PL, or another member of the supply chain, you can mitigate the bullwhip effect with TrueCommerce. We're your one-stop-shop for trading partner communications with solutions across the board, including fully managed EDI services, a comprehensive VMI solution, and next-generation supplier management portals. TrueCommerce helps you connect with every entity of the supply chain so you can better avoid the bullwhip effect and keep your inventory consistent. All of this comes with the 24/7 expertise of our support team. To learn more about TrueCommerce solutions and how they can help you reduce the bullwhip effect in supply chain management,
reach out to a team member today or request a free demo!
What is it called when distorted product demand information ripples from one partner to the next throughout the supply chain quizlet?The bullwhip effect occurs when distorted product-demand information ripples from one partner to the next throughout the supply chain.
What is information distortion in supply chain?This variation in demand orders is called the information distortion. When this variation in demand orders are used for inventory levels, than these levels are bigger than the actual demand is in the supply chain for the products. Dealing with the information distortion has different causes.
Which effect is caused by a distortion of information about the demand for a product as it passes from one entity to the next across the supply chain?The bullwhip effect is the distortion of information about the demand for a product as it passes from one entity to the next across the supply chain.
What causes the bullwhip effect in supply chain?Bullwhip effects are created when supply chain members process the demand input from their immediate downstream member in producing their own forecasts. Demand input from the immediate downstream member, of course, results from that member's forecasting, with input from its own downstream member.
|