Origin and Development
The terminology, bullwhip effect, originates from the reality, according to which a light motion of the handle of a bullwhip can results in making the tip of the belt flay wildly at speed more than 800 miles per hour, about 20 percent quicker than speed of sound, producing a sonic boom. One of the major issues occurred at the time of implementation of supply chain is Bullwhip effect. Bullwhip effect was firstly announced by Procter and Gamble Company (Gundlach and Murphy, 2000). Bullwhip effect refers to the increase in inconsistency of orders as one goes up a supply chain. The Bullwhip effect can also be termed as demand deformation along the supply chain, in other words the demand alteration proliferates upstream in an augmented manner. According to few researchers, there are four basic causes of Bullwhip effect which are demand forecast updating, order batching, shortage gaming and price fluctuations. Bullwhip effect is one of the most basics dynamics in a supply chain management.
Forrester (1961) began the analysis of Bullwhip effect and explained that the inconsistency of the demand to the producers is much higher than that of consumer demand and also the unpredictability in orders will be intensified at each stage in the supply chain (Forrester, 1961). For instance, if there is a wholesaler, a retailer, a distributor and an industry, then only retailer examines the customer demand, the other supply chain employees have to direct their conclusions on the incoming orders, as a result of which there is difference in orders in the supply chain (Hanna and Newman, 2006). Bullwhip effect is responsible for causing a number of ineffectiveness such as excessive investment in inventory, bad customer service, reduced revenues, poor capacity plans, inefficient transportation, and irregular production schedules.
The researchers discovered following four important causes of the Bullwhip effect.
Demand Forecasting: At every time, a downstream individual places order, and an upstream individual places order to upstream individual by predicting the orders which they received from their downstream members, but prediction of demand based on orders in place of end users demand data become highly inaccurate as one goes up the supply chain. This is referred as the greatest contributor for the Bullwhip effect. This can be prevented by contributing a common demand data from which forecasting can be done.
Order Batching: In order to protect order processing system and transportation costs, generally organisations place orders to their upstream members at regular intervals. Bullwhip effect occurs when demands are gathered before placing of orders. Order batching can be prevented by lowering the transportation cost and order processing. Order processing can be minimised by implementing EDI dependent order transmission process. The consequence of order batching is more common in small segments, which results in less bending of demand information and more efficient and effective delivery or production programmes.
Price fluctuations: Increase in demand occurs when business organisations initiates promotions programs such as special discounts, coupons, packages etc which results in buying of more and more goods or products by customers. Therefore, there always happens a price fluctuation at the time of promotional offers launched by company which affects the procurement processes. The best way to control the bullwhip effect because of price fluctuation is to minimise the frequency as well as profundity of producer’s trade promotions.
Figure: Bullwhip effect due to price fluctuations and rational decision making.
(Source: http://www.few.vu.nl/en/Images/werkstuk-moll_tcm39-354834.pdf )
Rationing Game: It refers to the situation when there is high demand from the retailer to producer, and when the capacity of the producer is limited then the producer will share the supply of the good to the retailers. It usually happens when retailer places order in more quantity than demanded. The rationing game intensifies the Bullwhip effect even more than in the existence of demand forecasting only. Rationing game emerges out of imaginary shortage or actual shortage. The supplier can implement the rule for distribution on the basis of sales in the earlier time by the retailer, at the time of shortage. Such rule has been implemented by General Motors, which assigns on the basis of significant sales (Hanna and Newman, 2006).
The best illustration of the bullwhip effect is the famous “beer game”. In this game, contestants (students, managers, analysts and others) perform the roles of consumers, retailers, distributors, wholesalers and suppliers of a famous brand of beer. The contestants are unable to communicate with one another and must accept order decisions on the basis of orders from the other downstream player. Various researchers studied the impact of information, forecasting model and lead time on the Bullwhip effect. In their research, a two level supply chain has been considered which allows one manufacturer and one retailer. In this chain, demand has been followed by auto regression process and in the end it has concluded that the inventory and cost lessening can be achieved by sharing of information.
Methods and approaches utilised to minimise the effect of Bullwhip Effect
The bullwhip effect can be identified as a range of events that causes supplier demand inconsistency up the supply chain. It is an incident that happens in supply chain management when customers overbuy irrespective of their demands. These great, unplanned purchases results in sudden and extreme changes in supply chain management of organisations and are difficult to assuage as they cannot be specifically forecast. Trigger incidences consist of the frequency of orders, different quantities ordered, or the coordination of both events through downstream partners in a supply chain.
The bullwhip effect has been now identified as an unavoidable event of demand variation (Hanna and Newman, 2006).
A number of organisations have achieved a remarkable competitive advantage by understanding the basic reason of the bullwhip effect and operating with their supply chain partners to minimise it. The combined efforts between supply chain members are responsible for minimising inventories and an effective supply chain that is highly responsive to demands of consumers. In certain cases, manufacturers have even combined inventories in a planned way to eliminate any supply chain disturbances that might occur due to bullwhip effect.
There are some methods that can be implemented by organisations to decrease the bullwhip effect. These methods are:
Portfolio Planning: Portfolio planning mainly focuses on diversification of the supply base. The aim of the portfolio planning is to engage suppliers in long-term plans to cover maximum part of the expected demand. The left behind demand can be fulfilled by a smaller number of suppliers with short-term contracts who has the ability to respond speedily to changes in demand. A premium has been received by these short-term contract suppliers as they are handling the risk in this circumstance. Also, this short-term contract relationship with suppliers facilitates manufacturers to speedily adjust to change in demand (Richason and Media, 2014).
The portfolio planning helps in diversifying the risk of manufacturers by solving the issues of procurement in a same way a financial planner would save a client from dangerous fluctuations in the stock market. The portfolio planning aids in protecting organisations against insecurities and vagueness that are not in manufacturer’s control.
Postponement: Postponement is an approach adopted by manufactures in which they take extra time in finishing as much as possible the final feature of products. Finally assembly is usually performed in regional distribution centres as these centres are nearer to the consumers in comparison of the manufacturing sites. For instance, a canned corn producer allocates its corn for different grocery store retailers. The producer/distributor of corn waits for the demand offered by grocery stores before packing cans of corn under the brand name of individual grocer (Richason and Media, 2014).
This strategy is highly successful in business environment which is unable to forecast product varieties very well, however can combined demands of end-users and hold-up the final process in finishing a product. As manufacturers are able to review accurately the entire demand of a product variety, the retailer can delay until the time when the need for a specific product arises. This enables the distributor to differentiate the product rapidly and meeting the demands of consumers.
Information sharing between supply chain members: Sharing of information between supply chain members assists them in actively involving in swapping demand information of final customer. Sharing of information is best circulated in an environment where demands of customers are comparatively stable. It also one of the most demanding approaches as the level of the information sharing and dexterity involved with the supply chain members. Informing sharing between supply chain members’ results in improvement in operations of business and members can discuss how information visibility upstream assists in minimising the bullwhip effect. The supply chain members can utilise final consumer demand information to effectively plan each customer’s planning function to optimise the whole supply chain (Moll, 2013). Point-of-sales data and other important information can be shared with the upstream members by retailers so that these groups can achieve a clear understanding of the actual demand for a specific product
Figure: Supply chain collaboration framework.
Operational Efficiency: In addition to the above methods, supply chain managers need to improve the flow of information among the members of the supply chain. Better communication and forecasting end-users demands is highly helpful in lowering the bullwhip effect. Moreover, vigilance in daily operations of the supply chain to monitor trends and better forecast customer needs. Supply chain managers need to establish a forecasting system comprising of consumer demands and supplier inventory, in coordination with market fluctuations (Moll, 2013).
Replenishment Smoothing: Supply chain managers need to implement effective measures to reduce delays in final products. Business organisations should implement innovative software and other computer aided ordering to effectively track products along the supply chain. Fulfilling orders to delivery time also highly reduces fluctuations along with decreasing inventory levels and operation costs. Supply chain members need to focus close attention to point of sale purchases done by consumers. Implementing organisation’s point of sale process to make reports that helps in tracking costumer’s choices and ordering nature. This assists in identifying future trends as well as improving communication among the members of supply chain.
Examples of Supply Chain
In the year 2000, Bullwhip effect was experienced by two famous and leading telecom equipment manufacturers Cisco and Lucent. Both major manufacturers reached at demand forecast that exhibited constantly increased demand for networking gear and wireless equipment. Both leading telecom equipment manufacturers demanded their suppliers to supply parts and raw materials as fast as possible, offering the suppliers with a promise that they would be extra paid for large supplies. This demand was fulfilled by one of the suppliers, Solectron, which supplied components and raw material in excess (Srinivasan, 2011). Solectron had an idea that the orders contributed to a high demand for telecom equipments that was irrationally high, even under a best-case circumstance. Nevertheless, it was forced to manufacture at maximum throughput to fulfil requirements from its individual consumers.
In the year, 2001, “illogical exuberance” crashed with the authenticity of the dotcom implosion. The demand that was predicted by the software failed to turn up and as a result of which Cisco was pushed to write off 2.2 billion dollar in inventory and lay off more than 8000 employees. Many suppliers had to remain with unnecessary inventory that had been produced due to demand from Cisco and other consumers. Solectron was left with excessive inventory of about 4.5 billion dollar. Thus, it is clear from above example that Cisco and Solectron were accused of the bullwhip effect.
An article published in January 2010 in the Wall Street Journal exhibited that Caterpillar in coordination with its chief suppliers discover more efficient inventory methods in response to the poor economy of the last few years. In the year 2009, Caterpillar performed carefully and actively to restock its inventories to fulfil a high demand for mining and construction equipment in the following years. Caterpillar provided guidance to its steel supplier to prepare itself for a 2010 requirement that would double the quantity in 2009. Caterpillar planned to work on this scheme irrespective of the fact that its own sales were hard to change by a resultant amount during the first half of the year 2010 as Caterpillar wanted the suppliers to enhance production steadily and thus improve the bullwhip effect. Caterpillar also met with significant suppliers in the end of 2009 to make sure that the suppliers had the supply to improve output quickly (Srinivasan, 2011). In few cases, Caterpillar also helped many suppliers in getting finance. The strategy adopted by Caterpillar worked beneficially.
Conclusion and Discussion
The bullwhip effect is a determined occurrence that will always be there in supply chains and cannot be entirely removed. A number of researchers in their researches have showed the existence of the bullwhip effect. Some researchers have described only behavioural causes to the bullwhip effect. These reasons are the poor identification of time legs, which results in constant and under-ordering, and the utilisation of inventory policies and forecasting techniques. An extensive research has also been performed on the impact of various inventory techniques, forecasting policies, and other aspects that impact the process. These factors consist of forecast flaws, collaborations, lead times, seasonality etc.
Thus, on the basis of above discussion it can be concluded that bullwhip effect refers to the activity of organisation buyers and automated inventory response processes to amplify the requirement to increase or decrease inventory in return to difference or absence of inevitability in demands of customers. The bullwhip effect can influence practically all companies in some way, and manufacturers try to implement methods or approaches to minimise the effects.
Gundlach, G.T and Murphy, P.E. 2000. AMA Educators' Proceedings. American Marketing Association
Hanna,M.D., and Newman, W.R. 2006. Integrated Operations Management: A Supply Chain Perspective. Thomson/South-Western
Moll, J.2013. The Bullwhip Effect: Analysis of the Causes and Remedies. [Online]. Available at: www.few.vu.nl/en/Images/werkstuk-moll_tcm39-354834.pdf [Accessed 15 November 2014].
Richason, O.E., & Media, D.2014. How to Reduce the Bullwhip Effect. [Online]. Available at: http://smallbusiness.chron.com/reduce-bullwhip-effect-3908.html# [Accessed 15 November 2014].
Srinivasan, M. 2011. Building Lean Supply Chains with the Theory of Constraints. New York: McGraw Hill Professional