The Bullwhip Effect

The Bullwhip Effect

اسلاید 1: The Bullwhip EffectHenry C. CoTechnology and Operations Management, California Polytechnic and State University

اسلاید 2: The BullWhip Effect2Next time you need gasoline …Pause for a moment and considerAll you’ve had to do is coast into a gas station and you’d find … gasoline. It’s simply there, ready for you to buy – every time, all the time. For you, and for countless other motorists.Yet Somebody must have put the gasoline into the gas station’s underground tank for you to pump from. To begin at the beginning, somebody must have prospected for oil, found it, and then dug the well to extract it. Next, somebody must have shipped the oil to a refinery, converted it into gasoline, and then transported the gasoline to your favorite gas station. In short, an awful lot of work must have occurred, across a long and vast network of firms – the supply chain, to deliver a reliable supply of gasoline.

اسلاید 3: The BullWhip Effect3The Bullwhip EffectThe supply chain for gasoline is indeed quite reliable, so much so that most consumers take it for granted. In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, victim of a pernicious pathology in its supply chain.That particular disease even has a terrifying name: the Bullwhip Effect.

اسلاید 4: The BullWhip Effect4The Beer GameRole-playing simulation developed in the 1960’s at MIT’s Sloan School of ManagementProduction and distribution of beer. Players divide themselves into groups: Retailer, Wholesaler, Distributor, and Brewer. Weekly consumer demand simulated by a deck of cardsRetailer sells from his inventory and reorders from the Wholesaler, who sells from his inventory and reorders from the Distributor, who in turn sells from his inventory and reorders from the Brewer, who finally sells from his inventory and restocks from his production. Order processing delays; Shipping delaysInventory carrying costs; Stockout costs Players base their decisions strictly on the orders they receive from their respective buyers.

اسلاید 5: The BullWhip Effect5“During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out.”“In virtually all cases, the inventory levels of the retailer decline, followed in sequence by a decline in the inventory of the wholesaler, distributor, and factory. As inventory falls, players tend to increase their orders. Players soon stock out. Backlogs of unfilled orders grow. Faced with rising orders and large backlogs, players dramatically boost the orders they place with their supplier. Eventually, the factory brews and ships this huge quantity of beer, and inventory levels surge. In many cases one can observe a second cycle.”John Sterman, one of the original proponents of the Beer Game

اسلاید 6: The BullWhip Effect6Stakeholders along supply chain Have different and frequently conflicting objectives. Often operated independently.The network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective.

اسلاید 7: The BullWhip Effect7Variability increases as one moves up the supply chainSource: Johnson & Pike, 1999

اسلاید 8: The BullWhip Effect8Consequences of the Bullwhip EffectLower revenues. Stockouts and backlogs mean lost sales, as customers take their business elsewhere.Higher costs.High carrying costStockout costDistributors need to expedite orders (at higher shipping expenses)Manufactures need to adjust jobs (at higher setups and changeover expenses, higher labor expenses for overtime, perhaps even higher materials expenses for scarce components.) All entities in the supply chain must also invest heavily in outsized facilities (plants, warehouses) to handle peaks in demand, resulting in alternating under or over-utilization.

اسلاید 9: The BullWhip Effect9Worse quality.Quirky, unplanned changes in production and delivery schedules disrupt and subvert control processes, begetting diverse quality problems that prove costly to rectify.Poorer service. Irregular, unpredictable production and delivery schedules also lengthen lead time, causing delay and customer dissatisfaction.

اسلاید 10: Causes of Bullwhip Effect

اسلاید 11: The BullWhip Effect11Demand variability, quality problems, strikes, plant fires, etc. Variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect.

اسلاید 12: The BullWhip Effect12Overreaction to backlogsNeglecting to order in an attempt to reduce inventoryNo communication up and down the supply chainNo coordination up and down the supply chainDelay times for information and material flow

اسلاید 13: The BullWhip Effect13Order batching - larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of transportation economics such as full truck load economies, and to benefit from sales incentives. Promotions often result in forward buying to benefit more from the lower prices.Shortage gaming: customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient.

اسلاید 14: The BullWhip Effect14Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand.Free return policies

اسلاید 15: Countermeasures to the Bullwhip Effect

اسلاید 16: The BullWhip Effect16Countermeasures to order batchingCountermeasures to shortage gamingCountermeasures to fluctuating pricesCountermeasures to demand forecast inaccuracies Free return policies

اسلاید 17: The BullWhip Effect17Order BatchingHigh order cost is countered with Electronic Data Interchange (EDI) and computer aided ordering (CAO). Full truck load economics are countered with third-party logistics and assorted truckloads. Random or correlated ordering is countered with regular delivery appointments. More frequent ordering results in smaller orders and smaller variance. However, when an entity orders more often, it will not see a reduction in its own demand variance - the reduction is seen by the upstream entities. Also, when an entity orders more frequently, its required safety stock may increase or decrease; see the standard loss function in the Inventory Management section.

اسلاید 18: The BullWhip Effect18Shortage GamingProportional rationing schemes are countered by allocating units based on past sales. Ignorance of supply chain conditions can be addressed by sharing capacity and supply information. Unrestricted ordering capability can be addressed by reducing the order size flexibility and implementing capacity reservations. For example, one can reserve a fixed quantity for a given year and specify the quantity of each order shortly before it is needed, as long as the sum of the order quantities equals to the reserved quantity.

اسلاید 19: The BullWhip Effect19Fluctuating PricesHigh-low pricing can be replaced with every day low prices (EDLP). Special purchase contracts can be implemented in order to specify ordering at regular intervals to better synchronize delivery and purchase.

اسلاید 20: The BullWhip Effect20Demand Forecast InaccuraciesLack of demand visibility can be addressed by providing access to point of sale (POS) data. Changes in pricing and trade promotions and channel initiatives, such as vendor managed inventory (VMI), coordinated forecasting and replenishment (CFAR), and continuous replenishment can significantly reduce demand variance.

اسلاید 21: The BullWhip Effect21Free Return PoliciesFree return policies are not addressed easily. Often, such policies simply must be prohibited or limited.

اسلاید 22: Vendor Managed Inventory

اسلاید 23: The BullWhip Effect23Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.”Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer).

اسلاید 24: The BullWhip Effect24The supplier—usually the manufacturer but sometimes a reseller or distributor—makes the main inventory replenishment decisions for the consuming organization.The supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead.The purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit. The VMI Partnership

اسلاید 25: The BullWhip Effect25The manufacturer is responsible for both its own inventory and the inventory stored at is customers’ distribution centers.