The Bullwhip effect

I Contents

1. Definition

2. History of the Bullwhip effect

3. The Beer game
3.1 Example from class

4. Causes of the Bullwhip effect
4.1 Demand forecast updating
4.2 Order batching
4.3 Supply Shortage
4.4 Price Variations

5. How to counteract the bullwhip effect:
5.1 Avoid multiple demand forecast
5.2 Break order batches
5.3 Stabilize price
5.4 Eliminate gaming in shortage situations

6. Conclusion

II. Bibliography

1. Definition

The bullwhip effect is a central phenomenon of supply chain management, arising out of the dynamic processes of the supply chain.⁶ It describes that different demand patterns and even small changes in consumer demand can lead to fluctuations in order volumes, which can rise along the chain. This means there are small changes at the end-consumer, but as one moves up the supply chain to the manufacturer it can lead to large variations, as shown in figure 1.¹⁰ As every organization attempts to solve its problem from its own perspective, the network oscillates in large swings.¹⁰

Figure 1) A simple supply chain with the steps manufacturer, distributer, wholesaler and retailer. The more moving upstream, the more “bullwhipped” the demand becomes.⁹

Abbildung in dieser Leseprobe nicht enthalten

2. History of the Bullwhip effect

The first person who dealt with a simulation model of the bullwhip effect was Jay Forrester in the year 1961.⁵ He examined the link between demand and inventory. His work has inspired many authors to develop business games (e.g. the beer game, see chapter 3) to demonstrate the bullwhip effect and its fallouts.³

Three decades later, logistics executives at Proctor & Gamble (P&G) did research on the order patterns of Pampers.⁶ Its sales at retail stores were fluctuating, although the variabilities were certainly not extreme. As they examined the distributors' orders, the executives were astonished by the degree of variability. They looked at P&G's orders of materials to their suppliers and they discovered higher swings. The variabilities did not make sense at first sight. While the consumers consumed diapers at a balanced rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. The “bullwhip effect” was born.

3. The Beer game

A very simple way to illustrate the bullwhip effect in the supply chain is the role- playing simulation called the “beer game”,⁸ which was developed by MIT Sloan School of Management in the 1960s. 4 participants must assume a role in the supply chain: retailer, wholesaler, distributor and factory. The players are not allowed to communicate with each other; they have to make their beer order decision based on the order of the player next to them. The task is to produce (for the factory) and deliver (for all other stages) units of beer until it reaches the external customer at the downstream end of the supply chain. Inventory and backlog incur cost - each item in stock costs 10 NOK per week, while each item on backlog costs 20 NOK. Consequently, the primary aim of each subgroup is to keep their costs as low as possible. It makes sense to play at least 30 rounds (weeks) to see consequences in terms of higher swings upstream.

Every typical game shows one common character. As consequence of the rational behavior of each player, the variabilities in the supply chain are amplified as they move up the supply chain.⁶

[...]

¹ Andersen K., EDI and Data Networking in the Public Network, Kluwer Academic Publishers,1998.

² College of Business and Public Policy, Alaska, 2012, accessed 12.09.2012 http://www.cbpp.uaa.alaska.edu/afef/bullwhip_effect_in_supply_ch.htm

³ Dejonckheere, J., Disney S., Lambrecht M., European Journal of Operational Research, Measuring and avoiding the bullwhip effect: A control theoretic approach Volume 147, 3:567–590, 2003.

⁴ Disney S., & Lambrecht M., On Replenishment Rules, Forecasting, and the Bullwhip Effect in Supply Chains, Volume 2., Publishers Inc, 2008.

⁵ Enzeklopaedie der Wirschaftsinformatik, 2012, accessed 09.09.2012http://www.enzyklopaedie-der-wirtschaftsinformatik.de/wienzyklopaedie/ lexikon/informationssysteme/crm-scm-und-electronicbusiness/ Supply-Chain-Management/Planung-in-Lieferketten-und-- netzwerken/Bullwhip-Effekt

⁶ Lee H., Padmanabhan V., Whang S., Sloan Management Review, Volume 38, 3:98-103, 1997.

⁷ Tayur S., Ganeshan R., Magazine M., Quantitative