Bullwhip Effect: Minimizing Strategy

Bullwhip

Lee et al. define the bullwhip effect as “the amplification of demand variability from a downstream site to an upstream site”. The bullwhip phenomenon is observed in supply chains where the decisions at the subsequent stages of the supply chain are made greedily based on local information, rather than through coordination based on global information on the state of the whole chain. The first consequence of this information distortion is higher variance in purchasing quantities compared to sales quantities at a particular supply chain stage. The second consequence is increasingly higher variance in order quantities and inventory levels in the upstream stages compared to their downstream stages (buyers).

Understanding the causes of the bullwhip effect can help managers find strategies to mitigate it. Lee suggested that making demand data available at downstream site to an upstream site is a remedy to mitigate demand signal processing. Thus, both sites can then use same data while updating their forecasts. Their strategy can be achieved by using Electronic Data Interchange (EDI) and Point of Sales (POS). Using collaboration tools like Vendor Managed Inventory (VMI) can be very useful as these systems make available the demand data and inventory position information to members of the supply chain.

Now batch ordering has often led to bullwhip effect, which has serious implications for the whole chain. One reason that order batches are large or order frequencies are low is the relatively high cost of placing an order and replenishing it. Hence, discount on assorted truckload, consolidation by third party logistics and regular delivery appointment are solutions to the bullwhip effect. Smaller and synchronized batch sizes can also be seemed as a good way.

‘Forward Buy’ arrangement in which items are bought in advanced of requirements, usually to take advantage of manufacturer’s attractive price offer is another source for bullwhip effect. The simplest way to minimize the effect caused by such forward buying and diversions is to reduce both the frequency and the level of wholesale price discounting. The manufacturer can reduce the incentives for forward buying by establishing a uniform wholesale pricing policy. From an operational perspective, practices such as Continuous Replenishment Program (CRP) together with a rationalized wholesale pricing policy can help to control retailer’s tactics, such as diversion.

Asprova creates concrete information integrity between supply chain members, allowing for smooth dissemination of superior quality demand data from downstream site to the upstream site. Our advanced planning and scheduling functions improve operation processes, shorten lead times and reduce demand volatility which proves to be effective in mitigating the bullwhip effect. Nevertheless, it plays an active role in future development of supply chain strategic alliance.

 

Photo credit: ©Flickr davidd

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