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Bullwhip Effect which is Supply Chain Demand Amplification caused due to distorted information moving from one end of a supply chain to the other causing tremendous inefficiencies. Companies can successfully counteract the bullwhip effect by thoroughly understanding its causes and effects. Several industry leaders are implementing innovative strategies that create new challenges such as integration of new information systems, definition of new organizational relationships, and implementation of new incentive and measurement systems.
Various initiatives and remedies based on the underlying coordination mechanism, namely, information gathering and sharing, channel positioning, and operational efficiency can oppose the very effects. Through information sharing, demand information at a downstream site is transmitted upstream in a timely fashion. Channel positioning is the coordination of pricing, transportation, inventory planning, and ownership between the upstream and downstream sites in a supply chain. Operational efficiency refers to activities that improve performance, such as reduced costs and lead-time.
Supply Chain strategies to counter measure Bullwhip Effect
Following are few Supply Chain strategies employed to reduce or tame the Bullwhip effect and to improve business performance.
Avoidance of Multiple Demand Forecast Updates
Members of a supply chain conducts forecasting in association with its planning based demand input from their immediate downstream member in producing their own forecasts. Demand input from the immediate downstream member, results from that member's forecasting, whose input is from its own downstream member.
Solution to the recurring processing of consumption data in a supply chain is to make demand data at a downstream position available to the upstream site allowing both sites can update their forecasts with the same raw data in the current computerized scenario, manufacturers request sell-through data on withdrawn stocks from their resellers' central repository warehouse. Although the data are not as absolute as point-of-sale data from the resellers' stores, it offers considerably more information than was available when manufacturers didn't know what happened after shipping of their products.
Electronic Data Interchange: Supply chain partners can use electronic data interchange (EDI) to distribute data. In the consumer industry, around 20 percent of orders placed by retailers of consumer products were transmitted via EDI in early 1990's.Now it's grown to around 80%. The EDI basically facilitates information transmission and sharing among chain members. In the consumer products industry, this practice is known as Vendor-Managed Inventory (VMI) or a continuous replenishment program (CRP). Several companies such as P&G, Campbell Soup, M&M/Mars, Apple, Nestle, Quaker Oats, and Scott Paper uses CRP many of their customers.
P&G employs VMI in its diaper supply chain, starting with its important supplier, 3M, and their customers- Wal-mart.
Apple Computer has a "consumer direct" program, i.e., it sells directly to consumers without involving the reseller and distribution channel. An advantage of the program is that it allows Apple to spot the demand patterns for all its products. Dell Computers is another company which sells its products directly to customers.
Just-In-Time Replenishment: Long resupply lead times can aggravate the bullwhip effect. Improvements in operational efficiency can help reduce the highly variable demand due to multiple forecast updates. Hence, just-in-time replenishment is an effective way to mitigate the effect.
Break Bulk Orders
Order batching contributes to the bullwhip effect therefore companies need to devise strategies that lead to smaller batches or more frequent resupply.
Electronic data interchange [EDI] can reduce the cost of the paperwork in generating an order.
P&G has introduced standardized ordering terms across all business units to simplify the process and dramatically cut the number of invoices.
General Electric is electronically coordinating buyers and suppliers throughout the company.
Nabisco perform computer-assisted ordering, paperless, thereby customers order more frequently.
Assortments of different products: Another reason for large order batches is the cost of transportation. To tackle this cost, some manufacturers encourage their distributors to order assortments of different products. Hence a truckload may contain different products from the same manufacturer as an alternative of a full load of the same product.
Thus for each product, the order frequency is much higher, the frequency of deliveries to the distributors remains unaffected, and the transportation effectiveness is preserved. P&G has given discounts to distributors who are willing to order mixed-SKU (stock-keeping unit) lots of its products."
Composite distribution for fresh and chilled food uses the mixed-SKU idea to make resupply more regular. Since fresh produce need to be stored at different temperatures, trucks to transport them need to have a variety of temperatures.
Third-party logistics: The use of third-party logistics companies also helps make small lot replenishments economical. They give room for economies of scale that was not feasible in a single supplier-customer relationship. By consolidating loads from several suppliers located close by, a company can realize full truckload economies even without having the batches coming from the same supplier.
P&G coordinates regular delivery arrangements with its customers. Hence, it distributes the replenishments to all the several retailers evenly over a week.
Stabilize Price Variations
Reduction of both the frequency and the level of wholesale price discounting can control bullwhip effect caused by forward buying and diversions. The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy.
Everyday Low Price (EDLP): Retailers and distributors can aggressively negotiate with their suppliers to give them everyday low cost (EDLC). P&G, Kraft, and Pillsbury have moved to an everyday low price (EDLP) or value pricing strategy. P&G reported its highest profit margins in twenty-one years and showed increases in market share in early 1990's.
Activity-based costing (ABC) systems facilitate companies to recognize the unnecessary costs of forward buying and diversions. When companies run provincial promotions, some retailers buy in bulk in the area where these promotions are held, then divert the products to other regions for utilization. ABC systems provide explicit accounting of the storage, individual handling, costs of inventory, transportation, and so on that previously were hidden and often outweigh the profit of promotions.
Eliminate Gaming in Shortage
The sharing of capacity and inventory information helps to lessen customers' anxiety and, consequently, lessen their need to employ in gaming. Times when a supplier faces a shortage, instead of assigning products based on orders, it can assign in proportion to past sales records. Customers have no incentive to overstate their orders.
General Motors has long used this method of allotment in cases of short supply.
Sharing capacity information is insufficient when there is a genuine shortage. Few manufacturers work with consumers to place orders well in advance of the sales time. Thus adjust production capability or scheduling with improved knowledge of product demand.
Counter measure to Generous return policies
Generous return policies that manufacturers offer retailers heighten gaming. Without a penalty, retailers will continue to overstate their needs and cancel orders. Few computer manufacturers are starting to enforce more stern cancellation policies.
Eliminate incentives for customers and distributors
On eliminating these incentives, it can prevent demand accumulation and order staging. Minimizing incentivized promotions will cause the customers to delay orders and there by smoother ordering patterns.
We need to understand the product demands at each stage of the supply chain. Basically increase the collaboration through shared demand information as discussed above. This shall ensure there are no information queues leading to information flow delays.
A Methodological approach to solving the bullwhip problem
The principal decision lies in whether to study the bullwhip problem in discrete or continuous time system. In discrete time [using Laplace transform and differential delay], the various system states [demand rates, inventory and WIP levels] and replenishment orders are placed at the equally spaced moments of time. In between these moments of time, no information about the system is known. In continuous time [using z transform] the systems states are monitored at all the moments of time and the rate of order is continuously adjusted.
Neither of the representations of time is incorrect. Just that one representation of time may be more suitable for a given situation than the other. Consider for example, in a grocery supply chain, supermarkets total up demand that has occurred during the day, a replenishment order is prepared and the delivery is dispatched from the distribution centre overnight. This scenario is especially suitable for a discrete time analysis. On the other hand, a petrochemical plant might be able to constantly adjust its production of different grades of product to mirror the current demand rates for each grade. This type of scenario is more agreeable and suitable to a continuous analysis.
Finally we can conclude that the bullwhip effect results from rational decision making by members within the supply chain. Companies can effectively counteract the consequence by thoroughly considering its underlying causes.
Thus the companies can either let the bullwhip effect paralyze them or discover a way to conquer it and play it to their advantage.