Bullwhip Effect – Causes and Solutions, Essay Example

The Bullwhip Effect is a supply chain management’s dynamical phenomenon, which is caused by the extreme variation of stock, market demand and lead times. The longer the lead time within the supply chain, the more serious the problems within the organization would become. Companies need to eliminate the bullwhip effect by improving their supply chain management practices, reducing lead time. (Disney and Lambrecht, 2008.)

The bullwhip effect is caused by sharp drops and pikes in customer demand, and as the company’s production, supply and delivery methods are not flexible enough, this would cause overproduction or shortage of goods. As a result the customer service levels drop and this in turn negatively affects the whole organization. One of the most commonly used simulations used to demonstrate the bullwhip effect was developed by Sterman, and it is called the Beer Game. (1984). It is a computer simulation educational program to develop techniques to improve suppy chain management practices. This simulation has been used for decades by professionals, and in business education. When customer demand increases or drops significantly, the cost of operating a supply chain would increase. When the customer demand drops, the production pipeline needs to be emptied. If there are no effective strategies in place, the company would face increased storage and distribution costs. When the market demand increases, the company needs to fill up the pipeline to avoid production backlog and delays.

As large manufacturing firms work with other wholesale companies, most of them decide to handle large inventories through a centralized system. The traditional chainless chain did not have a system to connect the chain participants (retailer, wholesaler, distributor, factory) and it was not easily reviewable. Still, companies accepted it as the right method, as they kept larger inventories to cover market fluctuation. This created extra costs. As the market for many goods became more competitive, companies looked at reducing the costs of logistics and storage. Discovering the bullwhip effect made companies realize that reducing the lead time and makes demand forecasting more reliable. The traditionally accepted chainless model created sub-optimization of inventory and raised supply chain costs. When Forrester discovered the bullwhip effect, supply chain management grew out of the logistics concept. While the traditional chainless method focused on the internal business processes, the SCM model created a system to integrate external factors.

The secondary reasons for the bullwhip effect are based on the weaknesses in the company’s planning and behavior practices. The change in the safety stocks (security stock kept excess of order volumes to avoid shortage) would create a higher variability. Variability can also be triggered by using the procurement in batches practices. The larger the batches are, the less flexible the supply chain becomes. The variability of prices would have an effect on customer demand. The Barilla SpA case study (Simchi-Levi et al. 2003. p. 91-117) shows that when the company offers discounts for customers, market demand can become erratic and unpredictable. The costs of the supply chain wiped out the extra sales profits of the company during these discount periods, because of the poor design of the supply chain and the company’s inability to adjust production and logistics.

The solutions to eliminate the bullwhip effect were designed to eliminate out-of-stock and overproduction situations. (D’Atri et al.) In this method, both the behavioral and operational causes of the problem are targeted. The human element (decisions not made by software or rules) did have a great effect on the outcomes, and the more human players that were in the Beer game, the higher the cost of keeping stocks was. The successful planning strategies were determined as central planning, reducing the time of information exchange, and cutting back lead time. The behavioral strategies included the decrease of price variability, cooperation with suppliers and delivery companies, as well as using an advanced stock management and order system, which eliminates human elements.

Schmitt et al. (2011( find that centralization of inventory would make the supply chain easier to handle. Indeed, there is no need for multiple safety stocks; however, the central inventory management system needs to be directly linked to suppliers, to reduce lead and information processing time. The geographic location has a great importance when determining costs, production, and distribution. Although one inventory would make the supply chain easier to manage, it would also cause increased costs of stock. Inventory is determined as a starting stock based on statistical data, incoming orders or market predictions, and its size depends on the lead time, cost of storage and production. The bullwhip effect drives up the costs at the upstream stage, and the downstream stage would not have any knowledge of the problems. When out-of-stock situations occur, the retailer would not be able to determine the reasons behind low stock, which is why it is essential to create a link between manufacturers, suppliers, distribution centers and retailers. When the information is not centralized, there is a higher occurrence of the bullwhip effect. (Simchi-Levi et al. 2003. p. 109) Chainless chains are criticised by most researchers quoted above, and direct linking between manufacturers and market demand is needed to change this model. The most commonly used method to improve supply chain management systems and eliminate variability is defined by the SCOR functions:

Plan, Source, Maintain, Deliver. The framework is often used as a forecasting tool, as well as a monitoring system within the company.

The leadership should support improvements of the supply chain management, so the Point of Sale (POS) information would be used when creating forecasts. Sharing information across the different areas of business would create better customer service and more cost effective operation. Many supply chain systems are available to support mass production companies with these initiatives, and their use would reduce workflow, inventory size and costs alike by replacing the traditional “chainless chain” structure.

References

Disney, S., Lambrecht, M. 2008. On Replenishment Rules, Forecasting and the Bullwhip Effect in Supply Chains.

Sterman, J.D., (1984), Instructions for Running the Beer Distribution Game (D-3679), Sloan School of Management, MIT.

Simchi-Levi, D., Kaminsky, P.,  Simchi-Levi, E. (2003) Designing and managing the supply chain: concepts, strategies, and case studies

D’Atri et al. Supply Chain and Virtual Enterprises: the Beer Game Evolution. (online) http://sprouts.aisnet.org/571/1/BeerGame_paper_v6.0.pdf

Schmitt, A., Schnyder, L. Shen, ZJM (2011) Centralization Versus Decentralization: Risk pooling,  Risk Diversication, and Supply Uncertainty in a One-Warehouse Multiple Retailer System. Working Paper.