Bullwhip Effect In Supply Chain Networks

The objective of supply chain management is to provide a high velocity flow of high quality, relevant information that will enable suppliers to provide an uninterrupted and precisely timed flow of materials to customers. However, unplanned demand oscillations, including those caused by stockouts, in the supply chain execution process create distortions which can wreck havoc up and down the supply chain. There are numerous causes, often in combination, that will cause these supply chain distortions to start what has become known as the Bullwhip Effect.

While the devil is usually buried in the details, as is the case here, the most common general drivers of these demand distortions are:

• Customers

• Promotions

• Sales

• Manufacturing

• Policies

• Processes

• Systems

• Suppliers

This unplanned for demand results in a disturbance or “lump of demand”, which may be a minor blip for any one customer, oscillates back through the supply chain often resulting in huge and costly disturbances at the supplier end of the chain. Often, these demand oscillations will launch a “mad scramble” in manufacturing with the need to acquire and expedite more raw materials and reschedule production.

The “Bullwhip Effect” has in the past been accepted as normal, and in fact, thought to be an inevitable part of the order-to-delivery cycle. Yet, the negative effect on business

performance is often found in excess inventories, quality problems, higher raw material

costs, overtime expenses and shipping costs. In the worst-case scenario, customer service

goes down, lead times lengthen, sales are lost, costs go up and capacity is adjusted. An

important element to operating a smooth flowing supply chain is to mitigate and preferably eliminate the “Bullwhip Effect”.

Lee et al. (1997) discussed four possible causes of the bullwhip effect: demand forecast updating, order batching, price fluctuation, and rationing and shortage gaming. Demand forecast updating suggests that demand amplification occurs due to the safety stock and long lead time. As orders are forecasted and transmitted along the supply chain, the safety stocks are built up, and thus the bullwhip effect occurs.

Material requirements planning or economics of transportation require companies to order goods at certain times. This periodic batching causes surges in demand at a particular time period, followed by the periods of time with no or little orders, and other

time periods with huge demands. Price fluctuation, which usually results from price

discount or promotion, also distorts buying pattern and creates bigger variability of

demand and demand lumpiness. Finally, when demand significantly exceeds supply,

manufacturers often ration products to their customers based on what they order.

Recognizing this rationing policy, the customers place orders larger and more frequently than what they really need with a hope of getting more products.