Maestría en Administración

Alumno: Jose Francisco Salazar Morales 171461

Cd. Juarez Chih, 29 de enero 2018

The Bullwhip Effect in Supply Chain

The supply chain is a complex group of companies that move goods from raw materials
suppliers to finished goods retailers. These companies work together when meeting
consumer demand for a product; supply chains allow companies to focus on their specific
processes to maintain maximum probability. Unfortunately, supply chains may stumble
when market conditions change and consumer demand shifts.

Definition

The bullwhip effect on the supply chain occurs when changes in consumer demand
causes the companies in a supply chain to order more goods to meet the new demand.
The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier. This effect can be observed
through most supply chains across several industries; it occurs because the demand for
goods is based on demand forecasts from companies, rather than actual consumer
demand.

Forecasting Errors

When companies enter new products into the marketplace, they estimate the demand of
the good based on current market conditions. Most companies in the supply order more
than they can sell, attempting to prevent shortages and lost sales of goods. This "extra"
inventory begins to increase or decrease during the normal market fluctuations of supply
and demand. When demand increases, the companies closest to the consumer will
increase inventory to meet the consumer demand. When the demand falls, the front-end
of the supply chain will decrease inventory, amplifying the extra inventory on each
company up the supply chain.

Behavioral Causes

One cause of the bullwhip effect is normally driven by management behavior at the front-
end companies of the supply chain. Retail management never wants to have a stock-out
on a popular good, leading to higher orders from the wholesalers. This eventually
squeezes each company in the supply chain and creates decreases in inventory.
Another major behavioral effect is the ordering of too much inventory when consumer
demand has fallen for an item. Retailers may have raised their inventory levels to avoid
a stock-out but are now met with goods that cannot be sold quickly. This creates overstock
of inventory for each supply chain company.

Operational Causes

The main operational cause of the bullwhip effect comes from individual demand
forecasts from each company in the supply chain. This causes an increase in demand
from companies in the supply chain, but not the actual consumers who will purchase the
goods. A lack of communication is also prevalent during operational causes; companies
may not supply information up the supply chain regarding current market conditions,
causing improper levels of inventory.

Corrective Measures

To properly manage the fluctuations in consumer demand, implementing a point-of sale

(POS) system with a just-in-time (JIT) inventory system. This allows each company in the
supply chain to process information electronically regarding individual goods.
Understanding consumer demand can then be evaluated based on the order information
from the POS system and allow managers to order more goods if needed.

Running a product-oriented business requires the implementation of an efficient supply

chain management system. Ideally, an effective supply chain is able to achieve a
competitive advantage by providing accurate information to suppliers so they can
maintain an uninterrupted flow of products to customers. The “bullwhip effect” influences
how managers evaluate the supply chain. Understanding this concept can help business
owners and managers avoid costly pitfalls and maintain a top-notch supply chain.

What is the bullwhip effect?

The bullwhip effect is a phenomenon that represents the instabilities and fluctuations in
product and supplier orders throughout various stages of the supply chain. In short,
growing or waning customer demand directly impacts a business’ inventory. Businesses
often attempt to forecast demand, amassing what they believe to be the proper amount
of raw materials and resources needed in order to meet customer demand in an efficient
and timely manner. When moving up the supply chain from consumer demand to raw
material suppliers, variations can often be amplified, causing issues with time, cost and
inventory in supply chain management.

What causes the bullwhip effect?

Variables associated with lead-time—such as delays in manufacturing, shipping and

transmitting information throughout the supply chain—all influence the bullwhip effect.
Other important causes include human behavior and management. Additionally,
decisions made by those who oversee the supply chain at various stages will also directly
influence the bullwhip effect. These managers control different aspects of the supply
stage—ranging from customer service to shipping—and each one actively works on a
daily basis to mitigate risk, forecast trends in demand, and maximize profits.

Sometimes, these managers can accidently make decisions that negatively affect other
leaders in the chain. Supply chain errors that contribute to the bullwhip phenomenon
include lack of communication and coordination, batch ordering, price fluctuations,
overreaction to backlogs, errors in forecasting, inflated orders, and product promotions.

How does the bullwhip effect impact inventory, shipping time, and overall cost?

The bullwhip effect impacts the supply chain on many levels—all of which can prove costly
to the company. Businesses work hard to forecast demand in order to maintain a
manageable and useful inventory, but unfortunately, the variables that cause the bullwhip
effect can lead businesses to have either an excess or lack of inventory. Both of these
are detrimental for different reasons. Exaggerated orders based on misguided forecasts
result in inadequate inventories.

Depending on the product, an excess of inventory could prove costly to the company, and
if consumer demand does not increase it could result in wasted resources. On the other
hand, not having sufficient inventory can lead to poor customer relations due to unfulfilled
orders and unavailable products. Overall these mistakes could be expensive for
businesses.

Why is safety stock involved?

In order to prepare for the unforeseen fluctuations in demand throughout the supply chain,
businesses need to build and manage safety stock. Safety stock refers to the reserve
inventory used as a buffer by businesses to accommodate immediate changes in
customer orders. If customer demand increases rapidly, the available safety stock can be
used to fill orders while managers increase their own orders to suppliers. This allows for
time to increase production without imposing on customer service. This additional stock
does not solve the problem of the bullwhip effect, but it can lessen the effect’s symptoms,
as it is used as a safeguard for costly variables in supply chain management.

How can the bullwhip effect be prevented?

Businesses looking to ameliorate the bullwhip effect can take steps to tighten the supply
chain and minimize error. The first step for businesses is to familiarize themselves with
the bullwhip effect, its causes, and how it affects their overall costs. Forecasting demand
is essential to supply chain management and businesses can best forecast product
demands through the timely synthesis of information. This involves reducing the time for
receiving projected and actual customer demand information and establishing as close to
real-time product demand as possible.

Managers should also work to understand demand patterns throughout all stages of the
supply chain by sharing information and collaborating with other managers of different
chain stages. Other methods for preventing the bullwhip effect include reducing the sizes
of orders, consistently offering good product prices as a way to avoid surges resulting
from promotional discounts, improving customer service, and eliminating causes for
customer order cancellations to ensure smooth ordering patterns.

Business and supply chain managers should not overlook the bullwhip effect. It is a
wasteful phenomenon that results in the potential loss of financial and physical resources.
Managers who understand the bullwhip effect will be better able to forecast demands and
make well-educated decisions for maintaining a consistent and efficient supply chain.

Sources

http://sloanreview.mit.edu/article/the-bullwhip-effect-in-supply-chains/

https://www.entrepreneur.com/article/232953

http://ieeexplore.ieee.org/document/5305026/?reload=true

http://apem-journal.org/Archives/2008/APEM3-1_045-055.pdf

http://web.mit.edu/2.810/www/files/readings/King_SafetyStock.pdf