The Bullwhip Effect in The Supply Chain and

The Corresponding Solution

Lixin Miao, Xiongbo Guo, Zhiwei Mia0

wnsumer to original producer along the. supply chain. The

Ab.vrraci-The id= of Supply chain mn?sgcmcnt (SCM) is a newly
retailer uses the demand history of the.consumer to do demand
developed theor). of management in nowadays. Bat when the demand
information is pa-d OD along the mpply chain a n yL a phenomenon analysis, in which traditional methods can be used. Then the
that the flUcturliOn Of the demand information b e m m a larger and larger, retailer sends an order sheet to the jobber according to the
which is called "bullwhip effect-, "Bullwhip erfen" may h a w much .
negativt A few I inlmdueed
*re
m ~ ~ U T L in
result of his forecasting, and then the jobber sends an order
this papcr. We also explain I strategic slliance bcmecn the retailer and . ' sheet to his supplier and so on. All these form a supply chain
the supplier and lhe main farms of the sllisncc. Funhermom, a compam in which each member a different pan and do demand
b m e n lhc centralired eontml strategy of the multistage system and the
m d i t i o n d strategy is made l o show the sdvmtagei of the former. forecasting alone, using the same or different methods.
lndu 7Umr-Supply Chain Manngcmcnt(SCh1). bullwhip erfcef If we take the wnsumer as the end of the supply chain. the
SlrafegiC Plliince. V"cnor-hIansgcmcn1 Inventor). VMI)
original producer is the start. As the end of the chain, the

1. INTRODUCTION consumer demand is not definite, but it varies in a definite

scope(exclude seasonal goods ). We can use a normal
The idea of Supply Chain ManaEement (SCM) was
distribution to describe the demand information. However.
developed in turhulent conditions for companiesto chase for
when the demand of the consumer changes. the order sheet
maximum interests. It is an attractive management idea and
f?om the retailer to .the jobber changes as a result, but the
mode. Hou,ever, if we use traditional mode of ordering to do
change of the latter is more larger then the former. When the
inventory management inevitably we will enwunter a
jobber sends an order sheet to his supplier. the change will
intractable p r o b l e m 4 e m a n d variance magi@, that is
become even larger. This phenomenon is called "Bullwhip
"Bullwhip Effect". How can we weaken and even eliminate
Effect" in a supply chain.
this effect? Based on research which is known, we shall
A

/&
analyze the problem and present an effective solution. That is I
to establish a strategic alliance between retailer and supplier.

11. EFFECT".
"BULLWHIP ' . dem, :\/\/&+-v
\.,/ \.! '..
The first step of inventory management is to do demand :, '.

analysis, so that we can make reasonable and effective

inventory strategy. Traditional demand analysis is based on '

original ...... jobhcr retailer consumel

demands history. Producer use some methods for^ example, Pioducer

regression and Time Series Method) to forecast the future H~~ does this 6zBullwhipeffect" w m e out? How much is
demand. In this procedure, only Sale forms are needed, SO it is the effect? The quantitative mathematic model was given in
vety easy to do. The demand information passed from the the (Designing and managing the supply chain) (David
Lixin Mi-. is at D e p m e n l of lndusvial Ensneein& Tsinghus University. , Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi), In his
Bcijing. 100084, China. (Email: 1unia~mail.uinghua.cdu.cn)
xiongb zhiwei ~ i
with hpment
~ ~ .
of civil ~ ~ ~ i ' ~model
~ eonly
r ai retailer
~ ~ and a jobber are considered, D denotes
TringhuaUnivmity, Beijing, IOOOW, China. (Email mrujs@ohu.com) the demand which the retailer faces, Q denotes the quantity
which the retailer orders from the jobber. L denotes the lead
time which is the gap 'between when an order is placed and

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when it is received and p denotes the number of the data
which the retailer uses to forecast, the Bullwhip effed can
be drscribed as follows:
Vur(Q) 2L 2L2
-21+-+,
V P P pass his own order sheet to his supplier, we can find the
111. THE IMPACT OF THE BULLWHIP EFFECT
The Bullwhip Effect will cause some negative effects.
These are included as follows:
Too much safety inventory are needed: each member in
the supply chain must retain a large inventory to ensure
that the next members order be satisfied, so the inventory
expense will increase;
The performance will decrease: because the demand is not
definite, the plan of the company will not fit the reality
and the production will not meet the demand. In this
condition, potential incomes are lost or many goods are
overstock.
It will affect decision making: the decision maker may
make new investment because of the fluctuation of the
demand or adapt the inventory plan to demand at the peak.
Such decision may lean the company to a wrong way. The
fluctuating o f t h e demand may even cause the fluctuating
of the transport plan, and the cost of tmispon may also
increase. All these changes are not needed and can be
avoided, because the real demand of the consumer havent
changed that much.
In order to diminish the fluctuating of the demand
information and keep the chain running with higher
efficiency. we must weaken or even eliminate the Bullwhip
Effect.
IV. DEALING WITH THE BULLWHIP
EFFECT
Based on the mathematical expression (I), We can easily
find that diminishing L can weaken the Bullwhip Effect.
Usually the lead time contains two parts-the time spent on
producing and transporting goods and the time for dealing
with the order sheet. We can use direct transport to shorten the
first part. And Electronic Data Interchange (EDI) can be used
to shorten the second part.
As the information technique developed and the theory of
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SCM progressed, much attention is paid to the cenaalizing of
demand information. In the mathematical expression (l), only
a retailer and a jobber are considered. If we consider each
member in the supply chain, that is each member forecast
f u m e demand according to the order sheet he received and
relation between the demand of the start node and the demand
ofthe end node as follows:
P P I
If we centralize the demand information, each member
(2)
knows the demand of the consumer. At first the retailer
forecasts according to the demand history of the consumer and
find out his inventory level, then order sheet and the result of
forecasting are passed to the jobber. In the second step, the
jobber uses the retailers information to decide his own
inventory level, and then his order sheet and the retailers
forecast result pass to his supplier. All the other members do
the same thing like this. In this condition each member knows
the demand of the consumer and makes his.inventory strategy
according to it. We can describe the multilevel bullwhip effect
as follows:
From the mathematical. expression (2) and (3) we can see
that the variance of the demand becomes bigger and bisger
when the infovation is passed on whether we use the method
of centralizing demand information. Also we can find that the
effect of the latter is much less. than the former. Because in
decentralization mode only the retailer knows the demand of
the consumer. the supply chain is more fluctuanr. In
centralization mode each member knows the demand o f the
consumer and the supply chain is less f l u c k t . So
centralizing the information is another yay to weaken the
Bullwhip Effect.
Before the development of information techique,
centralizing information, especially real time transfer of
information is unimaginable. But now the use of Point Of
Sells (POS) and Electronic b a t a Interchange (EDI) greatly
benefit the transfer of information and the information
centralization comes into being. Howevcr, the POS and'EDI
technique only provide the hardware for sharing information.
In order to achieve the target, the point is to establish strategic
alliances in the supply chain. The alliance between the retailer
and the supplier is one ofthe most important alliances.
v.' MAINFORMS Of THE STRATEGIC ALLIANCE:
As the POS and ED1 technique provide the hardware for
sharing information, the strategic, alliances provide the
software for sharing information. If the strategic alliance is
established between $e retailer and the supplier, not onl; the
demand information can be shared but also the retailer's
inventor), information can be shared by the supplier. So some
effective strategies can be applied in the supply chain to
weaken the bullwhip effect. , ' '
In general. the strategic alliance between the retailer and the
supplier has several main forms as follows:
Quick Response Strategy:
This is a'strategy of the' supply chain management
dereloped in American rag trade in late 1980s and is
called Quick Response (QR). It is developed to reduce
the cycle from the raw and processed matrrials to the
consumer, decrease the inventory and enhance the
efficiency of the supply chain. In'.this case, the retailer
still prepares the order sheets. hut the supplier Pan obtain
the data ahout the sale from the retailer through sharing
the demand information. So he can improve the
foremring clearly using the shared data. The supplier
knows the lead time in the procurement and his
productivity better than the retailcr, so he can use the
shared information to better match his production and
inventory with the actual sale of the retail and make his
plan better. The most notable significance of the strategy
is that the lead time is reduced. So the bullwhip effect can
be weakened obviously.
Continuous Replenishment Program:
This can be called CRP. In this case, the supplier
obtains the data about the sale and the invcntory from the
retailer, He replenishes the retailer's stock in a small batch
but in high frequency according to the data. In this way he
can keep the retailer's stock at a.given quantity. Besides,
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he can make sure that the selling can be at a high serving
lcvcl by make a contract with the retailer. So the supplier
can make the stock management be improved in a
structural way in the condition that a given serving level
can still be achieved. The supplier increases the frequency
of the replenishment actively. In the traditional mode, the
supplier just replenishes'the retailer3 inventory according
to his order'sheet, but now the supplier partakes the
retailer's responsibility on the inventory replenishment.
So this can make the supplier responds to the retailer's
demands more quickly and also m&e the retailer's
inventory quantity at a low level. This strategy certainly
enhances the efficiency of the supply chain.
Vendor-Management Inventot? Strategy:
This can be called VMI. In the above paragraphs. we
conclude that if each node of the supply chain can use the
demand information of the last node (the retailer) to make
his plan, the bullwhip effect is much weaker than the case
in which the information of the consumer demand can't
be shared by all the nodes in the supply chain. But the
bullwhip can't he removed completely according to the
mathematical expression (3). That is to say, if all the
nodes use the same demand information and the same
technology for forecasting to make the stock management
strategy, there .will still be the demand variance
magnifying (though the effect is much weaker than the
case in which the information can'! be shared by all the
nodes). But in the case of VMI, the former node (the
supplier) obtains demand information and inventory
information of the latter node (the retailer), then makes
the whole plan and replenishes the latter node's inventory.
That is to say, through sharing the information about the
demand and the inventory, the supplier doesn't have to
forecast the demand and make the replenishment plan
according to the retail's order sheet. So this strategy can
make sure that there is not repeated, demand forecasting
and a centralized control mode is established. The
bullwhip effect can be controlled most effectively.
VI. COMPARMGTHElHREEFORMS:
in the supply chain, the object of the management is oflen
the multistage system which is composed of many nodes. If
we apply the strategic alliance between the retailer and the VII. COMPARING THE CENTRALIZED CONTROL STRATEGY OF
supplier to a large-scale and integrate supply chain and THEMULTISTAGE SYSTEMAND Tfif TRADITIONALSTRATEGY
compare the three strategies, we can conclude: The multistage system often has a Fmplicated reticular
If the first and the second strategies are'used, the bullwhip -Cture became the supply chain in the actual economy is
effect C a n be weakened O b v i o W and stock management very complicated, But we can. take the following simplest
can be improved. Although the efficiency of the supply chain system.showed in the figure as an example as a maner of
is much enhanced, the two strategies are noi centralized convenience.
control strategies, that is to say, they are distributed control
strategies. Each node still makes its own stock strategy
without considering the other nodes. So the two strategies
can't make the whole supply chain achieve holistic
optimization but often partial optimization.
1- I
"

As the supply chain management develops, the stock

control doesn't emphasize particularly on each node's cost on we define:
the stock, but considers the holistic optimization of the whole L,' =the lead time at node j:
supply chain as the aim. VMI is a kind of centralized control
strategy. The former node obtains demand information and l j ' ( [=the
) local inventory ofthe, node j i i t h e t, only
inventory information of the latter node, and doesn't have to
the node j's own inventory;
forecast the demand and make the replenishment plan
. ..
according to the latter node's order sheet. This can control the c,,' = the stock ratesofthe &ej, the cost per unit ofthe
bullwhip effect radically. Besides, there is'only one control
goods;
centre in the supply chain. I t controls the inventory of each
The above figure illustrates a simple supply chain. but it's
node in the supply chain. This strategy b with a view to the
typical. There are J nodes in the system. We order the I nodes
total cost of the whole supply chain. so it can achieve the
according to direction in which the.goods are transported: the
holistic optimization of the whole supply chain.
first node is I, the second is J-I, then J-2. ...... the last node
The mode of the supply chain management that bases on
(the retailer) is the node 1. Each node is a part of the supply
VMI or emphasizes the idea o f VMI becomes more'and more
chain which can keep the production, transportation and sale
popular in many companies because of the above advantage. . .
continuous. The consumer demand is at the node I . The node I
The corresponding centralized stock control strategy of the
denotes the supplier that connects. with the external of the
multistage system also attracts more and more expens. The
supply chain. The relation between two conterminous nodes
stock system in the supply chain can't be considered the same
which is denoted by the line with, an arrowhead is within the
as the single stock system that emphasizes on one certain node.
system.
It is a multistage system composed of many nodes. The
The traditional stock strategy based on the single stage ,.
traditional strategy that determines the quantity and the time o f
system demands each node make its own plan separately. The
the procurement based on the cost of stock and procurement is
most important parameters that need to be determined is the
still applied in the multistage system, but this can't make sure
quantity and the time of the procurement. This strategy is
the system work efficiently. In'the conditions that the strategic
based on the cost of stock and procurement of one.cekain
alliance has been established. &d the information can be
node instead of the total cost of the whole supply chain.
shared by, all the nodes, the centralized control strategy of the
Besides, there are not strategic alliances among all the nodes
multistage system shouldn't be confined to the traditional idea
and the information can't be shared. So the variable that each
In this way the bullwhip effect can be controlled effectively
. ' node pays attention to is' its own' inventoly, that is the local
and the efficiency ofthe supply chain can be enhanced.

. .

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 . .
assumption seems extreme, it is r e a h a b l e to some extent.
inventory of,the node j & defined a b o v e - I j ' . And the
Besides, the process of the replenishment must be a process
in a cycle if we assume that the consumer demand is steady
stock rates of the node j-c, is important.
I : (we use R to denote the consumer command per unit time). So
However, because the centralized Mntrol .strategy of the
we can consider the cycle of each node's procurement TJ as
multistage system b n s i d e n the holistic optimization of the
whole supply chain as the aim and information can be shared, the variable that we must control.
.we must accordingly introduce a new concept o f the node's And we define:
inventory and supersede the local inventory of one certain the average fixed cost of the node j's procurement per
node by the new concept. In order to.achieve this, first, when
we speak of the node j, we must has the concept that the node j cycle=-' O J
contains the'node j itself and all the nodes that are arrayed
after the nodej, that is all the nodes whose sequence numbers 1
the average inventory ofthe node j per cycle=-RT,
are less than or equal to j. The new. concept of the node j's 2
inventory is that the node j's inventory contains not only the the total cost of the node j's inventory per
node's local inventory but,also all the goods that have been 1 1 2
cycle=- RTJc,,TI = -cI RT,
transported or are being transported to nodes,armyed after'it. 2 2
In a word, the new' concept should be different from the the average cost of the node j's inventory per
traditional idea in which each node is considered separately 1
cycle=-R?.c,,
and each node just pays attention to its own local inventory. 2
So the average cost of the whole system is
Based on the new concept introduced above, we will define
two variables parallel to variable defined above:

IJ(o= xi'o
iSJ

'IJ ='IJ cl(,+!)^'

In this mathematical expression, TJ =aJ . and

So the total cost of the system's stock is: U, is a plus integer.

The problem can be described as follows:

J I ' .

Then we can use the new variables'to describc the cost of COJ 1
Minimize C = x ( - +-RTJc, J )
the system's inventory instead of the local inventory. This is J J'

very important.
In this case, in order to solve the model conveniently, we s.t. ,Z' =a,TJ-, , a, isaplusinteger, j>l

assume Lj'=O.This is important. Although it may be found Obviously, the problem described in this model .is very
different from the traditional stock model. The situation that
to be an extreme assumption, it c'an be accepted in a supply
the traditional stock model describes is that each node is
chain which works efficiently. For example, in a VMI system,
separate and the order sheet is passed from the last node lo the
through -sharing the information about the demand and the
first node one by one. So the bullwhip effect is very great. But
inventory, the supplier doesn't have to forecast the demand
this model makes full use of the strategic alliance among all
and make the replenishment plan according to the retail's
the nodes and the shared information, improve the stock
order shee1:So there is no doubt that the lead time will be
management. So this mode controls the bullwhip effect
reduced greatly. Then -we can concllide ,that though the
farthest. Besides, this management considers the holistic

1058
optimization of the whole supply chain as the aim. So the
strategy of this model is the one that is very suitable to the
modem supply chain management and is very helpful to
enhance the efficiency of the supply chain.

VIII. CONCLUSION
Because of the development of the SCM, we have to face
the bullwhip effect in inventory management This problem
cant be solved in traditional management mode. A strategic
alliance between the retailer and the supplier is a good way to
weaken this effect. If the strategic alliance is applied well
among each node of the supply chain, the chain will be
running efficiently.

REFERENCES:

[ I ] JOSEPH GEUhTS. PANOS M. PIUIDMOS, H. EDWINROMEUN, SUPPLY

CHAM MANAGEMENT : YODELS. MPLICATIONS. AND RESEARCH

DIRECTIONS. DORDRECM ; BOS : KLUWER ACADEUIC.d o 0 2

[21 Roben B. Handfield. Emai L. Nichols. Jr. Inmducllon to rupdly chain

management. Upper Saddle River. N.J. Rentice Hall, cl999
~

[I1 Sunil Chapra. P e l s Mcindl. Supply chain management : strategy.

planning, and apemion. Beijing : Tringhva Univenirj Fiar. eZOOl

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