INFORMATION DISTORTION IN A SUPPLY CHAIN: THE BULLWHIP EFFECT

GROUP 3

Farze- An- Islam

121 0481 060

Progga
S Fateeha Zannat Tanjin

121 0889 660

121 0795 060 111 0098 060

Information transferred tends to be-distorted -misguide upstream members

Information flows among the members of supply chain

Manufacturer

Distributor

Wholesaler

Retailer

Information distortion impact on-

Production scheduling Inventory control

Delivery plans

 Retailers order do not match with actual retail sales.

Orders to supplier has larger variance than sales to buyer.

4 Sources of Bull-whip effect

Demand signal processin g

Rationing game

Order batching

Price variations

An Idealized Situation

A multi-period inventory system operated under a periodic review policy Where,

(i) demand: stationary (ii) supply : infinite with a fixed lead time (iii)fixed order cost: No (iv) product price: stationary over time

Demand Signal Processing

Demand: non-stationary

Order-up-to point : non-stationary

Project the demand pattern based on Distributors rely on retailers orders to forecast demand Manufacturers rely on distributors orders

Multiple Forecasting

Supplier loses track of the true demand pattern

at the retail level.

Long lead times lead to greater fluctuations in

the order quantities

Strategies to reduce- Demand Signal Processing

Information sharing among members of the chain Avoiding multiple demand forecast updates Vendor Managed Reduction in lead times

Rationing game
If Demand > Production Capacity retailer will issue

an exaggerated order more than their actual demands. Then the demand information will be distorted further if retailers are allowed to cancel orders when their actual demand is satisfied .

Strategies to reduce- Rationing game

Allocate scarce products in proportion to past

sales records

Share capacity and inventory information Enforce more strict cancellation and return policies.

Order Batching
Retailers :
Transportation costs Order processing costs

Distributor :

Periodic ordering amplification contributes to bullwhip effect.

Forms of Order Batching

Random Ordering Demands from retailers are independent Positively Correlated Ordering All the retailers order in the same period

Balanced Ordering Orders from different retailers are evenly distributed in time

Reasons behind Order Batching

Ordering cost reduction
Transportation economics Sales incentives Promotions resulting in forward buying

Counter measures to order

batching
High order cost:
Electronic Data Interchange (EDI) Computer aided ordering (CAO)

Full truck load economics:

Third-party logistics Assorted truckloads.

Random or correlated ordering:

Regular delivery appointments More frequent ordering

Price Variations
When a manufacturer offers an attractive price, retailers engage in "forward buy" arrangements in which items are bought in advance of requirements Retailers buy in larger quantities that exceeds their actual needs. When the product's price returns to normal, they stop buying until the inventory is depleted. The customer's buying pattern does not reflect its consumption pattern.

Strategies to reduce- Price Variations

Reduce the frequency & the level of wholesale price discounting.

Move to an everyday low price (EDLP)

Keep high & low pricing practice but synchronize purchase & delivery schedules