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Bullwhip effect

Order Size

Phenomenon Observed
in Supply Chains

Customer
Customer
Demand
Demand
Distributor
Distributor Orders
Orders

Retailer
RetailerOrders
Orders

Production
ProductionPlan
Plan

Time
2

The Bullwhip Effect!

Bullwhip Effect
The bullwhip effect is a phenomenon observed in supply chains
wherein the demand variability increases as one moves upstream
from retailers to distributors to manufacturers

Retailers
Warehouses/
Distributors
Manufacturers
Commonly, the variability of Q is 2 to 15 times the variability of D

Example: P&G Diapers

Bullwhip Effect Example


Period Third tier

Second tier

First tier

OEM

Prod

Prod

Prod

Stock

1
2

100

100

100

90

100
95

95

95

95
95

95

95

95
95

95

95

95
95

95

95

95
95

95

Prod

Stock

Stock

Stock

Demand

Bullwhip Effect Example


Period Third tier

Second tier

First tier

OEM

Prod

Prod

Stock

Prod

Stock

100

100
100

100

100

100

80

100
90

90

100
95

95

100

90
95

95

95
95

95

95

95
95

95

95
95

95

95

95
95

95

95
95

95

95

95
95

95

95
95

95

Prod

Stock

Stock

Demand

Bullwhip Effect Example


Period Third tier

Second tier

First tier

OEM

Prod

Stock

Prod

Stock

Prod

Stock

100

100
100

100

100
100

100

100

100

60

100
80

80

100
90

90

100
95

95

120

80
100

100

90
95

95

95
95

95

90

100
95

95

95
95

95

95
95

95

95

95
95

95

95
95

95

95
95

95

95

95
95

95

95
95

95

95
95

95

Prod

Stock

Demand

Bullwhip Effect Example


Period Third tier

Second tier

First tier

OEM

Demand

Prod

Stock

Prod

Stock

Prod

Stock

Prod

Stock

100

100
100

100

100
100

100

100
100

100

100

100

20

100
60

60

100
80

80

100
90

90

100
95

95

180

60
120

120

80
100

100

90
95

95

95
95

95

60

120
90

90

100
95

95

95
95

95

95
95

95

100

90
95

95

95
95

95

95
95

95

95
95

95

95

95
95

95

95
95

95

95
95

95

95
95

95

Typical supply chain dynamics The Bullwhip Effect


Manufacturers orders to
10
its suppliers
Orders

Orders

10

Orders

10

Time
Manufacturer

Consumers

Wholesaler

Retail Store

Wholesalers orders to
manufacturer
Time
Source:SlackandLewis2002

Time

10
Orders

Sales from store

Stores orders to
wholesaler

Time

Bullwhip is Bad
It distorts the order information & amplifies order variability.

Impact of Bullwhip Effect:


-- Inventory: More safety stock needed
-- Transportation: Lower utilization of transportation
-- Warehousing: More warehouse capacity needed

Higher costs

-- Manufacturing: Lower capacity utilization


-- Customer Service: Lower service level, more likely to cause
stockouts and lost sales

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Causes
Order batching
Demand forecast updating (Lack of
information sharing)
Rationing of supply
Behavioral Causes

12

Demand Signal Processing

Order Qt goes to upstream

Mfctr.

Lead time L

Orders from downstream


in the past p time periods
Dt-p, Dt-p+1, , Dt-1

Retailers

Customers

Retailers forecast customers demand


and then place orders with manufacturer
Manufacturer receives orders from retailers
13

Order batching
Order Qt goes to upstream

Mfctr.

Lead time L

Orders from downstream


in the past p time periods
Dt-p, Dt-p+1, , Dt-1

Retailers

Customers

Assume the retailer orders every 3 periods


If customer demands are 4, 4, 4, 4, 4, 4, 4,
Then retailer demands are 0, 0, 12, 0, 0, 12,

14

Demand Forecast Updating


Order Qt goes to upstream

Mfctr.

Lead time L

Orders from downstream


in the past p time periods
Dt-p, Dt-p+1, , Dt-1

Retailers

Customers

L=5
In the past: demand (forecast) per period has been stable at 4; an order for
4 items has been placed each period; inventory levels have been kept low.
This period, demand has gone up to 8, and the forecast for future periods
has gone up to 8 as well.
How much should you order in this and coming periods to attain the right
inventory levels in the future?
Order 8+L(8-4) = 28 products now and 8 in coming periods.

15

Demand Forecast Updating


Order Qt goes to upstream

Mfctr.

Lead time L

Orders from downstream


in the past p time periods
Dt-p, Dt-p+1, , Dt-1

Retailers

Customers

In the past: demand (forecast) per period has been stable at 4; an order for
4 items has been placed each period; inventory levels have been kept low.
This period, demand has gone up to 28,

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Rationing and Shortage Gaming


When product demand exceeds supply, a manufacturer often rations
its product to customers. Example:

Car Manufacturer
Available = 200

Dealer 1

Order = 100

Received = 67

Dealer 2

Order = 200

Received = 133

Only 2/3 of the order can be fulfilled

Knowing the manufacturer policy, customers exaggerate their real


needs when they order (game the system). Example:

Car Manufacturer
Available = 500

Dealer 1

Need = 120

Order = 180

(Received = 180)

Dealer 2

Need = 180

Order = 270

(Received = 270 )

As a result, customers orders give the supplier little information on a


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products real demand, a particularly vexing problem for new products

Behavioral Causes
Not taking outstanding orders into
account.
Not using or misusing feedback and
additional information.

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The Role of Supply-Chain


Management
Manage entire chain as a system
Reduce inventory levels
Reduce cycle times and delays
Share information (partnerships) e.g. CPFR
(Collaborative Planning, Forecasting and
Replenishment)
Compete on customer service rather than
crass price cuts and promotions

Counteract the Bullwhip


Cause of Bullwhip

Initiatives

Order batching

Keep ordering costs low

Demand forecast updating

Share demand information

Rationing of supply

Share inventory information

Behavioral Causes

Training
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For more information, see:


Lee, Hau L., V. Padmanabhan and Seungjin
Whang, (1997), Information Distortion in a
Supply Chain: The Bullwhip Effect,
Management Science, Vol. 43, No. 4, pp. 546558
Lee, Hau L., V. Padmanabhan and Seungjin
Whang, (1997), The Bullwhip Effect in Supply
Chains, Sloan Management Review, Vol. 38,
Spring, pp. 93-102