Bullwhip Effect in supply

chain network

Dr. Saurabh Pratap

Indian Institute of Information Technology
Jabalpur, INDIA
 Presentation Overview
 What is the bullwhip effect
 Consequences of the bullwhip effect over the supply chain
performance
 Causes of the bullwhip effect
 Counter measure of bullwhip effect by implementation of
policy based replenishment program
 Implementation of Bacterial foraging algorithm to determine
optimal order up-to level based ordering policy
 An Example
 Summary

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 What is Bullwhip effect?

The bullwhip effect refers to the

phenomena that the variability of
orders in supply chain increases as
one moves closer to the source of
production.
It causes costly effect to the supply chain
As an example : Excessive inventories,
Unsatisfactory customer service, Uncertain
production planning.

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Variability increases as one moves up the supply
chain

Source: Johnson & Pike, 1999

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 Mathematical realization of bullwhip effect

What is the relation between variance of orders and variance of

demand
If variance (order) > variance (demand) {bullwhip effect}
If variance (order) = variance (demand) {no bullwhip effect}

Demand Order

Retailer

Bullwhip effect = variance (order) > variance (Demand)

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 Consequences of the Bullwhip Effect
 Lower revenues.
 Stockouts and backlogs mean lost sales, as customers take their
business elsewhere.

 Higher costs.
 High carrying cost
 Stockout cost
 Distributors need to expedite orders (at higher shipping expenses)
 Manufactures need to adjust jobs (at higher setups and changeover
expenses, higher labor expenses for overtime, perhaps even higher
materials expenses for scarce components.)
 All entities in the supply chain must also invest heavily in outsized
facilities (plants, warehouses) to handle peaks in demand,
resulting in alternating under or over-utilization.

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 Continue..
 Reduction in product quality.
 Quirky, unplanned changes in production and delivery schedules
disrupt and subvert control processes, begetting diverse quality
problems that prove costly to rectify.

 Poor customer service.

 Irregular, unpredictable production and delivery schedules also
lengthen lead time, causing delay and customer dissatisfaction.

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 Causes of Bullwhip Effect

 Demand Variability
 Rationing and shortage gaming
 Order batching
 Price fluctuations
 Long lead times
 Behavioural factors

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 Processing of demand Information

Variability coupled with time delays in the transmission of information up

the supply chain and time delays in manufacturing and shipping goods
down the supply chain create the bullwhip effect.

 Contributing factors
 No visibility of end demand
 Multiple forecasts
 Long lead-time
 Demand forecast inaccuracy

 Counter Measures
 Access sell-thru or POS (Point of sell ) data
 Direct sales (natural on web)
 Single control of replenishment
 Lead time reduction
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 Rationing or shortage gaming
Shortage gaming: Customers order more than they need during a period of
short supply, hoping that the partial shipments they receive will be
sufficient.

 Contributing factors
 Proportional rationing scheme
 Ignorance of supply conditions
 Unrestricted orders

 Counter Measures
 Allocation based on past sales.
 Shared Capacity and Supply Information
 Flexibility Limited over time, capacity reservation
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 Order Batching
Order batching - Larger orders result in more variance. Order batching
occurs in an effort to reduce ordering costs, to take advantage of
transportation economics and benefits form sales incentives.
 Contributing factors
 High Order Cost
 Full Truck load economies
 Random or correlated ordering
 Counter Measures
 Electronic Data interchange (EDI) & Computer Assisted Ordering
(CAO)
 Discounted on Assorted Truckload, consolidated by 3rd party logistics
 Regular delivery appointment
 Volume and not lot size discounts

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 Price fluctuation
When, product’s price is low (through the direct discount or any
promotional scheme), customer buys in bigger amount than the
needed. When product’s price returns to normal the customer stops
buying until it has deleted its inventory. Thus, High-low pricing
produces the difficulty to access the actual demand of product.

 Contributing factors
 High-Low Pricing leading to forward buy
 Delivery and Purchase not synchronized
 Counter Measures
 Every day low prices (EDLP)
 Limited purchase quantities
 Scan based promotions

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 Our Focus!

 Our Focus is on the counter measure of bullwhip effect, where a policy

based replenishments program are developed to establish coordination
between each participated stages of supply chain.
 Considers the situation
 The participants doesn’t share their demand information with other
members.
 Each player has more than one choices of transportations (fast
transportation facility, slow transportation facility).
 The participants follows the same replenishment policy that is
assigned by manufacturer to all of the participants.

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 Continue…
Optimal order up-to level based policy: According to this policy, the
optimal order up-to level (s) are assigned to the each participants of
the supply chain and they utilize it to decide the amount of product
that is to be ordered for replenishment.

An example:
 It is a multi-stage, serial and single product supply chain
 Supply chain comprises (Customer–Retailer–Warehouse-Distributor
and Manufacture)
 Each stage participants orders to immediate up-stream member of the
supply chain
 Manufacturer has database of the past demands ( Data of per period
customer demand )
 Retailer , warehouse and distributor have two types of transportation
options (their lead times are one period and two periods respectively)
to effectively replenish their demands.

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 Approach for replenishment

Traditional order up-to level approach- According to this approach

each member forecast their order up-to level in each period and
creates orders to achieve their inventory level up-to the forecasted
level.

Optimal order up-to level approach- In this approach, a fixed order

up-to level (s) is assigned to each supply chain participants by a
governing body (Manufacturer). All member follows this assigned
optimal level for long period of time until a new order up-to levels
are allotted.

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 Functioning of traditional order up-to level
approach

Lead time Lead time

order order
Customer demand
Retailer Distributor Manufacture

Order Order
replenishment replenishment

• Forecast for next

period customer • Forecast for next • Forecast for next
demand period retailers period distributors
• Current inventory demand demand
level • Current inventory • Current inventory
level level

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 Process performed by retailer at a period t
Yt= lead time* ( moving average
of demand in time period P) +
adjusting constant *(variance
of lead time demand) (qt) Order created at the
End of period t -1

Retailer forecast Order (qt)=

order upto point order upto point (yt)- remaining
Demand at for time t (yt) Unit at end of t-1(yt-1-Dt-1)
Time t
Retailer

Replenishment
of order at
starting of time t
Remaining unit at
End of (t-1) order-up-to
inventory level at
time(t-1) – demand
realized by retailer
at (t-1)
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 Optimal order up-to level approach
Optimal order up-to level approach-
It establish a continuous replenishment program. In the starting of the
period participant realize their inventory level and the amount it get below
to the assigned order up-to inventory level, they order to immediate
upstream member to replenish it.
Manipulation of optimal order up-to levels:
Objective-
 Maximization of acquired profit
 Maximum customer satisfaction
 Minimization of supply line inventory
 Minimum transportation cost

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 Manipulation Optimal order up-to level for the supply
chain participants
 Input
 Manufacturer have customer demand data sets of previous periods.
 Supply chain comprising five stage (Customer- Retailer – Warehouse-
Distributor -Manufacturer )
 There are two types of transportation facilities for all members of the SC, thus
two optimal levels are assigned for each members.
 Per unit back order/ Penalty cost, Per unit inventory holding cost, Per unit sale
price of the product, Per unit transportation costs for slow and fast
transportation, replenishment lead time of the transportations
 Supply chain modeling using optimal order up-to level
 Mathematical formulation (Objective function)
 Encoding (String representation)
 Manipulation of fitness value of the string
 Utilization of evolutionary algorithm to search best string
 Output (Optimal order up-to level which can provide most profitable
replenishment program)

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 Supply chain model using optimal order
up-to level approach

Lead time Lead time Lead time

Customer Order
Order Order
demand
Ware-
Retailer Distributor Manufacture
house
Order Order Order
replenishment replenishment replenishment

Receive the
product that is
• Ordered quantity at the
in
starting of period =
transportation
(Optimal order up-to level)
– (Inventory at the end of
previous period)

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 Objective function
Total profit acquired by entire SC of M players, after running it for T period/weeks
is
t T  k M 

 ( SP  Fcdt ) 
t 1 
 
HC× Linvk,t + BC× Binvk,t + TC1 ×Y1,k,t  TC2  Y2 ,k,t 

 k 1

Back order
Acquired cost
revenue Transportation
Holding cost cost

 Where
Linvk,t = Inventory at the end of the period t at the stage k
Binvk,t= Back order inventory that is not fulfilled
Y 1,k,t= Order created by the participant k using fast transportation
Y 2,k,t= Order created by the participant k using slow transportation
Fcdt= Fulfilled customer demand
HC, BC, TC1, TC2 per unit cost of holding, back order and
transportations respectively, SP = Per unit sale price of the product
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 Encoding

 Encoding is the first and foremost step in solving a problem

 To encipher a representation scheme for fixed order up-to inventory
levels, an Chromosome (candidate solution) is represented in a form of
string.

10 10 14 43 31 41

Chromosome  Candidate Solution

1. Numbers (1-6) represent the order up-to inventory levels i.e.
2. First three cells represents the first order up-to level for retailer,
warehouse and distributor respectively.
3. 4th , 5th and 6th represents the second order up-to level for retailer ,
warehouse and distributor respectively.

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 Supply chain using fixed order up-to level

Customer
Demand Retailer Warehouse Distributor Manufacturer

•Order
•Order at the starting at the
of the starting
period •Order of at
thethe
period
starting
Order using fast It isofassumed
transportation
the period
= (Firstthat manufacturer
order up-to is able to satisfy all
level)-
Order using fast transportation = (First Orderorderusing
the of up-to
fast level)-
demand transportation
generated by=the
(First order up-to level)-
Distributor
(Inventory level
(Inventory level at the end of the period at the end
(Inventory the period t-1)
t-1) level at the end of the period t-1)
Order using slow
Order using slow transportation= (Second transportation=
Order using orderslowup-to(Second order up-to
transportation= (Second order up-to
level –at(the
level) – ( Inventorlevel) Inventor oflevel
end level) at( Inventor
the t-1
the –period end +oflevel
the period t-1 of
at the end + the period t-1 +
quantity replenished quantity
using replenished usingreplenished
first transportation)
quantity first transportation)
using first transportation)
•Inventory level at
•Inventory level at the starting of period the starting
•Inventory= Inventoryof period
level at the
level = Inventory
starting
at the end
of periodlevel=atInventory
the end level at the end
of + transported
of + transported inventory using fastinventory using fast
of transportation
+ transported transportation
inventory
in period (t-1)+
using fast in transportation
period (t-1)+ in period (t-1)+
transported
transported inventory using slowinventory using slow
transportation
transported transportation
inventory
in period using
(t-2) slow in transportation
period (t-2) in period (t-2)
•Satisfy demand
•Fulfillment of customer the orderin created
•Satisfy by order
the period
the the
t retailer
created in by
thewarehouse
period t in the period t

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 How supply chain are simulated using fixed
order up-to level
Let, released inventory from warehouse using slow transportation at period of (t-2)=26,
Released inventory from warehouse in the starting of the period (t-1)
using fast transportation =0,
using slow transportation =29,
Inventory level at the end of period (t-1)=8
If order up to levels represented as string 10 10 14 43 31 41

Replenishment processing at retailer stage in period t:

Customer Period Initial Fulfilled Remained Back Demand Repleni Demand Replenis Initial
Demand Inventory demand Inventory order using fast shed using hed inventory
(Retailer) at the end quantity slow quantity (Warehou
transport transport se)

33 tth 34 33 1 0 2 2 33 27 29
= 8+26+0
= 34-33 = 10 - 8 = 43-(8+2)
Customer demand <
Inventory available Demands are fully
= 29>2 = 27 out of 33 has been
satisfied
fulfilled 24
 Continue…

Customer Period Initial Fulfilled Remaine Back Demand Replenis Demand Replenish Initial
Demand Inventory demand d order using fast hed order ed inventory
(Retailer) Inventory quantity using slow quantity (Wareho
at the end transport transportat use)
ion

33 tth 34 33 1 0 2 2 33 27 29
26 (t+1)th 32 26 6 0 9 9 33 20 29
30 (t+2)th 42 30 12 0 4 4 33 27 31
… … … … … … … … … … …

This column contribute to provide

sum of acquired revenue Incurred costs (back order cost, inventory holding
cost, transportation cost) at retailer stage

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 Example

 In order to assign the optimal order up-to level (s) manufacturer

have information
 Period wise customer demand pattern =Normally distributed
with mean=30, variance= 5.0
 Per unit back order cost =1.5 $
 Per unit sale price of product=3.0 $
 Per unit inventory holding cost= 0.25 $
 Per unit transportation cost (fast transportation, lead time one
period )= 0.4 $
 Per unit transportation cost (slow transportation, lead time two
period )= 0.2 $

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Manipulation of optimal order up-to levels

 Generate the several set of customer demand data on the

basis of demand distribution.
 For all sets of customer demand optimal order up-to levels
are determined using random optimization technique.
 The result (order up-to level) which is suitable to provide
maximum profit in most of experiments that are selected as
a optimal order up-to levels.
 Acquire optimal order up-to levels have been tested over
practical data set of customer demand, performance of
supply chain are observed in form of customer satisfaction,
and period wise inventory level at the each stages.

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 Experiments conducted
Experiment Maximum Profit Optimum order up-to levels

1 4361.5 <14, 10, 17, 41, 30, 36 >

2 4515.92 <10,10, 11, 43, 31, 36 >
3 5015.1 <10,10, 11, 43, 31, 36 >
4 4550.6 <10, 10, 13, 43, 31, 37 >
5 4508.96 <12,10,14, 41, 30, 37 >
For all these six
6 4601.9 <12,10,14, 41, 30, 37 >
experiments results (10, 10,
7 4455.1 <10,10,11, 33, 29, 35 >
14, 43, 31, 41)
8 4491.92 <10,10,11, 33, 29, 35 >
is a same, thus has been
9 4305.96 <10,10,11, 33, 29, 35 >
selected as a suitable
10 4732.351 <10, 10, 14, 43, 31,41>
optimal up-to level for
11 4517.73 <10, 10, 14, 43, 31, 41>
given SC scenario
12 4747.966 <10, 10, 14, 43, 31, 41>
13 4795.146 <10, 10, 14, 43, 31, 41>
14 4591.314 <10, 10, 14, 43, 31, 41>
15 5190.5 <10, 10, 14, 43, 31, 41>
16 4539.8 <14, 10, 17, 41, 30, 36 >
17 4471.8 <13, 10, 11, 40, 31, 37 >
18 4553.7 <13, 10, 11, 38, 31, 37 >
19 4470.1 <11, 10, 11, 41, 31, 39 >
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20 4603.0 <11, 13, 12, 41, 31,39 >
 Test over practical data set
Performance of supply chain in form Inventory level at each stages by employing
optimal order up-to level (10, 10, 14, 43, 31, 41)

Inventory level (R etailer)

Inventory level (Warehous e)
Inventory level (D is tributor)
C us tomer D emand
60
50
Inventory levell

40
30
20
10
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
Number of period

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 Performance in form of customer
satisfaction

P erc entage of fulfilled

c us tomer demand

120
100
P erc entage

80
60
40
20
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97

Number of period

Results show that in most of the periods

customer demands are fully satisfied

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Importance of Optimal order up-to level bashed
approach
It provides a centralized approach by considering
supply chain as a whole.
Optimal order up-to level (s) based monitoring of
product replenishments facilitates a stringent control
over supply line inventory level and customer
satisfaction.
It facilitates the economized utilization of
transportation options to provide a steady flow of
material through out the supply chain.

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Thank you

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