Bull Whip Effect

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Bull Whip Effect

© All Rights Reserved

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chain network

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

2

What is Bullwhip effect?

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.

3

Variability increases as one moves up the supply

chain

4

Mathematical realization of bullwhip effect

demand

If variance (order) > variance (demand) {bullwhip effect}

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

Demand Order

Retailer

5

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.

6

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.

Irregular, unpredictable production and delivery schedules also

lengthen lead time, causing delay and customer dissatisfaction.

7

Causes of Bullwhip Effect

Demand Variability

Rationing and shortage gaming

Order batching

Price fluctuations

Long lead times

Behavioural factors

8

Processing of demand Information

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

9

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

10

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

11

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

12

Our Focus!

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.

13

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.

14

Approach for replenishment

each member forecast their order up-to level in each period and

creates orders to achieve their inventory level up-to the forecasted

level.

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.

15

Functioning of traditional order up-to level

approach

order order

Customer demand

Retailer Distributor Manufacture

Order Order

replenishment replenishment

period customer • Forecast for next • Forecast for next

demand period retailers period distributors

• Current inventory demand demand

level • Current inventory • Current inventory

level level

16

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

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)

17

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

18

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)

19

Supply chain model using optimal order

up-to level approach

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)

20

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

21

Encoding

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

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.

22

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

23

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

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

… … … … … … … … … … …

sum of acquired revenue Incurred costs (back order cost, inventory holding

cost, transportation cost) at retailer stage

25

Example

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 $

26

Manipulation of optimal order up-to levels

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.

27

Experiments conducted

Experiment Maximum Profit Optimum order up-to levels

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 >

28

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 (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

29

Performance in form of customer

satisfaction

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

customer demands are fully satisfied

30

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.

31

Thank you

32

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