10/4/2016

THEBULLWHIPEFFECT

Supplychainstages

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Supplychain:decentralized

The retailer does forecasting based on the customer demand.

demand
The distributor receives the order from retailer and then places the order to
the manufacturer.
If the distributor does not have POS data (decentralized information) then it
does forecasting based the order placed by the retailer.

Demandfluctuation

Lee,H,P.Padmanabhan andS.Wang(1997),SloanManagementReview

10/4/2016

Bullwhipinsupplychain
Manufacturer

Distributor

Retailer

Customer
demand

Production

Stock

Purchase

Stock

Purchase

Stock

100

100
100

100

100
100

100

100
100

100

Bullwhipinsupplychain
Manufacturer

Distributor

Retailer

Customer
demand

Production

Stock

Purchase

Stock

Purchase

Stock

100

100
100

100

100
100

100

100
100

100

60

100
80

80

100
90

90

100
95

95

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Bullwhipinsupplychain
Manufacturer

Distributor

Retailer

Customer
demand

Production

Stock

Purchase

Stock

Purchase

Stock

100

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

Bullwhipinsupplychain
Manufacturer

Distributor

Retailer

Customer
demand

Production

Stock

Purchase

Stock

Purchase

Stock

100

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

10/4/2016

Bullwhipinsupplychain
Manufacturer

Distributor

Retailer

Customer
demand

Production

Stock

Purchase

Stock

Purchase

Stock

100

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

Causesofbullwhipeffect
Demandforecasting(uncertainty)
Leadtime
Batchordering
Pricefluctuation
Inflatedorder

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Demandforecasting
Periodicreviewpolicy(P)
Basestocklevel
Basestockdependsonestimateofdemandand
standarddeviationofdemand.

Leadtime
Lead time influences the safety stock and reorder
points in Q model (continuous review).
Lead time influences the base stock level in P
model (periodic review).
For long lead time, small error in demand
estimates is amplified. Thus variability is increased.

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Batchordering
TheretailersmayorderbasedonEOQ
Thewholesalerobserverssporadiclargeorder
The wholesaler observers sporadic large order
followedbynoorder.
Volumediscount
FTLquantity
Quarterlysalesquota

Pricefluctuation
Promotionsanddiscounts
Forward buying and inventory stock up
Forwardbuyingandinventorystockup

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Inflatedorders
Shortagegaming

Quantificationofbullwhip

Var (Q)
2 L 2 L2
= 1+
+ 2
Var ( D )
p
p

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Centralizedinformation
Eachstageofsupplychaingettherealdemanddata
(POS)oftheretailer
Varianceoforderplacedbythekthstageofsupply
chainisVar (Qk)
VarianceofcustomerdemandisVar
Variance of customer demand is Var (D)
k
2
2 L
L
Var (Q)
= 1 + i =1 + i =12
Var ( D )
p
p
k

Decentralizedinformation
The wholesaler estimates the mean and variance
of demand at retailers point based on the order
received.
received
Varianceoforderplacedbythekthstageofsupply
chainisVar (Qk)
Variance of customer demand is Var (D)
VarianceofcustomerdemandisVar
k
2 L 2 L2
Var (Q k )
= 1 +
+ 2
Var ( D)
p
p
i =1

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Advantageofcentralizedinformation

In centralized, the variance of order increase additively with the total lead
time. In case of decentralized, the variance of order increase multiplicatively.
Centralized demand information can curb the bullwhip effect.

Reduceinformationuncertainty
Centralizeddemandinformation
Eachstageofsupplychainshouldhaveaccesstothe
Each stage of supply chain should have access to the
realdemandinformation.
Needstrustbuildingandcollaboration amongsupply
chainpartners

10

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Leadtimereduction
Crossdocking
EDI
GPS

Reducedemandvariability
Promotionsandpricediscountisdiscouraged.
EDLPstrategy
EDLP strategy

11

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Strategicpartnership
VMI
Onsitevendorrepresentative
Themanufacturerdoesnotrelyontheorderplaced.

EffectsofBullwhip

Increasedsafetystock
Reducedservicelevel
Inefficientallocationofresources
Increasedtransportationcosts

12