Phenomenon of bullwhip effect in a supply chain.

Buchmeister, Borut ; Kremljak, Zvonko ; Palcic, Iztok 等

Abstract: The Bullwhip effect is a wasteful phenomenon that occurs due to a lack of information across the supply chain. It is understood that demand forecast variance contributes to that effect in the chain. The authors experimented with two cases: a) stable demand with a single 5 % change in demand, and b) changing demand in periodic 10 % increases and later in the same decreases. Increasing variability of orders and stocks up the supply chain is evident. When we understand the nature of supply chain dynamics, there are several actions concerned with coordinating the activities of the operations in the chain, which is discussed in the last part of the paper.

Key words: supply chain, bullwhip effect, cases, elimination

1. INTRODUCTION

A supply chain, logistics network, or supply network is a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer. Supply chains link value chains (Chase et al., 2001; Nagurney, 2006).

Although many companies and corporations today are of importance not just on national but also on global scale, none are of a size that enables them to control the entire supply chain, since no existing company controls every link from raw material extraction to consumer.

2. BULLWHIP EFFECT

The Bullwhip effect (or Whiplash effect) is an observed phenomenon in forecast-driven distribution channels. Even a slight change in customer sales ripples backward in the form of amplified oscillations upstream, resembling the result of a flick of a bullwhip handle. Because the supply patterns do not match the demand patterns, inventory accumulates at various stages.

The concept has its roots in (Forrester, 1961) Industrial Dynamics. Because customer demand is rarely perfectly stable, businesses must forecast demand. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called safety stock. Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory (Lee et al., 1997; Metters, 1997; Simchi-Levi et al., 2003).

Factors contributing to the Bullwhip effect: forecast errors, overreaction to backlogs, lead time (of information--orders and of material) variability, no communication and no coordination up and down the supply chain, delay times for information and material flow, batch ordering (larger orders result in more variance), rationing and shortage gaming, price fluctuations, product promotions, free return policies, inflated orders (Slack et al., 2001).

[FIGURE 1 OMITTED]

3. STABLE DEMAND WITH A SINGLE 5 % CHANGE IN DEMAND

We present a four-stage supply chain where a manufacturer is served by three tiers of suppliers (see Table 1). The market demand has been running at a rate of 100 items per period, but in period 2 it reduces to 95 items per period. All stages in the chain work on the principle that they will keep in stock one period's demand.

At the beginning of period 2, the manufacturer (M) has 100 units in stock (that being the rate of demand up to period 2). Demand in period 2 is 95 and so the M knows that it would need to produce sufficient items to finish up at the end of the period with 95 in stock (this being the new demand rate). To do this, it need only manufacture 90 items; these, together with 5 items taken out of the starting stock, will supply demand and leave a finished stock of 95 items. The beginning of period 3 finds the M with 95 items in stock. The manufacturer now operates at a steady rate of producing 95 items per period.

The same logic is used through to the first-tier supplier (S1). The demand which it has to supply in period 2 is derived from the production rate of the M (dropped down to 90). The S1 therefore has to produce sufficient to supply the demand of 90 items and leave one period's demand as its finish stock. A production rate of 80 items per period will achieve this. In period 3 the demand from the M has risen to 95 items. To fulfil this demand, it must produce 100 items. After period 3 the S1 then resumes a steady state, producing 95 items per period. The fluctuation has been greater than that in the M's production rate, decreasing to 80 items a period, increasing to 100 items a period, and then achieving a steady rate of 95 items a period.

This logic can be extended right back to the third-tier supplier (S3). After period 5 the S3 resumes a steady state, producing 95 items per month. The fluctuation of production rate has been the most drastic, decreasing to 20 items a period, increasing to 180 items a period. In this simple case, the decision of how much to produce was governed by the following relationship:

Production rate = 2 x demand--starting stock (= 0) (1)

Shown case does not include any time lag between a demand occurring in one part of the supply chain and it being transmitted to its supplier. In practice there will be such a lag!

4. CHANGING DEMAND IN PERIODIC 10% INCREASES AND LATER IN 10% DECREASES

Table 2 presents a two-stage supply chain for an item with sales growing at 10 % per period for 4 periods and then shrinking by 10 % for 4 more periods. Both stages in the chain work with the same stock keeping strategy as before.

For example, in period 2 the sales of 110 units result in ending inventory of -10, which is thereafter corrected by an order and delivery of 120 units to bring the period 3 beginning inventory to its desired level of 110. Table 2 clearly shows the Bullwhip effect. The sales go up 46 %, and thereafter go down 35 %. Orders to the manufacturer go up by 59 %, and then down by 47 %. Even more dramatically, orders to the supplier go up by 73 % and then (after the first 10 % decrease) down by 58 % (173 to 73) and up (after another 10 % decrease) by 29 %.

5. HOW CAN THE BULLWHIP EFFECT BE AMELIORATED?

Companies must understand fully its main causes and implement some new strategies. Different actions are possible:

* Minimize the cycle time in receiving projected and actual demand information.

* Establish the monitoring of actual demand for product to as near a real time basis as possible.

* Understand product demand patterns at each stage of the supply chain.

* Minimize or eliminate information queues that create information flow delays.

* Eliminate inventory replenishment methods that launch demand lumps into the supply chain.

* Reduce the order sizes and implement capacity reservations.

* Minimize incentive promotions that will cause customers to delay orders and thereby interrupt smoother ordering patterns.

* Offer your products at consistently good prices to minimize buying surges brought on by temporary promotional discounts.

* Identify, and preferably, eliminate the cause of customer order reductions or cancellations.

* Implement special purchase contracts in order to specify ordering at regular intervals, limit free return policies.

6. CONCLUSION

The Bullwhip effect shows how small changes at the demand end of a supply chain are progressively amplified for operations further back in the chain, resulting in excess inventories, quality problems, higher raw material costs, overtime expenses, shipping costs and poorer service. The effect indicates a lack of synchronization among supply chain members because of corrupt key information about actual demand. In the worst-case scenario, customer service goes down, lead times lengthen, sales are lost, costs go up and capacity is adjusted. An important element to operating a smooth flowing supply chain is to mitigate and preferably eliminate the Bullwhip effect.

7. REFERENCES

Chase, R. B.; Aquilano, N. J. & Jacobs, F. R. (2001). Operations management for competitive advantage, McGraw-Hill/Irwin, Boston

Forrester, J. W. (1961). Industrial dynamics, MIT Press, Cambridge

Lee, L. H.; Padmanabhan, V. & Whang, S. (1997). Information distortion in a supply chain: the Bullwhip effect, Management Science, Vol. 43, No. 4, 546-558

Metters, R. (1997). Quantifying the Bullwhip effect in supply chains, Journal of Operations Management, Vol. 15, No. 2, 89-100

Nagurney, A. (2006). Supply chain network economics: dynamics of prices, flows, and profits, Edward Elgar Publishing, Cheltenham

Simchi-Levi, D.; Kaminsky, P. & Simchi-Levi, E. (2003). Designing and managing the supply chain, McGraw-Hill, New York

Slack, N.; Chambers, S. & Johnston, R. (2001). Operations management, Prentice Hall, Harlow

Table 1. Changes of production rates and stock levels along supply
chain (single 5% leap).

 Manufacturer

 Demand Prod. Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 95 90 100 / 95
3 95 95 95 / 95
4 95 95 95 / 95
5 95 95 95 / 95
6 95 95 95 / 95

 Supplier 1

 Demand Prod. Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 95 80 100 / 90
3 95 100 90 / 95
4 95 95 95 / 95
5 95 95 95 / 95
6 95 95 95 / 95

 Supplier 2

 Demand Prod. Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 95 60 100 / 80
3 95 120 80 / 100
4 95 90 100 / 95
5 95 95 95 / 95
6 95 95 95 / 95

 Supplier 3

 Demand Prod. Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 95 20 100 / 60
3 95 180 60 / 120
4 95 60 120 / 90
5 95 100 90 / 95
6 95 95 95 / 95

Table 2. Changes of production rates and stock levels
(continual 10 % demand changes).

 Manufacturer

 Demand Production Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 110 120 100 / 110
3 121 132 110 / 121
4 133 145 121 / 133
5 146 159 133 / 146
6 131 116 146 / 131
7 118 105 131 / 118
8 106 94 118 / 106
9 95 84 106 / 95

 Supplier

 Demand Production Stock
Period (market) rate start / finish

1 100 100 100 / 100
2 110 140 100 / 120
3 121 144 120 / 132
4 133 158 132 / 145
5 146 173 145 / 159
6 131 73 159 / 116
7 118 94 116 / 105
8 106 83 105 / 94
9 95 74 94 / 84