Supply Chain Integration

BULLWHIP Effect
VALUE OF INFORMATION

The Bullwhip Effect

and its Impact on the Supply Chain
• Consider the order pattern of a single color
television model sold by a large electronics
manufacturer to one of its accounts, a
national retailer.

Figure 1. Order
Stream

Huang at el. (1996), Working paper, Philips Lab

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 The Bullwhip Effect
and its Impact on the Supply Chain

Figure 2. Point-of-sales
Data-Original

Figure 3. POS Data After

Removing Promotions

The Bullwhip Effect

and its Impact on the Supply Chain

Figure 4. POS Data After Removing Promotion & Trend

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Higher Variability in Orders Placed by Computer
Retailer to Manufacturer Than Actual Sales

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

Increasing Variability of Orders

Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

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 We Conclude ….

• Order Variability is amplified up the

supply chain; upstream echelons face
higher variability.

• What you see is not what they face.

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 The Bullwhip Effect

No POS Data
Little Information Sharing

Poor
Forecasting

Production Schedules
Not Shared for Distribution
Planning
Min /Max
Little Information Sharing
for Manufacturing Planning

Manufacturing Distributor End User

The longer the supply chain, the harder the whip cracks!

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• Single retailer, single manufacturer.
– Retailer observes customer demand, Dt.
– Retailer orders qt from manufacturer.
– Lead time =L.

Dt qt
Retailer Manufacturer
L

The Bullwhip Effect

Var (Q ) 2 L 2 L2
≥1+ + 2
Var ( D ) P P

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 Var(q)/Var(D):
For Various Lead Times
14
L=5
12

10

8 L=3

4 L=1
L=1
2

0
0 5 10 15 20 25 30

Consequences….
• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs

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 Multi-Stage Supply Chains
Consider a multi-stage supply chain:
– Stage i places order qi to stage i+1.
– Li is lead time between stage i and
i+1.
qo=D q1
Retailer Manufacturer q2 Supplier
Stage 1 L1 Stage 2 Stage 3
L2

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 Formula
k k
2(∑ Li ) 2(∑ Li ) 2
Var(Q K )
≥ 1+ i =1
+ i =1

Var ( D) p p2
Var(Q K ) k −1  2 Li 2 Li 2 
≥ ∏ 1 + + 2 
Var ( D) i =1  p p 

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 Multi-Stage
Systems:Var(qk)/Var(D)

30
25 Dec, k=5

20

15
Cen, k=5
10 Dec, k=3
Cen, k=3
5
k=1
0
0 5 10 15 20 25

The Bullwhip Effect:

Managerial Insights
• Exists, in part, due to the retailer’s need to
estimate the mean and variance of demand.
• The increase in variability is an increasing
function of the lead time.
• The more complicated the demand models
and the forecasting techniques, the greater
the increase.
• Centralized demand information can reduce
the bullwhip effect, but will not eliminate it.

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 Coping with the Bullwhip Effect
• Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
• Reduce Lead Times
- EDI
- Cross Docking
• Alliance Arrangements
– Vendor managed inventory
– On-site vendor representatives

Example:
Quick Response at Benetton

• Benetton, the Italian sportswear manufacturer, was

founded in 1964. In 1975 Benetton had 200 stores
across Italy.

• Ten years later, the company expanded to the U.S.,

Japan and Eastern Europe. Sales in 1991 reached 2
trillion.
• Many attribute Benetton’s success to successful use
of communication and information technologies.

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 Example:
Quick Response at Benetton
• Benetton uses an effective strategy, referred to
as Quick Response, in which manufacturing,
warehousing, sales and retailers are linked
together. In this strategy a Benetton retailer
reorders a product through a direct link with
Benetton’s mainframe computer in Italy.
• Using this strategy, Benetton is capable of
shipping a new order in only four weeks, several
week earlier than most of its competitors.

How Does Benetton

Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with
production
and inventory information
• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy

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