Bullwhip:

In a supply chain the variability of the orders received by the supplier can be greater
than the demand variability. This phenomenon is named bullwhip effect. ...
The bullwhip effect refers to the phenomenon of amplification and distortion of demand
in a supply chain.

http://web.alt.uni-miskolc.hu/als/cikkek/2009/ALS3_p127_133_Grabara_Starostka_Patyk.pdf

CAUSES OF BULLWHIP EFFECT:

The four major causes of BULLWHIP EFFECT are:

1. Demand for forecasting

2. Order Batching
3. Price fluctuation
4. Rationing and shortage printing

1) Demand for Forecasting

Every company does forecasting for its production, scheduling, capacity planning, inventory
control and materials requirements planning. Each person in the supply chain network forecast
demands depending on the requirement from the downstream personnel. Thus apart from each
personnel forecast consists of their own forecast plus the requirement from the downstream personnel
in the network. This creates a huge variability in the actual and the forecasted demand. Usually we use
exponential smoothing method for demand forecasting. Also each person in the supply chain also has a
safety stock to meet unforeseen demand. If the time to resupply stock is longer the safety stock
maintained is higher. Thus, safety stock also adds to the bullwhip effect of having excess supply than the
demand.

2) Order batching
Each company places an order with an upstream organization using some inventory monitoring
or control. Usually there are two forms of ordering batches: periodic ordering or push ordering.
In periodic ordering the order is placed at a certain period in time means weekly, biweekly or
monthly. Due to this periodic ordering style the demand or supply during certain period is high
and during the other phase is slack, thus contributing to the bullwhip effect. On the other hand
ordering frequently one faces the obstacle of transportation cost. The difference in full truck
load price versus half truck load price makes it difficult to place frequent orders. In push
ordering a company experiences surges in demand. This is due to demands being pushed by the
sales person during the end of quarter or month to fill their sales quota. Thus the difference
between ordering pattern and consumption pattern in this case is erratic contributing to the
bullwhip effect.
Order of consumers are spread out evenly, the bull whip effect would be minimal.
3) Price fluctuation
Forward buy arrangement is a technique where items are bought in advance of requirements.
This arrangement is followed by the manufacture and distributor of grocery industry. This
results from fluctuation of prices in the market place. The manufacturers and distributors offer
discounted prices to increase their sales. This has led to customers purchasing the goods even if
there is no requirement. This forward buying has led to uncertainty in the actual demand and
requirement forecasting again contributing to the bull whip effect.

4) Rationing and shortage printing

When product demand exceeds supply a manifactur4e often rations its products to customers.
In one scheme, he allocates amount in proportion to the amount ordered. Eg: If the supply is 50
percent to demand, the customer will receive only 50 percent of the order placed. This will lead
to customers ordering in excess and with multiple distributors just to meet their requirements
or demands. Once there is enough supply suddenly the demand will disappear as the customet
has played the game of excess ordering to meet their demand. Again this causes discrepancy to
judge the actual requirement of the product.

The bull whip effect can be minimized by using various initiatives and remedies based on
information sharing, channel alignment and operational efficiency.

Information sharing:
1) Demand Forecast:

Understanding system dynamics

Use point of sale data

Electronic data interchange
Internet
Computer assisted ordering

Strategy to improve supply chain effectivity is through better collaboration with customers and
suppliers. When companies work with customers to understand their plans and forecasts, they
can build promotions and seasonality into the forecast and then provide more insight to their
suppliers to help prevent the build-up of unnecessary inventory due to the bullwhip effect.
Supplier portals, EDI transactions, event alerts and project portals are some of the most
common ways to increase visibility and collaboration.
2)Channel alingmnet:
Vendor managed inventory
Discount for information sharing
Consumer direct

The most important benefit of supply chain management applications is the visibility and insight
they provide. Without the right degree of insight, the company must rely on guesswork or rules
of thumb to make decisions. The result will nearly always be sub-optimization of the supply
chain that results in higher costs, excess inventory, and slow deliveries.

Operational efficiency:
Lead time reduction
Echelon – based inventory control

Even if a company tries to become more demand driven, it still need a forecast to plan long lead
time items or to cover demand from new customers, new products or in-house promotions.
While it’s a given that a forecast will be inaccurate, there are steps that can improve accuracy.
Ensuring that you use the right algorithm to project demand is one way to increase accuracy;
taking input from sales and customers is another.

Order Bactching:
Internet ordering
Channel alignment- discount on truck load assortment
Delivery appointments
Consolidation
Logistics outsourcing

Information Sharing- Electronic data interchange reduces the cost involved in manual process of
ordering which starts from raising PO however this does not curb the surge in demand on the
products as the cost involved in logistics especially between full-truck load and less-than-truck
loads are significant that companies find it economical to order full-truck load although this
leads to infrequent replenishments from the supplier. Infact, even if the orders are made with
little effort and low cost through EDI, the improvements in order efficiency are wasted due to
the full truckload constraint.
Now few companies have started giving discounts to distributors that are willing to order mixed
stock-keeping unit (SKU) loads of any products. Manufacturers could also prepare and ship
mixed SKU’s to the distributors’s warehouses that are ready to deliver to the stores.
Consolidation of distribution such as farm fresh produce / chilled products can use the SKU
concept to make resupply more frequent. Since these products need to be stored at different
temperatures, trucks to transport having such inbuilt infrastructure in it can help transport more
such goods.

Use of third party logistics also helps make small batch of replenishments economical.
By consolidating loads from multiple suppliers located near each other, a company can realize
full truck load economies without batches coming from same supplier. There are additional
handling and administrative costs for such consolidations or multiple pickups, but savings often
outweigh the cost. For small customers / retailers whose volume do not justify frequent full
truckload replenishments independently, this is appealing. Especially grocery wholesalers will
save significant cost in this medium.

Operational efficiency- Reduction in fixed cost of ordering by EDI or e-commerce

CAO
Causes of forward buying and diversions is to reduce both the frequency and the level of
wholesale price discounting. The manufacturer can reduce the incentives for retail forward
buying by establishing a uniform wholesale pricing policy.
From operational perspective & practices such as CRP together with a rationalized wholesale
pricing policy as stated above, can help to control retailers tactics. Manufacturers use of CAO for
sending orders also minimizes the possibility of such a practice.

PRICE FLUCTUATIONS
CHANNEL ALIGNMENTG- Continuous replenishment program
Everyday low price
Operational efficiency
Everyday low price
Activity based costing – enables to understand the excessive cost of forward buying and
diversions. ABC provides explicit accounting of the costs of inventory, storage, special handling,
premium transportation and so on.

SHORTAGE GAMING -
INFORMATION SHARING-
Sharing, sales, capacity and inventory data
Demand driven supply chain management is one of the most effective ways to reduce the
bullwhip effect. It is a known fact that most forecasts are inaccurate, so when actual demand
materializes it is almost certain to differ from forecast quantities. This causes companies to
place emergency orders on suppliers. Without effective communication, those suppliers’ supply
chain management systems will overreact, setting off a chain reaction of excess inventory that
increases cost and slows velocity. In contrast, a demand driven supply network will have less
overall inventory and be more responsive.

CHANNEL ALIGNMENT-
Allocation based on past sales