A CRITICAL ANALYSIS OF

BULL-WHIP EFFECT
IN SUPPLY CHAIN MANAGEMENT

Prepared by:
1. HEMANT AHER 19-S-002
2. SURAJ DHOLAKIA 19-S-037
3. AAKASH GADA 19-S-041
4. RIYA SHARMA 19-S-125
 1. POTENTIAL CAUSES OF THE BULL-WHIP EFFECT IN SUPPLY CHAIN:
The supply chain consists of boundary-spanning activities that transcend functional and organizational
boundaries. The failure to recognize interdependence caused by boundary-spanning activities is often
the main cause of the bullwhip effect. That is to say, uncoordinated demand creation and physical
supply activities across functions and organizations can lead to supply chain oversupply with resultant
inefficiency and ineffectiveness. In the following paragraphs, the various causes of the bullwhip effect
are discussed:

1. Information Failure: An unprecedented number and variety of products competing in today’s

markets make it increasingly difficult for manufacturers, suppliers, retailers to predict and plan for
orders and production volume (Fisher, Hammond, Obermeyer, and Raman, 1994). Coupled with
such demand uncertainty, a firm’s sales forecasting based on order history from its immediate
downstream supply chain members can distort the true end-customer demand and thereby
contributing to upstream order variability. In particular, during the period of continuous product
shortages, overzealous downstream supply chain members tend to over-order and stockpile their
shelves with inventory to catch up with previous demand, creating A phantom demand @ which, in
turn, triggers a series of over-forecast and the subsequent over-production in the supply chain. Lee
et al. (1997a) argued that a lack of demand information sharing among supply chain members might
contribute to the exaggeration of actual demand signals. Indeed, in the supply chain of
pharmaceutical companies such as Eli Lilly, Bristol-Myers Squibb, and McKesson, Lee et al. (1997b)
observed that information distortion had led the total pipeline inventory to exceed 100 days of
supply, when the optimal pipeline inventory should have been much less than 30 days of supply.
Reseller News estimates that 10 days of pipeline inventory was equivalent to a loss of one percent
of profit (Austin, Lee, and Kopczak, 1997). Austin et al. (1997) further noted that the more complex
a chain structure is or the more autonomous chain members are, the more demand information
tends to get skewed by each chain member
2. Chain Complexity: In a typical chain structure, each chain member tends to specialize in certain
functions. Manufacturers concentrate on production and national promotion, whereas distributors
concentrate on product assortment, bulk-breaking, storing, and delivering. Although distributors
are considered sales agents of manufacturers, they often represent multiple manufacturers with
diverse products. As such, channel intermediaries such as distributors by nature cannot match the
quantities and characteristics of products desired by ultimate end-customers to those of products
provided by manufacturers. For this reason, the presence of channel intermediaries may contribute
to the bullwhip effect. For instance, Dell Computer successfully adopted a direct marketing plan
called A Built-to-Order to reinvent the personal computer (PC) industry’s traditional supply chain by
delivering its PCs directly to customers within 36 hours after the order (Austin et al., 1997). With
Build-to-Order, end-customer orders are manufactured on receipts, eliminating the need for
demand forecasting. Therefore, a direct marketing plan which bypasses channel intermediaries can
mitigate the bullwhip effect. The chain complexity added by channel intermediaries can also
 increase order cycle time throughout the entire supply chain. Partly due to chain complexity, Kurt
Salmon Associates discovered that apparel industry products averaged 66 weeks to reach its
customers (Blackburn, 1991). Such time delays among supply chain links can add up to forecasting
difficulty and the subsequent bullwhip effect.
3. Product Proliferation: As many retailers such as Wal-Mart, D-mart, and Target are demanding more
diversified product lines and tailored services to meet the specific needs of different segments of
customers, there has been explosive proliferation of products offered to customers in terms of
color, design, and function. Such product proliferation, however, may backfire, because it can
significantly increase the chain complexity and demand volatility, while dramatically shortening the
product life cycle. With greater variations in product offerings, demand forecasting has become
more arduous than ever before. In fact, Chaffee (1995) observed that it would be very difficult for
the firm to forecast the demand for more than 20 different types of products with an acceptable
degree of accuracy, and the resulting forecasting difficulty could create the supply and demand
imbalance throughout the supply chain. For example, in the computer industry, which is typified by
product proliferation, shortage and oversupply problems are endemic (Fisher et al., 1994).
4. Sales Promotion: Today’s shrewd customers tend to shop only when sales promotion in the form of
coupons, rebates, and seasonal discounts is available. This shopping pattern often results in peaks
and valleys of customer orders and correlates with frequent price changes. Although sales
promotion is intended to benefit end-customers, many downstream distributors also tend to
stockpile huge amount of promotional inventory with an expectation of future price increase. Thus,
sales promotion is likely to create phantom demand throughout the supply chain, contributing to
over-order, overproduction, or temporary product shortages.

Procter and Gamble once discovered such a bullwhip effect in its diaper sales and production.
Procter and Gamble noticed that deep discount promotion accounted for more than 5 percent
variation in customer orders because it encouraged its customers to buy considerably more than
they could accommodate (Artzt, 1993). The same bullwhip effect was believed to be the important
reason why annual supermarket sales declined by one percent in 1993 (Saporito, 1994).
5. Economies of scale: To exploit cost saving opportunities resulting from economies of scale, many
firms prefer to order on a periodic basis so that they can accumulate orders large enough for volume
 purchasing or freight consolidation. Such periodic ordering is likely to cause a hockey stick
phenomenon (order surges at the end of month, quarter or year), which not only amplifies order
variability, but also increases order cycle time. For instance, with the widening spread between
truckload (TL) and less-than-truckload (LTL) rates in the wake of transportation deregulation, a
growing number of firms are prompted to pool small orders to create larger shipments weighing as
little as 5,000 pounds; the maximum time that shippers could hold an order is about 30 days
(Jackson, 1985). Freight consolidation also increases managerial time and responsibilities for sorting
traffic, assembling loads, bulk-breaking, material handling and arranging prepayment.

Therefore, freight consolidation can substantially increase order cycle time, exacerbating the
bullwhip effect. Another form of economies of scale that may cause the bullwhip effect is bundling
(providing the same package of products and services, regardless of the differences in customer’s
needs and preferences). Bundling forces downstream chain members to buy some of the items that
they would not want, creating phantom demand which, in turn, becomes a source of the bullwhip
effect.

2. MANAGERIAL IMPLICATIONS & REMEDIES TO TACKLE THE BULL-WHIP

EFFECT:

Understanding the causes of the bullwhip effect can help managers find strategies to mitigate it. Indeed,
many companies have begun to implement innovative programs that partially address the effect. Next
we examine how companies tackle each of the four causes. We categorize the various initiatives and
other possible remedies based on the underlying coordination mechanism, namely, information sharing,
channel alignment, and operational efficiency. With information sharing, demand information at a
downstream site is transmitted upstream in a timely fashion. Channel alignment is the coordination of
pricing, transportation, inventory planning, and ownership between the upstream and downstream sites
in a supply chain. Operational efficiency refers to activities that improve performance, such as reduced
costs and lead time. We use this topology to discuss ways to control the bullwhip effect.

1. Avoid Multiple Demand Forecast Updates:

Ordinarily, every member of a supply chain conducts some sort of forecasting in connection with its
planning (e.g., the manufacturer does the production planning, the wholesale, the logistics planning,
and so on). Bullwhip effects are created when supply chain members process the demand input from
their immediate downstream member in producing their own forecasts. Demand input from the
immediate downstream member, of course, results from that member’s forecasting, with input from its
own downstream member.
One remedy to the repetitive processing of consumption data in a supply chain is to make demand data
at a downstream site available to the upstream site. Hence, both sites can update their forecasts with
the same raw data. In the computer industry, manufacturers request sell-through data on withdrawn
stocks from their resellers’ central warehouse. Although the data are not as complete as point-of-sale
(POS) data from the resellers’ stores, they offer significantly more information than was available when
manufacturers didn’t know what happened after they shipped their products. IBM, HP, and Apple all
require sell-through data as part of their contract with resellers.
Supply chain partners can use electronic data interchange (EDI) to share data. In the consumer products
industry, 20 percent of orders by retailers of consumer products was transmitted via EDI in 1990.19 In
1992, that figure was close to 40 percent and, in 1995, nearly 60 percent. The increasing use of EDI will
undoubtedly facilitate information transmission and sharing among chain members.
Even if the multiple organizations in a supply chain use the same source demand data to perform
forecast updates, the differences in forecasting methods and buying practices can still lead to
unnecessary fluctuations in the order data placed with the upstream site.

2. Break Order Batches:

Since order batching contributes to the bullwhip effect, companies need to devise strategies that lead to
smaller batches or more frequent resupply. In addition, the counterstrategies we described earlier are
useful. When an upstream company receives consumption data on a fixed, periodic schedule from its
downstream customers, it will not be surprised by an unusually large batched order when there is a
demand surge.
One reason that order batches are large or order frequencies low is the relatively high cost of placing an
order and replenishing it. EDI can reduce the cost of the paperwork in generating an order. Using EDI,
companies such as Nabisco perform paperless, computer-assisted ordering (CAO), and, consequently,
customers order more frequently. McKesson’s Economist ordering system uses EDI to lower the
transaction costs from orders by drugstores and other retailers.21 P&G has introduced standardized
ordering terms across all business units to simplify the process and dramatically cut the number of
invoices.22 And General Electric is electronically matching buyers and suppliers throughout the
company. It expects to purchase at least $1 billion in materials through its internally developed Trading
Process Network. A paper purchase order that typically cost $50 to process is now $5.
Another reason for large order batches is the cost of transportation. The differences in the costs of full
truckloads and less-than-truck loads are so great that companies find it economical to order full
truckloads, even though this leads to infrequent replenishments from the supplier. In fact, even if 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 some manufacturers induce their distributors to order
assortments of different products. Hence a truckload may contain different products from the same
manufacturer (either a plant warehouse site or a manufacturer’s market warehouse) instead of a full
load of the same product. The effect is that, for each product, the order frequency is much higher, the
frequency of deliveries to the distributors remains unchanged, and the transportation efficiency is
preserved. P&G has given discounts to distributors that are willing to order mixed-SKU (stock-keeping
unit) loads of any of its products.24 Manufacturers could also prepare and ship mixed SKUs to the
distributors’ warehouses that are ready to deliver to the stores.

3. Stabilize Prices:
The simplest way to control the bullwhip effect caused by 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. In the grocery
industry, major manufacturers such as P&G, Kraft, and Pillsbury have moved to an everyday low price
(EDLP) or value pricing strategy. During the past three years, P&G has reduced its list prices by 12%-14%
and aggressively slashed the promotions it offers to trade customers. In 1994, P&G reported its highest
profit margins in twenty-one years and showed increases in market share. Similarly, retailers and
distributors can aggressively negotiate with their suppliers to give them everyday low cost (EDLC). From
1991 to 1994, the percentage of trade deals in the total promotion budget of grocery products dropped
from 50 percent to 47 percent.

4. TACKLING BULL-WHIP EFFECT IN COVID CONDITIONS & EFFECT ON

ECONOMY:
The Coronavirus disease (COVID-19) pandemic reveals an under-recognized reality of business—
companies in most every industry need the agility to onboard new suppliers quickly and open ancillary
sales channels in order to meet customer demand and remain competitive. Countries heavily impacted
by the virus, such as China or Italy, have restricted trade and closed borders, causing a huge disruption
in supply chains and commerce.

At the same time, buyer behavior is completely unhinged due to the ripple effect caused by COVID-19.
With a disrupted global supply chain and an uptick in panic buying, it’s a recipe for disaster for an
unprepared supply chain. Manufacturers are inundated with replenishment requests, days or
sometimes weeks after a supply shortage occur. And, businesses are tapping into multiple
manufacturers to procure the goods they need to manage the overwhelming influx of demand. This
often leads to overproduction and misinformed inventory build-up.
Enter the “bullwhip effect,” a phenomenon that refers to increasing swings in inventory in response to
shifts in customer demand as one move further upstream in a supply chain. The bullwhip effect is
caused by forecast inaccuracy at the end-customer demand point, and results in significant supply chain
inefficiencies. Even small variability in downstream demand can multiply as you go upstream, ultimately
becoming a big problem for manufacturers and their suppliers.

The demand shocks created by COVID-19 have caused extreme bull whip effects, resulting in an
unpredictable and unstable manufacturing environment where suppliers struggle to intelligently predict
demand as a result of panicked buyer behavior. How can companies combat this? Let’s first understand
what’s missing from today’s supply chains.

5. IMPACT ANALYSIS, DEPENDENCE ON FOREIGN TRADE & DEMAND

FLUCTUATIONS OF THE BULLWHIP EFFECT

What got the supply chain here in the first place-?

For years, companies have been focused on building a lean supply chain management strategy, which
optimizes for cost but often results in low inventories. However, they weren’t always designing flexibility
and agility into their supply chains, making it difficult for many to pivot in response to supply and
demand shocks.

When factories in China shut down, many manufacturers didn’t have a reliable second source to obtain
high quality components at scale, which impacted the smooth functioning of their supply chain. While
relying on a single source is cost effective most of the time, it can be crippling in the face of unforeseen
disruption.

Interestingly, this global pandemic has revealed a certain level of preparedness that laggard adopters,
such as those relying on traditional or custom systems, are lacking. On the flip side, COVID-19 is
validating for those companies that already have a high degree of automation and remote access to
critical business applications. These nimbler companies’ workforces can manage systems from browsers
on home computers, tablets, even smartphones – enabling their business to run uninterrupted.
Companies that haven’t automated have been forced to shut down until they can upgrade their
operations or physically return to the jobsite. Both have obvious downsides in our current climate.
The COVID-19 Supply Chain Impact – Avoiding the Bullwhip Effect

So how exactly can companies in supply chain intensive industries overcome the bull whip effect-

A. Have real-time understanding of buyer trends and supply

While most companies have invested in ERP and supply chain planning systems, few have invested in
ecosystem integration capabilities that provide a real-time view of demand and supply. This means
they’re dependent on batch updates to report on supply chain status, and also lack end-to-end visibility
across their order-to-cash and procure-to-pay processes. Superior resource planning calls for a firm
understanding of each sales touch point, be it online or from a cash register. Point-of-sale data yields
insightful demand trends – if you can aggregate it into one place and highlight those trends.

Unfortunately, panic buying creates an unstable basis for correctly understanding and predicting
product demand. This means real-time data aggregation is more critical now than ever. In a pre-COVID-
19 world, suppliers could create larger data sets that produce more long-term predictability. Now,
manufacturers and suppliers need to rely on smaller data sets generated in near real-time in order to
understand and communicate supply and demand. This method calls for greater agility across your
supply chain integration points in order to respond to real-time changes.

B. The Goldilocks approach: Finding just the right fit for true demand

It’s estimated that most people use one roll of toilet paper per person, per week. That would mean a
family of four quarantined in their home would need 16 rolls per month on average. In the midst of
worldwide coronavirus quarantines, there is no evidence to indicate that people have a need to, or are
actually, using more toilet paper than they normally would. While there may be some increase in
consumption due to all family members being home when they would otherwise use resources at a
place of work all day, there’s no data to support that overall consumption will rise. It appears that
people are hoarding and stocking items in their home pantries, which in turn means that they won’t be
buying TP in the next few months. Therefore, suppliers, manufacturers and retailers can expect low
demand and plan accordingly.

Meanwhile, hand sanitizers, disinfectants and tissues are also being purchased at much higher rates, but
consumption of these products is also increasing. While these items are flying off the shelves and some
pantry loading is taking place, hand-washing and sanitization recommendations from the media and
government agencies are driving up true demand. Therefore, supply chain leaders can expect a steady
or slightly lower demand as the coronavirus curve flattens.

At the other end of the toilet paper spectrum, hospital consumables like masks, gowns and gloves (some
of which are also being purchased by everyday consumers) have highly increased consumption with no
end in sight. Therefore, we can expect demand to remain high for the next several months.

C. Understanding the Trigger point: The domino effect of panic buying

What panic buyers likely don’t realize is that their stocking up signals “false demand,” contributing to a
whole slew of bullwhip effect problems further up the supply chain. For example, as fear mounts around
COVID-19, global delivery times are the longest they’ve been in almost ten years while manufacturers,
distributors and retailers are struggling to keep up with stock-outs and rising demand.

Without real-time demand data and end-to-end visibility across the entire supply chain, retailers simply
can’t maintain steady inventory — at least at the speed required to replenish a season’s worth of goods
overnight. "Our employees and suppliers are working tirelessly to try and keep up,” said Patrick Noon,
managing director of Costco Australia, where the country's stores sold 192,000 rolls of toilet paper in 30
minutes.

When you buy 100 rolls of toilet paper (and you normally buy 10 at a time), you’re essentially
sentencing factory workers, truck drivers and retail store associates to hours and hours of overtime in
the middle of a healthcare crisis. Not to mention, the long-term effect of panic buying means supply
likely won’t be replenished by the next time you need toilet paper because those with reserves at home
have inadvertently created a shortage in their panic to stock up.

6. RECOMMENDATIONS:
1. How can IOT help to reduce the bull-whip effect

A. Vendor Managed Inventory with RFID

While the concept of Vendor Managed Inventory (VMI) has been around for several years,
manufacturers now have the option to remotely monitor stock depletion through technologies like
barcoding or RFID tags.

Even though early adopters like Walmart saw mixed results the early 2000s, the confidence in this
technology has gone up significantly today.
According to a case study by Forbes, these technologies have the potential to reduce stock-outs by 50%
in finished goods inventory, with Macy’s looking at monitoring 100% of their inventory in 2018 using a
full-scale RFID implementation.
An added bonus is that the price of RFID tags has reduced significantly over the past decade, with a $1
chip in 2003 costing as low as 15 cents today!

B. Intelligent Monitoring with Sensors

Aside from tracking just the stock levels, companies have the option to take it to the next level through
cloud-integrated sensors. In fact, it is quite likely that a manufacturer would be interested in measuring
any parameters that would mitigate their risk.
For instance, food products need to be stored within a specific range of temperature and humidity. By
minimizing the risk of spoilage, disruptions are less likely, reducing the occurrence of a bullwhip effect
across the global value chain.
This is already being done on a large scale by vending machine companies like Cantaloupe Systems. With
sensors already being used in manufacturing on the operational level, there is a lot of potential for
relaying the impact of any variations through cloud-based ERP systems and vertical integration.
7. CASE STUDY:

AN EMPIRICAL STUDY ON CAUSES RESPONSIBLE FOR BULLWHIP EFFECT IN PHARMACEUTICAL

MANUFACTURING SECTOR

Abstract for Pharma manufacturing sector in Indore & primary research analysis:
The pharmaceutical industry develops produces, and markets drugs or pharmaceuticals for use as
medications. Pharmaceutical companies may deal in generic or brand medications and medical devices.
They are subject to a variety of laws and regulations that govern the patenting, testing, safety, efficacy
and marketing of drugs.
Globally, India ranks 3rd in terms of volume and 14th in terms of value. According to Department of
Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of India's pharmaceuticals
industry between 2008 and September 2009 was US$21.04 billion. Mumbai, Hyderabad and Ahmedabad
are the major pharmaceutical hubs of India. The domestic market is worth US$13.8 billion as of 2013,
and is expected to reach US$49 billion by 2020.
India's biopharmaceutical industry clocked a 17 percent growth with revenues of Rs.137 billion ($3
billion) in the 2009-10 financial year over the previous fiscal. Bio-pharma was the biggest contributor
generating 60 percent of the industry's growth at Rs.8,829 crore, followed by bio-services at Rs.2,639
crore and bio-agri at Rs.1,936 crore.
For the purpose of this research study pharmaceutical manufacturing companies nearby Indore city
were selected. Self -Designed Questionnaire was used for collecting Primary data for finding the causes
responsible for bullwhip effect. Data Analysis, Interpretation and Results: To find out the foremost
causes, which are responsible for Bullwhip Effect Questionnaire consisting of 23 statements related to
causes responsible for Bullwhip Effect was executed. The results obtained from the collected data are as
follows:
As per the study the most responsible causes for bullwhip effect are Long Material lead time, Capacity
limitations due to customer order fluctuation, Balancing inventory levels and Too dependency on
business of a particular customer. Whereas Cost of replacing outdated technology and Output based on
customer’s forecast are the least responsible causes for Bullwhip effect in Pharmaceutical
manufacturing companies nearby in Indore City.

Following strategies have been suggested by researcher:

After reviewing various articles, talking to the respondents and advice taken from various experts that
may help the manufacturing sector companies for reducing the Bullwhip Effect and increase their
company’s performance:
1. Maintain price consistency: In this research most important factor which affects the bullwhip
effect is Price Fluctuation. Hence for reducing the bullwhip effect one of the useful technique is
to maintain prices. There is an immediate impact of price fluctuations on the customer
purchases. When prices are lowered due to market conditions, customers order more.
Maintaining a consistent price even during market fluctuations decreases the bullwhip effect.
Offering products at stable and fair prices can prevent buying surges triggered by temporary
promotional discounts. Special purchase contracts can be implemented to encourage ordering
at regular intervals to better synchronize delivery and purchase.
2. Improving communication and forecasting: Another main cause of Bullwhip Effect is Forecast
Error. Hence next step for minimizing the bullwhip effect is, understanding of the customers'
demand and planning the inventory consumption. This can be done by improving
communication in whole supply chain. Lack of demand visibility can be addressed by providing
all key players in the supply chain with access to point of sale (POS) data. Suppliers and
customers must then collaborate to improve the quality and frequency of communication
throughout the supply chain. They also can share information through an arrangement such as
 vendor-managed inventory (VMI). Eliminating practices that cause demand spikes, such as order
batching, also can help.
3. Avoid multiple demand forecast updates: Companies can make demand data from downstream
available upstream. Or they can bypass the downstream site by selling directly to the consumer.
Also, they can improve operational efficiency to reduce highly variable demand and long
resupply lead times.
4. Break order batches: Companies can use electronic data interchange to reduce the cost of
placing orders and place orders more frequently. And they can ship assortments of products in a
truckload to counter high transportation costs or use third party logistics companies to handle
shipping.
5. Eliminate gaming in shortage situations: In shortages, suppliers can allocate product based on
past sales records, rather than on orders, so customers don’t exaggerate their orders. They can
also eliminate their generous return policies, so retailers are less likely to cancel orders.

The present study shows that Bullwhip Effect is present in all the selected pharmaceutical
manufacturing companies of Indore region. Some of the major Strategies suggested by researcher are
maintaining the price consistency, improving communication and forecasting, avoid multiple demand
forecast updates, break the order batches and eliminate gaming in shortage situations. The findings
from this study may be beneficial for manufacturing companies of Indore region and India as well.

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