bullwhip effect

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Definition
Tendency of consumers of a material or product in short supply to buy more than they
need in the immediate future.

The Bullwhip Effect in Supply Chain

Contributor
By Osmond Vitez, eHow Contributing Writer
Article Rating: (3 Ratings)
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The supply chain is a complex group of companies that move goods from raw materials
suppliers to finished goods retailers. These companies work together when meeting
consumer demand for a product; supply chains allow companies to focus on their specific
processes to maintain maximum probability. Unfortunately, supply chains may stumble
when market conditions change and consumer demand shifts.

Definition
1. The bullwhip effect on the supply chain occurs when changes in consumer
demand causes the companies in a supply chain to order more goods to meet the
new demand. The bullwhip effect usually flows up the supply chain, starting with
the retailer, wholesaler, distributor, manufacturer and then the raw materials
supplier. This effect can be observed through most supply chains across several
 industries; it occurs because the demand for goods is based on demand forecasts
from companies, rather than actual consumer demand.

Forecasting Errors
2. When companies enter new products into the marketplace, they estimate the
demand of the good based on current market conditions. Most companies in the
supply order more than they can sell, attempting to prevent shortages and lost
sales of goods. This "extra" inventory begins to increase or decrease during the
normal market fluctuations of supply and demand. When demand increases, the
companies closest to the consumer will increase inventory to meet the consumer
demand. When the demand falls, the front-end of the supply chain will decrease
inventory, amplifying the extra inventory on each company up the supply chain.

Behavioral Causes
3. One cause of the bullwhip effect is normally driven by management behavior at
the front-end companies of the supply chain. Retail management never wants to
have a stock-out on a popular good, leading to higher orders from the wholesalers.
This eventually squeezes each company in the supply chain and creates decreases
in inventory.

Another major behavioral effect is the ordering of too much inventory when
consumer demand has fallen for an item. Retailers may have raised their
inventory levels to avoid a stock-out but are now met with goods that cannot be
sold quickly. This creates overstock of inventory for each supply chain company.

Operational Causes
4. The main operational cause of the bullwhip effect comes from individual demand
forecasts from each company in the supply chain. This causes an increase in
demand from companies in the supply chain, but not the actual consumers who
will purchase the goods. A lack of communication is also prevalent during
operational causes; companies may not supply information up the supply chain
regarding current market conditions, causing improper levels of inventory.

Corrective Measures
5. To properly manage the fluctuations in consumer demand, implementing a point-
of sale (POS) system with a just-in-time (JIT) inventory system. This allows each
company in the supply chain to process information electronically regarding
individual goods. Understanding consumer demand can then be evaluated based
on the order information from the POS system and allow managers to order more
goods if needed.
How to Reduce the Bullwhip Effect

Contributor
By Bradley James Bryant, eHow Contributing Writer

Supply-chain management used to be simple. A customer ordered a product from you,

and you kept track of the items sold and ordered enough raw materials to keep up with
the demand. But customers now expect faster delivery times, which complicates the
restocking of raw materials. This is usually due to a lack of coordination between
different departments within the organization. For instance, if a car company can't sell its
cars, it might put a promotion in place to sell more cars. If sales and marketing
(distribution) isn't communicating with manufacturing, increased sales might be
misinterpreted as an increase in demand instead of a response to a promotion. The result
of this lack of coordination is what Stanford's Hau Lee calls the "bullwhip effect."
Specifically, these are decisions made by groups in the supply chain which worsen the
issues caused by an overstock or shortage in inventory.

Difficulty: Challenging
Instructions
1. Step 1

Improve information flow. The most obvious way to reduce the bullwhip effect is
to improve communication and forecasting along the supply chain. While end-
user demand is more predictable, it should not be the only source of information
for forecasting. Supply chain managers should be a part of the forecast. Ignoring
supply chain supply-and-demand signals when forecasting ignores day-to-day
fluctuations.

2. Step 2

Reduce delays along the supply chain. The best way to achieve this is by cutting
order-to-delivery time. This also reduces inventory carry and operating costs as
less capacity is needed to respond to fluctuations.

3. Step 3

Focus on point of sale data collection. By focusing on the end user via electronic
data interchange, supply chain mangers can reduce misleading signals sent from
sales and marketing (distribution).
 4. Step 4

Create smaller purchase orders. By reducing the order increments and order
"batching," supply chain managers can focus on ordering according to need rather
than vendor promotions to cut costs. The bullwhip effect has a greater cost to the
overall organization than any discount achieved from making a bulk order.

5. Step 5

Maintain consistent pricing. Pricing fluctuations change forecasts by spurring

purchases when prices are low and reducing purchases when prices are high. This
invariably leads to increased fluctuations for the supply chain to manage, which
increases the bullwhip effect.

Factors contributing to the Bullwhip Effect:

Forecast Errors
Lead Time Variability
Batch Ordering
Price Fluctuations
Product Promotions
Inflated Orders

Methods intended to reduce uncertainty, variability, and lead time:

Vendor Managed Inventory (VMI)

Just In Time replenishment (JIT)
Strategic partnership

Vendor Managed Inventory:

A means of optimizing Supply Chain performance in which the manufacturer is
responsible for maintaining the distributors inventory levels. The manufacturer has
access to the distributors inventory data and is responsible for generating purchase
orders. To further define it, lets look at 2 business models:

Under the typical business model:

When a distributor needs product, they place an order against a manufacturer. The
distributor is in total control of the timing and size of the order being placed. The
distributor maintains the inventory plan.

Vendor Managed Inventory model:

The manufacturer receives electronic data (usually via EDI or the internet) that tells him
the distributors sales and stock levels. The manufacturer can view every item that the
distributor carriers as well as true point of sale data. The manufacturer is responsible for
creating and maintaining the inventory plan. Under VMI, the manufacturer generates the
order*, not the distributor.

Vendor-managed inventory

Vendor-managed inventory (VMI) employs the same principles as those of JIT inventory,
however, the responsibilities of managing inventory is placed with the vendor in a
vendor/customer relationship. Whether its a manufacturer managing inventory for a
distributor, or a distributor managing inventory for their customers, the management role
goes to the vendor.

An advantage of this business model is that the vendor may have industry experience and
expertise that lets them better anticipate demand and inventory needs. The inventory
planning and controlling is facilitated by applications that allow vendors access to their
customer's inventory data.

Another advantage to the customer is that inventory cost usually remains on the vendor's
books until used by the customer, even if parts or materials are on the customer's site.

Buyback contract
A buyback contract is a contract under which a seller sells goods to a buyer on condition
that the seller can repurchase the goods at some future date, but at a price greater than the
buyer paid for them.

Forecast error - Wikipedia, the free encyclopedia

In statistics, a forecast error is the difference between the actual or real and the predicted
or forecast value of a time series or any other phenomenon of interest. ...

A strategic partnership is a formal alliance between two commercial enterprises,

usually formalized by one or more business contracts but falls short of forming a legal
partnership or, agency, or corporate affiliate relationship.
Typically two companies form a strategic partnership when each possesses one or more
business assets that will help the other but that it does not wish to develop internally.

Safety Stock: Remaining inventory between the times that an order is

placed and when new stock is received. If there are not enough
inventories then a shortage may occur.

lead time is the total amount of time required for completing a product beginning from
the date of receiving raw materials to the stage shipable to the customer (in the case of
manufacturing plant)....

replenishment lead time

it is the time taken to produce or bring meterial from out
side.it is based on planned delivery time and inhouse
production time

continuous replenishment program (CRP)

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Definition
Vendor managed inventory (VMI) arrangement in which either the vendor continuously
monitors a customer's inventory or customer supplies current inventory data, so that the
vendor can make timely shipments to maintain the customer's inventory at agreed upon
levels.

Quantity flexibility contract:

The supplier provides full refund for returned (unsold) items aslong as the no of returns is
no longer than the certain quantity.