Q 231. Explain the term Bullwhip Effect as it relates to Supply Chain Management. How can it be avoided or overcome using Lean production principles?

 

 

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Bullwhip Effect

Every supply chain has a distribution chain from retailer to manufacture. Goods move from raw materials suppliers to retailer for meeting the customer demand in the distribution chain. Continuous flow of product is important and play a vital role in growing the business in competitive era where many alternative products are available in the market and customer has many choices.

Bullwhip effect in supply chain occurs when order of more goods or product than actual demand. The Bullwhip effect follows up in the supply chain its start from retailer, wholesaler, distributer, Manufacture and raw material supplier. It is found those company in which demands of product depends on forecasting rather than actual consumer demand.

Examples:

A retailer store 70 pack of one soap brand in stock. If it is normally sells 20 packs per day, it would order to distributer for this quantity. But one day retailer sells 50 packs and assume increase the customer demand of product and order for 70pack to distributer to meet the higher forecasted customer demand

In same pattern distributer also assume that product demand will increase in future and distributer order 140 packs of same soap brand to the manufacture and manufacture produce 240 packs to be safe side, at the product demand increased from 50 pack at the customer level to 240 pack at the manufacture. This phenomenon called the bullwhip effect.

Customer demand (Unit)	Retailer demand (Unit)	Distributer demand (Unit)	Manufacturer manufacturing (unit)	Raw material inventory increased for (unit)
50	70	140	240	300

 

Impact of Bullwhip effect on supply chain

Bullwhip impact is always costly for business. It is very difficult and costly to maintain excessive inventory. It increases a waste in the system. Excessive or lack of inventory both situations can generate due to bullwhip impact and both situations are not favorable to the company. Over inventory is costly if customer demand decrease .it may be results to waste resources & raw material, in other hand low inventory lead to not fulfillment the customer demand and sale loss. These mistakes impacted the reputation & profit of organization.

Some time Quality of product affected in manufacturing a large volume with limited resources

Cause of Bullwhip effect: -

 Some main causes of the Bullwhip effect are below

Order Batching

Some time retailer or distributer round off the demand numbers in increasing pattern as per production or transportation feasibility. It is one of the causes for bullwhip effects 

Price fluctuations 

Cost changing, or some special discount may affect the buying pattern some time, all customers want to take the advantage of discounts which results irregular production

 Demand information

It is necessary to trust on past demand to estimate the current or future demand. We should not take a sudden fluctuation in the account to estimate the future demand.

Lack of Communication

Lack of the communication between each link of supply chain is one of the reason of bullwhip effect for example if manger take the product demand differently with different sources and supply different quantity

Free Return Policy

Free return policy some time become a cause of Bullwhip effect because customer give the extra demand and cancel it later without and penalty and for fulfill the customer demand retailer give the extra demand and cancel it later resulting it excess materials.

Apart above caused we can also divide the on major two part 1. Behavioral cause and 2. Operational Cause

Behavioral cause

1. Misuse of stock policy

2. Misperception of feedback

3. Panic for ordering

Operational Cause

1. Error in forecasting

2. Lead time variability

3. Lot sizing

4. Forward buying

5. Anticipation of shortage

Minimize the Bullwhip effect

a. Improve communication and better forecasting

We can minimize the bullwhip effect through better information and better forecasting. Improved communication accurse the distribution chain can reduce the effect.

b. Eliminate Delays

 Eliminate delay is another way to reduce the Bullwhip effect, if we can cut the time of delivery from manufacturer to customer then it will give the confidence to customer or retailer and they would not increase the order due to fear of shortfall. As per one study if we can cut the order to delivery time by half then we can cut the supply chain fluctuation by 80%.

Lean manufacturing plays a very important role in reducing of manufacturing time of product. we can use below tools and techniques to reduce the lead time or cycle time in all distribution chain

1. SMED (Single Minutes exchange of Die)- Reducing the change over time in the manufacturing.

2. Optimize the number of raw materials- If we optimize the number of raw materials in the series of product then it will make the process flexible and reduce the change over time and inventory

3. Switch the continuous manufacturing from batch manufacturing: - Supply as per demand is a new concept of supply chain .in continuous manufacturing factories are free to make any quantity as per order and not bound with batch size.

4. Use Just in time: - Implement JIT in the manufacturing and distribution chain too

5. Make VMP of end to end distribution chain: - We should make a VMP of the process to find out at where we should work for reducing the total lead time and should take a project on those problems

 

 

Bullwhip effect

 

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The bullwhip effect , aka  Forester effect, is a  phenomenon of supply chain inefficiency , and increasing accumulation of inventory, owing to uneven changes in customer demand.  There is increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain. The bullwhip effect  is so named, because  of the increase in amplitude of whip down the length. As we move farer from the original signal, the greater is the wave distortion. Similarly, the prediction accuracy decreases, as we move  along upstream of the supply chain. 

Bull  whip effect can lead to not only increased safety stock but can also lead to inefficient production excess  and inventory.  Also there  are chances of getting stock out, leading to  poor customer compliance and drop in sales value.

Though there are a  large number of causes postulated  for bullwhip effect,  the two major types are human related causes and operational causes.  They can be  further delineated into five major types.

 

A.    Delivery Lead Time: As the delivery lead time increases, the tendency to order large quantity increases,  leading to pile up of inventory.

 

B.    Order Batching: many of the firms have a tendency to place the orders in large batches that practically leads to large accumulation of inventory.

 

C.    Price and Sales Demand: frequent changes in the price of the product  -frequent discounts lead to sudden surge in the demand due to extensive buying by the customer and vice versa when the price again increases, leading to sudden drop in the demand  and this leads to uneven demand, chaotic supply chain and accentuation of bull whip  effect. Relying on past demand information for  future demand prediction  can further aggravate the issue. 

D.    Shortage Gaming: Many a  times there is a presumption that there is shortage of material, that leads to large ordering to multiple manufacturers and suppliers and followed by canceling of the order, when one of the supplier delivers the material. This creates  marked accumulation of material at the supplier or the manufacturer end.

 

E.    Information Myopia: Classically in  the supply chain, the source of information to any firm is limited to a firm that is immediately downstream  and there is no source of information or no access to  actual customer demand. This particular lack of coordination across the supply chain leads to  inventory buildup  and marked exaggeration of bullwhip effect.

 

 

Mitigating the Bull whip effect:

 

The  main principles of preventing or combating the bullwhip effects are: 

 

1.     Leadtime reduction: Reduction of order lead time and information lead time. Cross docking (little or no storage of material between  unloading of material at one end and further loading of material at the other end) and electronic data interchange  can significantly reduce both lead times. Safety stock level across supply chain and reorder points are both lead time dependent.

2.     Reducing variability: Everyday low pricing(EDLP), low price over a long horizon, without much variation, without any quality compromise. 

3.     Reducing uncertainty:  Centralising the demand information. Visiblity of customer demand and forecasted retailer’s demand  being visible to all partners of supply chain, including the manufacturer.

4.     Strategy partnering and buying : Information sharing in strategic partnering reduces variation in the system.  This requires VMI-Vendor Managed inventory . The manufacturer maintains the inventory at the point of use there by reducing any variation in the system and preventing excessive production of the material. Strategic buying policies  of the buyer and manufacturer reduce much of the variation caused due to frequent quantity discounts offered by the manufacturer.

5.     Advanced information technology: Intranet, the internal internet  in the companies replaces the sequential information flow with dynamic system and reduces manufacturing lead time and markedly reduces bull whip effect.

 

Lean Production Principles and reduction in bull whip effect:

 

Synchronisation Principle: Synchronous supply means to supply the product in accordance with the  requirements of the buyers. This concept is also known as Justin time and the goal is to produce and deliver the goods  just in time, thereby reducing the inventories across the supply chain.

Pull Principle: Pull logistics is a demand based system, in which  parts are only  being manufactured, transported across the chain and delivered to the customer when any external or internal customer signals the need.  The  best example of pull system is Kannaban, which  uses a statistical based approach to control material flow- both internal (upstream) and external(downstream).

Heijunka: Levelled production:- Toyota’s mixed production system is  a brilliant example of schedule or levelled production. It does not schedule the production according to the actual customer demand/orders which usually swings up and  down, but takes the total volume of orders in a period and levels/averages them out, so the same amount and  product mix are being made  in each scheduling period. So it reduces unevenness/Mura, thereby ultimately reducing waste/Muda.

 

 

 

 Heijunka Box- Levelling the volume and products type

 

 TAKT Time:  It is  total available time, divided by number of customers demanding parts. Customer demand and the obtained TAKT time, are  important drivers for both production and logistics across the supply chain. 

 

 

Bullwhip effect (Brief Concept) :

Bullwhip effect is a phenomenon, particularly in supply chain management, in which the more processes or steps we go away from the Voice of main customer, the accuracy of forecasting gets depleted. That means if we see in terms of graphical representation of the peak of graph, it is very low at the initial point and keeps getting enlarged as it moves away from the initial position.

 

Why It Happens :

 

It happens because of following key factors:

1. Communication
2. Ineffective Inventory Management Process
3. Management system
4. Lack of clarity on End to End Value chain
5. Poor Data based decision making
6. Lack of focus on internal customers

What is the Impact :

 

Generally, In order to avoid the stock out situation, every company tries to build excess stock so that end customer demand can be met without any deviation. This results in piling up of inventories at various intermediate level through out the supply chain. This blocks the cash flow and hence impact the overall profitability. 

 

How can we Improve :

 

In order to improve the Bullwhip effect, we need to consider improving the above critical factors. Management system shows the reflection of attitude of the Leadership team to grasp the actual Voice of customer and transfer it to last leg of the supply chain without hampering its sanctity. End to End Value stream mapping is an effective Lean tool to understand the current status of business scenario and what are the underlying values of customers/expectation from their voices. These voices we need to capture on regular basis and led the team to devise the fundamental of internal customers.

Having a continuous feedback loop with two way communication system with proper data driven decision making mechanism will help in establishing the culture of proper decision making without emotion and prejudices.

The actual expectation of the customer can be transferred to the end producer by deploying various Lean tools like data based forecasting, VSM, Kanban, Digital dashboard, Pull system, Takt time concept, Frequent deliveries, Muda elimination, Continuous flow processing etc.

But whats most essential is Management commitment to continually meet the customer's real voice on regular basis.

Thank You!!!

The bullwhip effect is defined as an extreme change in the supply position upstream(near the start of the process) that is generate by a small change in depend downstream(near the customer) in the supply chain.

 

The bullwhip effect

The below is an example taken from a case study involving children’s diaper sales of a large conglomerate

 

1.       Data on purchase patterns suggested that there is no clear pattern in purchasing behavior. Parents of very small children, have very different diaper buying patterns and this changes in fairly small increments owing to factors which are difficult to understand. They visit various stores, shop on Mondays instead of Thursdays, or buy two or three weeks’ worth at one time because diapers are on sale. So, actual demand never quite seemed to meet the forecast.

 

2.       Meanwhile the retailer had already ordered enough to allow a little extra safety stock to put in his/her storeroom. Or perhaps the retailer does a promotion without informing the distributor at all. This may cause a larger order to be requested than was originally forecasted These fluctuations impact forecasting for the distributor

 

3.       The wholesale distributor had perhaps, forecasted demand based on past orders from his retailer. However, those demand patterns now would have a greater variation than the demand arrangements at the retailer’s checkout counters due to that safety and buffer material that the retailer held on to. Sometimes, safety stock accumulates because demand is less than the forecast, and this means that the retailer’s next order is for less than its forecast – or perhaps it doesn’t have to order at the usual time at all, because there is an excess of diapers already– which probably would have to be sold off in a promotion.

The combined effect of all these activities would be that such miniscule variations in the end-user demand are completely blown up and magnified at the distributor

 

4.       Now, as the supply chain goes upstream, the, the manufacturer of those products (diapers in this case) looks at the demand pattern from the distributor and makes his own forecasts, which display an even broader fluctuation and variability

 

5.       And this variability goes up the supply chain with even wider swings

 

 

Thus, decentralized inventory planning can lead to the bullwhip effect and other problems, especially if customer demand isn’t available to all stages of the supply chain.

 

In turn, the bullwhip effect affects various supply chains that are heavily and serially on forecasting and is especially exacerbated when each entity in the supply chain forecasts independently of other players in the supply chain.

 

As the bullwhip effect is driven by inefficiencies in forecasting, the solution is clearly to replace the forecasts with actual demand information.

 

Clearly, this is not a simple matter to address, and the supply chain fraternity, over time has come up with various techniques for actual orders (not forecasts) drive production and distribution

 

·         One such a system is the pull system, where items are produced only as demanded for use or to replace those taken for use. Material control, withdrawal of inventory as demanded by the using operations. Material is held and not issued until a valid input signal comes from the (end) user.

 

·         In distribution system, the system of “Vendor Managed Inventory” gives a good example of a system for replenishing field warehouse inventories where replenishment decisions are made at the customer warehouse itself, and not at the central warehouse or the plant. And in the above example, diapers were managed at the retailers were managed directly by the conglomerate. Manufacturers of snacks chips, bread and soft drinks now routinely send their representatives to stock items at grocery and convenience stores.

 

·         A very important and often neglected way to prevent the bullwhip effect, is to have excellent levels of communications between supply chain partners, rather than having the assumption that the current orders will form an absolute reliable pattern.

·         IT can be used to gather, integrate and support to show actual supply chain activity

Sudheer Chauhan, Shashikant Adlakha, Sreyash Sangam, and Nilesh Gham - All published answers are winners too.