Bullwhip Effect - a lesson for scm partners to be fair

Process integration in a supply chain system plays extremely important role for the Supply Chain to be effective and competitively viable. It implies that the chain partners be fair in respect to information exchange.

For example, a firm XYZ produces cycle chains for the cycle manufacturing firm ABC. Another company PQR produces chain bits for the company XYZ.

Let us assume that the actual demand of ABC is not known to XYZ for a month.

XYZ also produces the chain bits for other chain manufacturers. So, XYZ , in order to meet the unknown requirement of ABC would like to keep a higher safety stock or the month. 
PQR also shall have to keep a higher level of safety stock for meeting the unknown requirement of XYZ.

This is a cascading effect resulting into higher safety stocks at the end of both the suppliers in the chain, XYZ and PQR.

In this small example, with only two suppliers being in chain, the inventory levels have gone unnecessarily high because of the lack of information on accurate demand of cycles at ABC's end.

Higher inventory is blocking of working capital for the firm that reduces the operational efficiency.

Just imagine what would be happening under these circumstances if the number of chain partners were to be large.

The aggregate inventory would have been much higher. This is called Bullwhip effect.

That is the building up of inventory along the chain as a negative effect or loss of opportunity cost resulting  from the absence of a coordinated effort , suitable and timely flow of information among the supply chain partners.   
In the supply chain, small changes in the consumer demands can lead to large variations in supply orders. This is related to 'Bullwhip effect'.

It is not the change in demand that drives the effect, it is the interpretation of these changes that are magnified as forecasting and planning take place. There are collaboration programs between retailers and suppliers to utilize actual store data, not forecasts to replenish facilities and this takes out a lot of the bullwhip impact by having the actual consumer demand, not forecasted demand drive the process.

 
 

The problem for Bull Whip effect arises from the part of the channel members when they do not share data with one another. The problem is with interpretation. Usually a distributor takes feed back from the retailers for placing the order backwards in the channel. Now, at any given point of time if there is a surge of demand from the retailer for some item, the distributor may get the message that there is increase in the demand of it. But in reality may be the reason for demand increase lies with some sales promotion part or some other reason except natural demand increase from customer. But due to non sharing of this data by retailer with his distributor, the distributor gets a wrong impression and he places more order backwards. This order magnifies itself as it goes backwards in the channel and by the time reaches the firm it has assumed a gargantuan shape. Now this is known as Bull whip Effect which starts as small and goes to become a large shape.
 
Thus the main basis of Bull Whip could be found with wrong interpretation by channel members due to non availability of data amongst themselves. Here customer demand fluctuations shouldn't be blamed as they are bound to have a mind of their own and we have to make our Supply Chain such that these variations are easily absorbed. Transparency is required and also regular communications among all the channel members should be their to ensure that Bull Whip problem shouldn't arise because ultimately they are going to suffer with huge inventories

Bullwhip is the result of misinterpretation of increase in demand, improper sharing of information. Even if we try to optimize our understanding and interpretation levels, what is more important here is that SYSTEMS, PROCESS, PROCEDURES delivers RESULTS!! Operators/Members just operate. It is a natural tendency of human being to estimate increase in demand thus the multiplicity of demand occur. The system should be transparent enough to let the members have a common data knowledge, and a common objective.!

After discussing the bullwhip effect, now what steps should be taken to minimize it?

Bringing transparency among all links in the chain would bring down this effect. All the players in the chain should share the information and data with each other. What other measures have proven successful in dealing with this problem?

The problem/obstacles which generally lead to BullWhip Effect are of 5 types. If companies are able to overcome these difficulties then Bull Whip Effect wouldn't be a threat. These are:
 
1. Incentive Based Obstacles
2. Informational Obstacles
3. Operational or Lead time Obstacles
4. Financial Obstacles
5. Behavioural Obstacles

The incentive based obstacles are generally with the sales people of the company. The incentive system is such that salespeople get bonus for all the sales they make to their customer who are generally wholesalers or in some case retailers. They are not concerned whether the sales have been made to the actual users i.e. common people who are actually going to use it. Thus they dump their products on the channel members and generating false sales and giving wrong information for achieving targets.

Operational Obstacles means the amount of lead time for the material from supplier to Lead Firm and the amount of time for the product to reach the market from the firm. Thus higher the lead time, the Bull Whip would go on increasing. Thus there is a need for lowering that.

Behavioural obstacles are with the company management who are only thinking of attaining local optimisation instead of going for the whole supply chain which will ultimately going to benefit all. But this mentality is not so easy to achieve wherein all are working to achieve some common objective but instead all the trying to increase its profitability over the expense of other partners

Finally, there is financial obstacle where we talk about pricing. The pricing decision of the firm should be used only by the finance deptt. and not by the marketing deptt. The pricing should be such it should take care of all the costing and profits. No company should try to use low pricing method as means to market their products. They should try to increase their profits by lowering their costs of various operations which comes under supply chain management. Like if two modes of transportation are present for taking from A to B, and takes 1hr & 3 hrs respectively, with same cost then everyone would go for the faster one. Thus in the same way customer want the best with the same price as available in the market. Higher the satisfaction he gets the better the result

One can find out the solutions only when considering the actual obstacles, very well brought out by him.
Adding to these points are : A company/Product manufacturer should not only focus on the manufacturing and then product delivery part to the immediate customer (distributors, retailers) but should also keep in mind that whether the product has reached the customer or the end user or not. This requires integration. The good example here is HUL. HUL has the system in which it collaborates the different partners of the supply chain, the distributors, retailers etc. They have a big system. Although maintaining such a collaboration isn't easy but the approach is right and results benefit for the organization.
The other aspect is to have global objectives rather than local ones or at the individual partner level.

Another prospective ,to add, of Supply Chain, which is very much helpful to minimize Bullwhip effect and many organizations are using it. There are 2 types of Supply Chains:

 1) Push types Supply chain (It is a forecast based Supply Chain where each activity takes place in advance assuming that customer will have this much of requirement in future ) and

2) Pull types Supply Chain (It is a demand driven Supply Chain where each activity will take place after receiving of actual customer order).
If an organization using Pull types supply chain then bullwhip effect will be minimal as each and every order will be placed on the actual customer demand not as per the forecast. The Key success of Pull System depends on the sharing of actual demand data at each level.
Dell computer is the best example of Pull system where actual customer demand data shared among the suppliers on real time basis and by using such method Dell is capable to deliver all its order to the customers on time with zero inventory level.

 

Surely the sharing of data would only go so far to minimize or mitigate the issues arising from the Bull Whip effect? While is it nice to know what the 'actual consumption rate' is for any given product, many companies still rely upon ERP systems to plan, replenish, & reserve inventory for the channel. Just 'knowing' is not enough for many of these ERP systems, I see more of a need to actually book & physically reserve inventory for a channel to consume stock at the DC.

Without doing this companies would run the risk of order queue-jumpers where the DC stocks are taken by one customer ahead of another. Despite having knowledge, presumably via VMI or another initiative, of one customers stocks & consumption rates, it is next to impossible to avoid inventory being sent to another party who simply orders product on the day.

The dilemma of course to to ensure there is an appropriate mechanism for securing inventory for any VMI enabled customer in an effort to manage the Bullwhip event.

How can a company reserve inventory in a lean & optimal manner without running a risk of stock out for the non-VMI channels? Who can say "sorry that inventory is reserved..." while only relying upon 'knowledge' alone?

The most effective means of mitigating Bullwhip is via channel awareness & customer education.

This is where Toyota's efforts to educate their competitors, channel partners, and general industry as being a pioneering process to removing Bullwhip events from global supply chains.

If this off take rate at each channel partner is known to all the other partners then the preceding supplier can supply goods at the same time as well make a proper interpretation the nature of the off take. If this is followed backwards in the same fashion then it would surely help to mitigate the BULLWHIP effect through such Continuous Replenishment.

As described , transparency and education over the whole supply chain is one way, but it does not depend on your company only, and therefore it will be a long way to optimize.

Another way to avoid the propagation of this effect is :

you have to work on your lead time reduction. When you will be fast enough to react to your customers changes in the time they require, you won't need any more forecast. The effect won't be propagated to your suppliers, and the bullwhip effect will not last.
When anyone in the loop achieved this point, demand changes will not create some bullwhip effect.

It can happen when the supplier does not have enough visibility on final consumer demands and forecasts began to overreact following the interpretation that is the situation at the moment "t". more collaboration from end to end supply chain is necessary in a win - win logic.

There is a great game that points up how supply chains respond to forecasted and unforecasted demand called the beer game. Players assume certain critical roles in the supply chain, are set up with initial inventory, and then you play and watch the fun. Its unbelievable what happens between players with very little end user demand swings

The Beer Distribution Game: http://www.beergame.lim.ethz.ch/

Supply chain simulation game ...explains inefficiencies of supply chains known as the bullwhip effect.

We have played this game during our sessions of world class manufacturing and the result of which is we called the BULLWHIP effect. The results show that it is not fully the fault of the people who operate different processes in a supply chain, but the problem is the system. "An average person can perform well in an Efficient supply chain, but even a efficient person would not be able to perform so well in an average system" Systems deliver result, operators just operate. I am trying to conclude is that the dynamics of any supply chain lies in its structure.

1) I always compare it to a traffic phenomenous - Traffic jam : a small car movement on the road can cause big waves of cars slowing down a few kilometers behind ...

2) I did also run the Beer game a couple of times and it's a super business case. It 's not easy to manage, but results are great. 

Process integration therefore is the need of the hour for the Supply chain partners for benefit sharing through:

  • reduced costs in inventory holding

  • utilizing opportunity cost in better product design and

  • manufacturing and earning more profit

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