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The Bullwhip Effect

The Bullwhip Effect. By Karlo Cantor. What is the Bullwhip Effect?. Demand variability increases as you move up the supply chain away from the consumers Small changes by customers can result in large variations on orders placed up the chain creating a bullwhip effect.

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The Bullwhip Effect

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  1. The Bullwhip Effect By Karlo Cantor

  2. What is the Bullwhip Effect? • Demand variability increases as you move up the supply chain away from the consumers • Small changes by customers can result in large variations on orders placed up the chain creating a bullwhip effect

  3. Supply Chain Management • SCM is the management of a network of interconnected businesses involved in getting the product or service required by the end customers in a supply chain

  4. Why is it called a Bullwhip Effect? • “This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.” – Wall Street Journal

  5. Background • The concept first appeared in Jay Forrester's “Industrial Dynamics” in 1961 and thus, it is also known as the Forrester effect • Also can be called the Whiplash Effect

  6. Importance • It is frequently the cause of serious inefficiencies that result from ordering too much or too little of a given product • Links in the supply chain react to changes further downstream

  7. Consumer • Bill likes Coke • Bill goes to the store and drinks a lot of Coke daily • So the store has to refill its stock regularly

  8. What if… • But what if Bill gets sick and can’t drink Coke for a few weeks? • The store has too much inventory and stops its orders due to decreased demand • The supplier stops orders as well • The manufacturer will slow down production of Coke

  9. But Wait… • Bill gets better and starts buying Coke from the store and starts drinking again (this time more!) • Now the store places more orders to account for the increased demand • The supplier doubles his order with the Coke manufacturer • The manufacturers increase production

  10. Coke Supply Chain Consumer Supplier Manufacturer

  11. Therefore • A small customer (like Bill) fluctuation can cause a major oscillation in the many stages of the supply chain • The effect is felt greater closer to the manufacturing stages

  12. What Causes this Effect? • Over reacting to the backlog orders • Little or no communication between supply chain partners

  13. What Causes this Effect? • Delay times between order processing, demand, and receipt of products • Order batching– Instead of ordering frequently, companies may order weekly, biweekly, or even monthly

  14. What Causes this Effect? • Limitations on order size (Ex. retailers can order products in cases of 10 from suppliers; however, distributors receive orders in cases of 1,000) • Inaccurate demand forecasts. • Free return policies

  15. Consequences • Customer demand is difficult to predict and relatively unstable • When demand increases, customers will increase their orders • When demand decreases, orders will fall or stop

  16. Countermeasures to the Bullwhip Effect • Make use of Electronic Data Interchange (EDI) to facilitate better communication and data sharing • More frequent orders instead of order batching

  17. Countermeasures to the Bullwhip Effect • Stabilize Prices – reduce both the frequency and the level of wholesale price discounting • Eliminate Gaming in Shortage – information sharing and allocating units on past sales instead of number of orders

  18. Countermeasures to the Bullwhip Effect • Vendor Managed Inventory (VMI) • Just in Time Replenishment (JIT) • Computer Aided Ordering (CAO)

  19. Works Cited • http://www.quickmba.com/ops/bullwhip-effect/ • http://en.wikipedia.org/wiki/Bullwhip_effect • http://www.ehow.com/about_6367519_example-bullwhip-effect.html • http://www.quickmba.com/ops/vendor-managed-inventory/ • http://sloanreview.mit.edu/improvisations/2010/01/27/understanding-the-bullwhip-effect-in-supply-chains/#.UJvpmbT3C2w • Hau L Lee, V Padmanabhan, and SeungjinWhang. The Bullwhip Effect In Supply Chains. Sloan Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102

  20. Time’s Up! • About your speaker: • Name: Karlo Cantor • School: University of Toronto Mississauga

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