BULLWHIP EFFECT IN SUPPLY CHAIN

An effective supply chain management means efficient flow of quality and timely information between customer and suppliers which shall enable the supplier to uninterrupted and timely delivery of material to the customer

But in practical life, there are situations which are never planned, and create oscillations in demand resulting in distortions in the supply chain. There can be a single cause or combinations of many factors. Suppliers, manufacturers, sales people, and customers have their own, often incomplete, understanding of what real demand is. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. This lack of coordination coupled with the ability to influence while being influenced by others leads.

Drivers of bull whip effect can be from Customers, suppliers, systems, processes, sales, manufacturing, external factors etc.

The unplanned demand from retailer oscillates back to distributor to the organization and finally to the supplier with increased degree of magnitude at each leveling supply chain.

Demand oscillation becomes higher while traveling up the supply chain resulting in overestimation at each level of the chain.

The effect of Bullwhip effect is found in excess inventories, quality issues, higher manufacturing and over head costs, lost sales, lower levels of customer service , high transportation costs, lead time variations etc. For an ideal supply chain operations elimination of bullwhip effect is necessary .

Though, bullwhip effect cannot be eliminated completely as there are other factors which are beyond the influence of suppliers and organizations like strikes, change in government policies, environmental factors, etc

Some of the causes of Bullwhip effect are -



Government Policies

Government policies also play a role in creating bullwhip effect in supply chain. For example in India, whenever government declares that price of Fuels (Motor Sprit, Diesel, LPG etc) shall be increased or decreased, the effect is visible on retail outlets. This in turn creates oscillations in supply chain and affects the planning at refinery.

Environmental Factors

Environmental factor are beyond the control of the human control. If there is a sudden drop to 7 degrees in temperature at place where minimum temperature was never below 25 degrees then there shall be sudden demand for winter cloths , which was never forecasted by supply chain partners, leading to oscillations in the supply chain

Sales Promotions

Many organizations conduct sales promotions and these promotions affect the inventories but supply channels fail to understand the impact of these promotions. Organisations should conduct the complete analysis of what and how these sales promotions can affect the supply chain.

False Orders

Sometimes your customer may give you the orders for quantity more than his requirement because he has less confidence in you that you will be able to fulfill his demand on time so he places the orders more than his actual demand and hedges himself. When he reaches at a comfortable situation he cancels the balance orders. These canceled order quantities causes excess purchased inventory, under utilization of your capacities

Sales personnel, who will not meet their targets for a particular time period will request the cooperative customer to increase the quantity and when the customer is not able to sell , he may cancel the order or may return the material partial or in full.

Full Truck Load Incentive

If your organization has a policy to provide incentive over transportation based on the utilization of the truck. In that case your customers keep on accumulating the order quantity and then release the demand. These kind of distortions affect your supply chain planning capabilities. Such freight incentive practices should be analyzed before actual implementation

Demand Forecast Inaccuracies :

If every supply chain partner is changing the demand forecasting by adding some percentage by his gut feeling then this hides the true customer demand.


Variability in the lead time

Variability in the lead time is also another factor for Bullwhip Effect. Customers may not have confidence in your logistic operations because they have experienced in high variability in lead time in past. So when they are out of stock or having inventories lower than desired, they may create a panic situations leading to traveling up of incorrect information in the supply chain.

Bull Whip effect can also be experienced by playing Beer Game. In this game there are four supply chain partners Retailer, Wholesaler, Distributor, and Manufacturer.

To play this game free of cost click here 

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