INTRODUCTION
The unmanaged supply chain is not a stable production concept by itself. Demand variability continuously fluctuates along the supply chain and goes up as one moves up the supply chain away from the retail consumer. Large variations in orders placed upstream are often triggered by small changes in consumer demand. Eventually the network can oscillate in very large swings as each organisation in the supply chain seeks to solve the problem to meet their own ends and approach it with its own perspective. This phenomenon is known as the bullwhip effect and has been observed across most industries resulting in increased cost and poorer service.
Causes of the bull whip effect:
• Un-forecasted sales promotions
• Sales incentives
• Lack of customer confidence
• Customers turning back sales orders
• Freight incentives
• Overreaction to backlogs
• Neglecting orders to reduce inventory
• Lack of communication up and down the supply chain
• Lack of co-ordination up and down the supply chain
• Delayed information flow and material flow
• Order batching-large orders cause more variance. Order batching occurs in an effort to reduce costs, to take advantage of transportation economics such as full truck economies and to benefit from sales incentives. Promotions often result in forward buying to benefit more from lower prices.
Example: To reduce stocked product, retailers may offer sales promotions to customers. If retailers fail to notify firms upstream in the supply chain, these firms may forecast increased sales as legitimate demand thereby producing product that was not wanted by the customer in the first place. Furthermore, sales incentives for salesman may entice salesman to sell products to firms to meet incentives. This may cause large inventories for the firm, or the firm may cancel the orders, which causes demand fluctuations in the supply chain.
Overcoming the bullwhip effect:
Knowing the exact causes helps us analyze the problem and design our approach to solving it in a better fashion. The following are possible solutions:
1. Improve communication along the supply chain.
a. Retailers notifying firms upstream of sales promotions will help clarify demand signals from consumers
b. Improved information will improve demand forecasts upstream in the supply chain.
Eg : Improved communication from retailers will assist firms upstream in the supply chain in determining what is actual product demand. Improved communication and reliable information helps firms to develop forecasts that are effective and accurate.
2. Improve sources of forecast data
a. Firms can use data from Point of Sale computer systems to derive data from forecasting
b. Firms along the supply chain can use EDI systems to retrieve data on items that are legitimately being purchased by customers
Determining product demand from actual data entered into point of sale (POS) computer systems and electronic data interchange (EDI) systems will result in accurate sales forecasts. In contrast, determining sales forecasts on experience or hunches may be risky.
High order cost is countered with EDI and computer aided ordering (CAO). Full truckload economies are countered with third party logistics and assorted truckloads. Random or correlated ordering is countered with regular delivery appointments. More frequent ordering results in smaller orders and smaller variance. However when an entity orders more often, it will not see a reduction in its own demand variance- the reduction is seen by the upstream entities. Also when an entity orders more frequently, its required safety stock may increase or decrease.
3. Work with firms upstream and downstream in the supply chain
a. Create smaller order increments to decrease time between orders. Order processing will become closer to real-time.
b. Work to develop consistent pricing of products to avoid demand fluctuations from the sale of inexpensive products.
Ordering products up and down the supply chain in smaller increments reduces the time between orders and allows for timely information to be available to your firm. Receiving information in real-time is a great advantage to a firm when forecasting data is essential to reducing costs.
Retailers attempt to minimize their inventory while maintaining sufficient on hand to guard against fluctuations in demand. The inventory, I(t), is depleted by the demand rate, D(t), and increased by the receiving rate, R(t), so the inventory balance equation is:
DI/dt = R (t) - D (t)
When a retailer orders from a manufacturer who employs a “make-to-stock” policy, the order may be fulfilled from the manufacturer’s inventory, in which case the fulfillment delay appears to the retailer as just the sum of the order processing and shipping times. If the manufacturer employs a “make-to-order” policy, then the fulfillment time will be much longer. While the retailer is often considered to be driving the supply chain, it is the manufacturer who determines the fulfillment time. The retailer or manufacturer can affect the lead time through long term, strategic moves, such as changing from offshore to onshore, quick response manufacturing, or to lean manufacturing, which shortens the manufacturing cycle.
4. Work with vendors to create smaller order increments and reduce order batching. Order batching exacerbates demand fluctuations.
5. Maintain stable prices for products. Price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations. High-low pricing can be replaced by EDLP (everyday low pricing). Special purchase contracts can be implemented in order to specify ordering at regular intervals in order to synchronise better delivery and purchase.
6. Allocate demand among customers based on past orders, not present orders to reduce hoarding behaviour when shortages occur.
Proportional rationing schemes are countered by allocating units based on past sales. Ignorance of supply chain conditions can be addressed by sharing capacity and supply information. Unrestricted ordering capability can be addressed by reducing the order size flexibility and implementing capacity reservations.
Example: one can reserve a fixed quantity for a given year and specify the quantity of each order shortly before it’s needed, as long as the sum of the order quantities equals the reserved quantity. Single control of replenishment or Vendor managed inventory (VMI) can overcome exaggerated demand forecasts. Long lead times should be reduced where economically dangerous. Free return policies are not addressed easily. Often such policies simply must be prohibited or limited.
Reducing the bullwhip effect in a firm:
• Some keys to reducing costs to a firm: stabilize prices along the supply chain and be sure the information along the supply chain is timely and accurate. This will enhance decision making and allow the company to be responsive to customer demand.
• Reduce the speculative decisions in the firm by using actual sales of product entered into point of sale or EDI computer systems. This will help the firm base their decisions on actual demand and not on demand based upon speculation or demand derived from a zealous salesman reaching a sales quota.
• Small orders and reduced batch orders increase information quality and contact with vendors up and down the supply chain
• Every firm should look to reduce costs and help them gain competitive advantage. Reducing costs along the supply chain is a new phenomenon. Perhaps your firm can gain a competitive edge by reducing fluctuations in the information along your supply chain.
SUMMARY
• Bullwhip effect is caused from distortions in information along the supply chain
• Results of the bullwhip effect can include: excess inventories, problems with quality, increased costs, overtime expenditures, lost customer service, lost sales and more.
• Causes of the bullwhip effect may include: poor forecasting of sales, incorrect information along the supply chain, sales incentives, sales promotions and lack of customer confidence.
• Solutions to the bullwhip effect include: improved information flow between firms along the supply chain, stable pricing, small order increments, focused demand on EDI or POS systems and removal of sales incentives
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