Bullwhip Effect — What is the Bullwhip Effect?

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The sup­ply chain is orga­nized around mul­ti­ple flows of mate­ri­als, infor­ma­tion, and finances. Their plan­ning, man­age­ment and con­trol along the chain is essen­tial to enable down­stream cus­tomer ser­vice. As the sup­ply chain is made up of mul­ti­ple actors with dif­fer­ent prac­tices and reg­u­la­tions, this tends to increase the degree of uncer­tain­ty and dynam­ic behav­ior of the sup­ply chain.

A good exam­ple of this dynam­ic is the rather explic­it bull­whip effect — also known as ampli­fi­ca­tion of demand variability.

What is the bullwhip effect?

In con­crete terms, the APICS defines this effect as fol­lows: ” The ampli­fi­ca­tion of demand change up the sup­ply chain is caused by a minor change down the chain. Inven­to­ries can then quick­ly go from being out of stock to being in sur­plus ” (Apics Dic­tio­nary, 2008).

The bull­whip effect results in either an increase in inven­to­ries when demand weak­ens, or a short­age when demand increases.

It gen­er­ates exces­sive fluc­tu­a­tions in demand or stor­age points through­out the sup­ply chain. This is con­firmed by the APICS “This phe­nom­e­non is due to the cas­cade effect of orders ‘going up’ the chain and prod­uct trans­port delays ‘going down’ the chain”(Apics Dic­tio­nary, 2008).

 

Even a small change in con­sumer sales results in an increase in orders up the chain. This increase in orders increas­es the fur­ther up the sup­ply chain you go (from the retail­er’s orders to the man­u­fac­tur­er’s)… Orders caus­ing an increase to an inven­to­ry build-up sit­u­a­tion as already mentioned. 

To main­tain ser­vice rates, over­stock­ing will occur. This over­stock­ing even­tu­al­ly leads to a poor use of resources, a decrease in the prof­itabil­i­ty of the orga­ni­za­tion (decrease in WCR, increase in fixed assets in stock…).

This effect stems from the irra­tional behav­ior of the actors in the sup­ply chain. 

Some examples

In the last few years, there have been two sig­nif­i­cant events in irra­tional con­sumer behav­ior:

• first a rush on the toi­let paper at the begin­ning of March 2019 due to a “pan­ic buy­ing” behavior
• and recent­ly, the same sit­u­a­tion is hap­pen­ing on oils in the first half of 2022

The increase in cus­tomer demand even­tu­al­ly cre­ates a short­age or rationing when, with­out much change in con­sumer behav­ior, these prod­ucts could be ade­quate­ly sup­plied — at least initially. 

It should be not­ed that a sit­u­a­tion where sup­ply con­tracts over a medi­um-term hori­zon can actu­al­ly lead to a lack of prod­uct availability.

What are the root causes ?

Cus­tomer behav­ior is not the only cul­prit. The com­pa­nies involved in the sup­ply chain also have a role to play in ampli­fy­ing the vari­a­tion in demand.

Among the most com­mon caus­es are:

• a lack of reli­able infor­ma­tion trans­mit­ted from one actor to anoth­er in the sup­ply chain
• demand fore­cast adjust­ments (sea­son­al­i­ty, trends…)
• grouped orders
• price fluc­tu­a­tion
• rationing and main­tained scarcity
• the vari­abil­i­ty of the dead­lines giv­ing place to poten­tial long lead time  (mate­ri­als, trans­port, production…)
• machines out of order, under main­te­nance or any oth­er activ­i­ty that impacts and lim­its pro­duc­tion capacities
• pro­mo­tion­al offers

Gen­er­al­ly speak­ing, the more actors along the sup­ply chain, the longer the whip and there­fore the greater its amplitude.

Glob­al­ized, seg­ment­ed and just-in-time chains with many spe­cial­ized sup­pli­ers are weak­ened and more sen­si­tive to the bull­whip effect.

Is the “fire­fight­er mode” or reac­tive man­age­ment, which con­sists in con­tin­u­ous­ly tak­ing cor­rec­tive actions to man­age emer­gen­cies and unfore­seen events, with excep­tion­al trans­port and oth­er catch-up meth­ods, sus­tain­able? While these solu­tions may be viable in the short term, they tend to exac­er­bate the phe­nom­e­non and are costly.

How to reduce the bullwhip effect?

The sus­tain­able solu­tion pro­posed by APICS is: “The bull­whip effect can be elim­i­nat­ed by syn­chro­niz­ing the sup­ply chain” (Apics Dic­tio­nary, 2008).

There­fore, some of the caus­es list­ed above can be eas­i­ly coun­tered by imple­ment­ing the fol­low­ing mea­sures:

• improve com­mu­ni­ca­tion between play­ers: part­ner­ships, VMI (Ven­dor Man­age­ment Inven­to­ry), EDI. The reli­able and con­stant shar­ing of infor­ma­tion between actors will allow every­one to adapt with­out under/over stocking.
• reduce or con­trol the influ­ence on demand: more sta­ble prices, con­trolled actions and pro­mo­tions or man­aged with an adapt­ed soft­ware package
• size sup­plies: not only on the basis of “eco­nom­ic” lots and place con­stant and not exag­ger­at­ed orders
• adjust the sales fore­cast to be as accu­rate as pos­si­ble and be aware of their limitations
• not to main­tain the short­age and not to ration the production
• to have a good dimen­sion­ing of the safe­ty stock to avoid the dou­ble order
• Risk man­age­ment to have con­tin­gency plans in case of extreme situations
• man­age pro­duc­tion capac­i­ties as pre­cise­ly as pos­si­ble with the MPS(Mas­ter Pro­duc­tion Schedule)
• set up an S&OP (Sales & Oper­a­tions Planning)
• place capac­i­ty, time or inven­to­ry buffers, pay­ing atten­tion to bot­tle­necks. Pool them when pos­si­ble — pooling.

Bullwhip effect: which tools?

It is also pos­si­ble to imple­ment some tools from the Lean Man­u­fac­tur­ing method­ol­o­gy. This will reori­ent the flows towards a demand-dri­ven “pull” sys­tem that will pro­vide flex­i­bil­i­ty and agility.

Also con­sid­er delayed dif­fer­en­ti­a­tion and DDMRP. It explodes BOMs, which allows you to size and place buffers at strate­gic points while reduc­ing lead times. In fact, the bull­whip effect is reduced.

It is good to spec­i­fy that a well para­me­ter­ized com­put­er sys­tem, which takes into account all the para­me­ters men­tioned above will give good results exploitable for a good pilot­ing of the organization. 

Don’t be afraid of dis­rup­tions and trust your sup­ply chain ecosystem.

 

 

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