Bullwhip Effect (document en anglais)

THE BULLWHIP EFFECT

Supply Chain Management (November, 2013)

The Bullwhip effect is the phenomenon of increasing amplification of the demand variability back along the supply chain.

It’s the subject of a real attention by researchers of the past fifteen years and this phenomenon concerns the supply chain managers because it is a major cause of loss of effectiveness and efficiency in the supply chain.

What is exactly the « bullwhip effect?

The Bullwhip effect reflects the increasing amplification of demand shifts upwards along a supply chain.

Indeed, the bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier. This effect can be observed through most supply chains across several industries; it occurs because the demand for goods is based on demand forecasts from companies, rather than actual consumer demand

Thanks to several companies and our researches, we could determine the causes and consequences of the Bullwhip effect.

What are the causes of the bullwhip effect?

There are many factors said to contribute to the bullwhip effect in supply chain:

Demand Forecast Updating: Every company in a supply chain does product forecasting for its production scheduling, capacity planning, inventory control, and material requirements planning. Forecasting is often based on the order history form the company’s immediate customers.

The beer game in class is a perfect example to illustrate this cause. Indeed, in this game we have no information on the all supply chain. When a downstream operation places an order, the upstream manager processes that piece of information as a signal about future product demand. Based on this signal, the upstream manager readjusts his demand forecasts and in turn, the orders placed with the suppliers of the upstream operation. This process is a major contributor to bullwhip effect.

Order Batching: Companies may not immediately place an order with their supplier. Often accumulating the demand first. Companies may order weekly or even monthly. This creates variability in the demand, as there may for instance be a surge in demand at some stage followed by no demand after

Lack of communication: Between each link of the supply chain makes it difficult.

Price Fluctuation: Special discount and other cost changes can upset regular buying patterns. Buyers want to take advantage on discounts offered during a short time period, this can cause uneven production and distorted demand information.

Free return policies: Customers may intentionally overstate demands due to shortages and then cancel when the supply becomes adequate again, without return forfeit retailers will continue to exaggerate their needs and cancel orders; resulting in excess material.

What are the consequences of the bullwhip effect?

Excessive Inventory: As a result, the producer may end up producing more of the product than the market is actually willing to accept. This means that the producer will have produced too many units.

Inefficient production: the bullwhip effect can lead ton inefficient production. This happens when the producer does not have accurate demand data and cannot accurately produce the required amount of product ahead of time and cannot schedule production in an efficient way. This can lead to a reactive production, where the producer does not produce enough and then must rush to produce more.

Insufficient quality: due to many flow and organization ‘s disturbances. Quality is no longer a priority

Increases of Cost: The most important effect that the Bullwhip effect has is it increases costs. This happens for a variety of reasons. When there is an inefficient production, it means that stock-outs will occur. Stock-outs results in lost revenues form sales that are missed. They can cause costly losses to a company’s reputation.

Many companies has suffered form this phenomenon of bullwhip effect. The majority of company can be affected, however, companies are faced with an important demand’s variation or those who are dependent on their suppliers or their distributors are more risky.

We ‘ll take the case of Barilla S.p.A, to analyze what happened? And mainly what solutions have they found?

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