The Bullwhip or Whiplash Effect


By
Junaid M
Mamta S Nair
Prabodh M Das
Rahul Ramachandran
S2 MBA
Institute of Management in Kerala
Thiruvananthapuram
E-mail:
prabodhmohan@gmail.com
 


The objective of supply chain management is to provide a high velocity flow of high quality, relevant information that will enable suppliers to provide an uninterrupted and precisely timed flow of materials to customers. However, unplanned demand oscillations, including those caused by stockouts, in the supply chain execution process create distortions, which can wreck havoc up and down the supply chain. There are numerous causes, often in combination, which will cause these supply chain distortions to start what has become known as the "Bullwhip Effect" or "Whiplash Effect". The distorted information results in excessive inventory throughout the system, poor forecasts, capacity realisation problems, higher costs, falling customer service standards, longer cycle times, decreasing sales, revenues and the like.

The most common general drivers of these demand distortions are Customers, Promotions, Sales, Manufacturing, Policies, Processes, Systems and Suppliers.

Causes

Isolated planning: Manufacturers, suppliers and retailers most often prepare their sales estimates and forecasts in isolation with each other. A small increase in demand prompts retailers to place an increased quota of order with wholesalers, who in turn place huge orders with manufacturers. This increases the actual demand and results in excessive inventory.

Sales incentive plans: In their pursuit to be eligible for an incentive or bonus, sales people who have not achieved targets press upon indirect channel partners to place additional orders, thus altering the sales forecasts at the eleventh hour. Thus a disparity is caused between planned production and orders.

Pricing and promotion policies: Repeated price changes and sales promotion activities interrupt the demand forecasts. Shortage in stock caused by clearance sales could result in overstocking throughout the supply chain, creating excess costs.

Batching: To take advantage of freight concessions and administrative costs, companies place bulk orders (batching) at certain time points of the year. The manufacturer has to make changes in production schedules to meet the demand. Thus interrupts the smooth functioning of the supply chain.

Cracking the "Bullwhip Effect"

  • Specifically understand what drives customer demand planning and inventory consumption.
  • Real time information and collaboration among supply chain partners to keep track of product demand at each stage.
  • Sales targets should be spaced out over shorter periods.
  • Effectively designing promotions.
  • Scheduling transportation.
  • Probing for the reasons behind reduction or cancellation of orders.
     


Junaid M
Mamta S Nair
Prabodh M Das
Rahul Ramachandran
S2 MBA
Institute of Management in Kerala
Thiruvananthapuram
E-mail:
prabodhmohan@gmail.com
 

Source : E-mail April 2, 2005

 
 
 

 

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