The Bullwhip Effect in Supply Chains

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Department
Business Administration
Course
BUS 336
Professor
Michael Johnson
Semester
Winter

Description
The Bullwhip Effect in Supply Chains ● Bullwhip Effect: Demand order variabilities in the supply chain amplified as they move up the supply chain (aka, “whiplash” or “whipsaw” effect) ● Results from rational decision­making by members in supply chain ● Can be counteracted by thoroughly understanding underlying causes Causes of the Bullwhip Effect ● Demand Forecast Updating ○ Product forecasting often based on order history from immediate customers → demand pattern projected based on observation ○ Demand signal processing a major contributor to bullwhip effect ○ When lead times b/w resupply of items along supply chain are longer, even more fluctuations ● Order Batching ○ Periodic Ordering (e.g. ordering biweekly, monthly) ■ Variability in orders down the supply chain is higher than demands of company itself ■ Period ordering amplifies variability and contributes to bullwhip effect ○ Push Ordering ■ Surges in demand from customers “pushing” orders onto it ■ Ordering patterns more erratic than customers’ consumption patterns → “hockey stick” phenomenon ■ Periodic ordering → if randomly spread out or overlapping, variability increases ● especially seen in companies that do MRP or DRP (distribution requirement planning) ● Price Fluctuation ○ Forward buying: items bought in advance of requirements, usually b/c of manufacturer’s attractive price offer ■ Usually results from price fluctuations (e.g. special price promotions) in the marketplace ■ Price promotions cause customers to buy more in one go and stock up for future needs → much bigger variation in buying quantities ● Rationing and Shortage Gaming ○ If Demand > Supply, allocation of amount in proportion to amount ordered → exaggerated orders; when demand cools, orders disappear and cancellations come in ○ “Gaming”: customers’ orders gi
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