bulwhip effect

8/6/2019 Bulwhip Effect

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Supply Chain Management- Cracking thebullwhip effect

An Approach Paper

By Paritosh Agarwal



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Table of Contents

TABLE OF CONTENTS .....................................................................................................................................2

1. INTRODUCTION.........................................................................................................................................3

2. WHAT IS BULLWHIP EFFECT? ..............................................................................................................4

3. THE BEER GAME ......................................................................................................................................6

4. CAUSES OF BULLWHIP EFFECT.........................................................................................................11

5. IMPACT OF BULLWHIP EFFECT..........................................................................................................13

6. CRACKING THE BULLWHIP EFFECT..................................................................................................14

7. THE BULLWHIP EFFECT AND ITS IMPACT ON SUPPLY CHAIN ...................................................15

8. CONCLUSION ..........................................................................................................................................17

9. REFERENCE............................................................................................................................................18



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1. Introduction

Fluctuations in demand vary significantly between industries. The apparel industry, for example,

is subject to major demand adjustments driven by business cycles and seasonality, while thediaper market enjoys relatively consistent demand. One would expect players in various retailsupply chains to frequently misjudge demand, causing shortages or inventory surpluses atdifferent stages in the chain. But given the consistency in diaper demand, shouldn’t the diapersupply chain be more accurate and efficient? Yes – it should . But it isn’t. Even industries withreliable demand patterns waste millions of dollars each year because they aren’t able to matchproduction to demand. A major cause of supply chain inefficiency has been dubbed the“bullwhip effect”.



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2. What is Bullwhip Effect?

Even industries with reliable demand patterns waste millions of dollars each year because they

aren’t able to match production to demand. A major cause of supply chain inefficiency has beendubbed the “bullwhip effect”.

Proctor & Gamble coined the term “bullwhip effect” by studying the demand fluctuations forPampers (disposable diapers). This is a classic example of a product with very little consumerdemand fluctuation. P&G observed that distributor orders to the factory varied far more than thepreceding retail demand. P & G orders to their material suppliers fluctuated even more.

Babies use diapers at a very predictable rate, and retail sales resemble this fact. Information isreadily available concerning the number of babies in all stages of diaper wearing. Even so P&Gobserved that this product with uniform demand created a wave of changes up the supply chain

due to very minor changes in demand.

Fig 1



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Fig 2

The graphical representations above show the bullwhip effect between two supply chainpartners. It can be seen that the Distributor orders to the factory experience demand fluctuate farmore drastically than the retail demand. Over time as the Distributor builds inventory and fulfillsorders, it communicates very different demand levels to the upstream factory by the orderamounts it requests. This becomes more complicated the farther up the supply chain we go.

The bullwhip effect describes how inaccurate information, a lack of transparency

throughout the supply chain, and a disconnect between production and real-time supplychain information result in lost revenue, bad customer service, high inventory levels andunrealized profits.

As information (usually forecast data) is passed down the supply chain, most participants onlyhave access to data from businesses either directly above or directly below them. In industrieswhere the entire supply chain can consist of numerous layers, this means that the majority of theinformation that managers use to make decisions is localized to only a few participants andhidden from those further up or downstream. Without a clear view of end-user demand,companies must rely on only that information they have access to. Unfortunately, thisinformation is often distorted by multiple layers of forecasts and transactions.

This principal is easily demonstrated through an exercise often conducted in business schoolscalled the beer game.



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3. The Beer Game

The beer game was developed at MIT by the Systems Dynamic Group in the 1960s. The gameinvolves a simple production/distribution system for a single brand of beer. There are threeplayers in the game including a retailer, a wholesaler, and a marketing director at the brewery.

Each player's goal is to maximize profit.A truck driver delivers beer once each week to the retailer. Then the retailer places an order withthe trucker who returns the order to the wholesaler. There's a four week lag between ordering andreceiving the beer.

The retailer and wholesaler do not communicate directly. The retailer sells hundreds of productsand the wholesaler distributes many products to a large number of customers.

The following represents the results of a typical beer game:-

3.1 The Retailer

Week 1: Lover's Beer is not very popular but the retailer sells four cases per week on average.Because the lead time is four weeks, the retailer attempts to keep twelve cases in the store by

ordering four cases each Monday when the trucker makes a delivery.

Week 2: The retailer's sales of Lover's beer doubles to eight cases, so on Monday, he orders 8cases.

Week 3: The retailer sells 8 cases. The trucker delivers four cases. To be safe, the retailer decidesto order 12 cases of Lover's beer.

Week 4: The retailer learns from some of his younger customers that a music video appearing onTV shows a group singing "I'll take on last sip of Lover's beer and run into the sun." The retailerassumes that this explains the increased demand for the product. The trucker delivers 5 cases.The retailer is nearly sold out, so he orders 16 cases.

Week 5: The retailer sells the last case, but receives 7 cases. All 7 cases are sold by the end of the week. So again on Monday the retailer orders 16 cases.

Week 6: Customers are looking for Lover's beer. Some put their names on a list to be calledwhen the beer comes in. The trucker delivers only 6 cases and all are sold by the weekend. Theretailer orders another 16 cases.

Week 7: The trucker delivers 7 cases. The retailer is frustrated, but orders another 16 cases.

Week 8: The trucker delivers 5 cases and tells the retailer the beer is backlogged. The retailer isreally getting irritated with the wholesaler, but orders 24 cases.

3.2 The Wholesaler

The wholesaler distributes many brands of beer to a large number of retailers, but he is the onlydistributor of Lover's beer. The wholesaler orders 4 truckloads from the brewery truck drivereach week and receives the beer after a 4 week lag. The wholesaler's policy is to keep 12truckloads in inventory on a continuous basis.

Week 6: By week 6 the wholesaler is out of Lover's beer and responds by ordering 30 truckloadsfrom the brewery.

Week 8: By the 8th week most stores are ordering 3 or 4 times more Lovers' beer than theirregular amounts.



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Week 9: The wholesaler orders more Lover's beer, but gets only 6 truckloads.

Week 10: Only 8 truckloads are delivered, so the wholesaler orders 40.

Week 11: Only 12 truckloads are received, and there are 77 truckloads in backlog, so thewholesaler orders 40 more truckloads.

Week 12: The wholesaler orders 60 more truckloads of Lover's beer. It appears that the beer isbecoming more popular from week to week.

Week 13: There is still a huge backlog.

Weeks 14-15: The wholesaler receives larger shipments from the brewery, but orders fromretailers begin to drop off.

Week 16: The trucker delivers 55 truckloads from the brewery, but the wholesaler gets zeroorders from retailers. So he stops ordering from the brewery.

Week 17: The wholesaler receives another 60 truckloads. Retailers order zero. The wholesalerorders zero.

The brewery keeps sending beer.

3.3 The Brewery

The brewery is small but has a reputation for producing high quality beer. Lover's beer is onlyone of several products produced at the brewery.

Week 6: New orders come in for 40 gross. It takes two weeks to brew the beer.

Week 14: Orders continue to come in and the brewery has not been able to catch up on thebacklogged orders. The marketing manager begins to wonder how much bonus he will get forincreasing sales so dramatically.

Week 16: The brewery catches up on the backlog, but orders begin to drop off.

Week 18: By week 18 there are no new orders for Lover's beer.Week 19: The brewery has 100 gross of Lover's beer in stock, but no orders. So the brewerystops producing Lover's beer.

Weeks 20-23. No orders.

At this point all the players blame each other for the excess inventory. Conversations withwholesale and retailer reveal an inventory of 93 cases at the retailer and 220 truckloads at thewholesaler. The marketing manager figures it will take the wholesaler a year to sell the Lover'sbeer he has in stock. The retailers must be the problem. The retailer explains that demandincreased from 4 cases per week to 8 cases. The wholesaler and marketing manager think demand mushroomed after that, and then fell off, but the retailer explains that didn't happen.

Demand stayed at 8 cases per week. Since he didn't get the beer he ordered, he kept orderingmore in an attempt to keep up with the demand. The marketing manager plans his resignation.

3.4 Lessons from the Beer Game

1. The structure of a system influences behavior. Systems cause their own problems, not externalforces or individual errors.

2. Human systems include the way in which people make decisions.



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3. People tend to focus on their own decisions and ignore how these decisions affect others.

3.5 Lessons Related to the Learning Disabilities

1. People do not understand how their actions affect others.

2. So they tend to blame each other for problems.

3. Becoming proactive causes more problems.

4. The problems build gradually, so people don't realize there is a problem until it’s too late.

5. People don't learn from their experience because the effects of their actions occur somewhereelse in the system.

The players eventually discover a little of Pogo's wisdom. According to Pogo, "We have met theenemy and he is us"

Fig 3. Stock variability amplification in a supply chain due to

Bullwhip Effect

Fig 3 shows the effect of lack of synchronization among supply chain members on the wholechain. Even a slight change in the customer sales ripples backward in the form of amplifiedoscillation upstream, resembling the flick of a bullwhip handle. Because the supply patterns donot match the demand patterns, inventory accumulates at various stages as shown by Beer Game.

The above graph can be split into end to end graphs at each level which will present a betterpicture.



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Fig 4 Stock variability at POS (Point of Sale)

Fig 5 Variability graph for retailer order to Wholesaler

Fig 6 Ripples in Wholesale Orders to Manufacturer



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Fig 4 shows that very less variance at the POS (Point of Sales). Graphs starts showing greaternumber of peaks as the orders move from retailer to Manufacturer.



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4. Causes of Bullwhip Effect

It is important for us to understand the causal factors that create supply chain oscillations. Hereare some examples:

• How does sporadic sales promotions impact demand patterns, cost and margins?

Many companies that conduct sales promotions that effect current inventory and the supplypipeline do not understand the impact, on a quantitative and qualitative basis, of what their salespromotion policies and practices actually do. After gaining a complete and accurateunderstanding of what sales promotions do for you vs. what sales promotions do to you, mostcompanies are left with the need to answer the question, “What sales promotion policies andpractices should we change?” A common complaint from the manufacturing side of the business,and a common reason for severe demand distortions that cause supply chain oscillations, areunforecasted and “unknown” sales promotions. These unplanned for sales promotion eventsripple throughout the supply chain creating excess costs which border on the incalculable.

• Does your sales incentive plan contribute to demand distortions?

Sales targets, quotas and commission accelerators when applied to an extended quota period,such as three months, will often cause demand distortion. Management needs to examine therationale for sales incentives to be based on shorter-intervals rather than three months or longer.Typically, shorter measurement periods promote a smoothing of demand resulting in decreasedordering lumps resulting in a dampening of the “Bullwhip Effect”.

• Are you the victim of false orders and subsequent cancellations?

Two common causes for false orders are:

1. The customer does not have confidence in your ability to rapidly and reliably supply product.In other words, your customers do not believe you will ship their orders on-time. As a result,customers will hedge by placing higher than projected demand on the manufacturer in the hopethey will receive what they need, when they need it and then, when product availability isconsidered satisfactory, cancel the balance of future orders. These “false” orders often result inexcess purchased material in inventory and in the pipeline as well as underutilized capacity.

2. Sales personnel who will not meet their quota for a time period that would acceleratecommissions and qualify them for a bonus, will often have added or change orders placed by acooperative customer to achieve quota. The customer in turn may later cancel, or return, part or

all of the order, as well as expects some concessions and/or special treatment from thesalesperson in the future for providing the “service”.



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• Do transportation incentives cause demand lumps?

Transportation discount incentives for volume orders will often cause customers to accumulateorders and then release lumps of demand. After thoroughly examining the impact that thisincented distortion has on hampering your own supply chain planning capabilities, and the

resultant associated costs, it may be time to examine your freight incentive practices.

• Have you developed partnerships based on trust with your customers?

With distributors often leery of a manufacturer’s ultimate intentions, especially with thepossibility the distributor will be removed from the sales chain, and, the manufacturer sellingdirectly to end-users, there is no desire to frequently share customer volumes, demand patternsand inventory positions. On the other hand, this mistrust contributes to demand oscillations,stock outs, higher inventories and lost sales for the manufacturer and distributor. Developing aworkable and effective solution is essential.

For whatever individual or combination of causes that creates demand surges and oscillations,these lumps of demand explode out through your supplier network and their supplier network often extending lead times due to unexpected, and often false, increases in demand. Then, thesupplier network may not be able to get raw material in a short enough lead time which reversesin the supply chain as it causes theirs and your delivery lead time to lengthen.Then, the product manufacturer tells their distributors who tell their dealers that lead times haveincreased due to supply problems. The “Bullwhip Effect” is now traveling the other way - -down the supply chain. And, it may get worse with another “Bullwhip Effect” going up the chainagain as longer lead times cause customer’s replenishment planning systems to “kick-out” new,and very often, false demand for future supply coverage. This new surge in demand often causesdecisions to be made that will increase capacity unnecessarily as the demand ultimatelydissipates.

Other factors that cause oscillations in the supply chain are:-1 Forecast errors2 Overreaction to backlogs3 Lead time (of information-orders and of material) variability4 No communication and no coordination up and down the supply chain5 Delay times for material and information flow6 Batch ordering (large orders result in more variance)7 Rationing and shortage gaming8 Price fluctuations9 Free return policies10 Inflated orders



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5. Impact of Bullwhip Effect

The variability that results from Bullwhip effect can cause numerous problems for themanufacturers. According to the study conducted by Georgia Technical University supply chainproblems cost firms on an average anywhere between 9% and 20% of their overall value over asix month period. In the grocery industry alone, the Efficient Consumer Response initiative hasestimated that streamlining the inefficiencies of the supply chain could result in $30 billion insavings. These negative financial outcomes are the result of the following consequences resultingfrom the bullwhip effect:

1 Excessive inventory investments: Since the Bullwhip effect makes the demand moreunpredictable, all companies need to safeguard themselves against the variations to avoidthe stock outs.

2 Poor customer service level: Despite the excessive inventory levels mentioned in the firstconsequence, demand unpredictability may cause stock outs anyways.

3 Lost Revenues: In addition to the poor customer service levels of the secondconsequence, stock outs may also cause in lost revenues.

4 Reduced Productivity: Since revenues are lost, operations are less cost efficient.5 More difficult decision making: Decision makers react to demand fluctuations and adapt

(production and inventory) capacities to meet peak demands.6 Sub-Optimal transportation: Transportation planning is made more difficult by demand

uncertainties induced by the Bullwhip effect.7 Sub-Optimal production: As transportation, greater demand unpredictability causes

missed production schedules.



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6. Cracking The Bullwhip Effect

Essential to minimizing the “Bullwhip Effect” is to first, specifically understand what drives

customer demand planning and inventory consumption as they are the triggers for replenishmentorder quantities at various points in the supply chain. The most effective process for smoothingout the oscillations of the “Bullwhip Effect” will be customers and suppliers understanding whatdrives demand and supply patterns and then, collaboratively working to improve informationquality and compressing cycle times throughout the entire process. More than likely, you willfind opportunities for improvement by adopting some or all of the following actions, amongothers, to minimize the “Bullwhip Effect” and increase business performance.

• Minimize the cycle time in receiving projected and actual demand information.• Establish the monitoring of actual demand for product to as near a real time basis as possible.• Understand product demand patterns at each stage of the supply chain.

• Increase the frequency and quality of collaboration through shared demand information.• Minimize or eliminate information queues that create information flow delays.• Eliminate inventory replenishment methods that launch demand lumps into the supply chain.• Eliminate incentives for customers that directly cause demand accumulation and order stagingprior to a replenishment request, such as volume transportation discounts.• Minimize incentivized promotions that will cause customers to delay orders and therebyinterrupt smoother ordering patterns.• Offer your products at consistently good prices to minimize buying surges brought on bytemporary promotional discounts.• Identify, and preferably, eliminate the cause of customer order reductions or cancellations.• Provide vendor-managed inventory (VMI) services by collaboratively planning inventory needs

with the customer to projected end-user demand then, monitor actual demand to fine tune theactual VMI levels. (Note: VMI can increase sales and profits especially in industries wherebuyers can go to alternative sources if you or your distributor stock-out.)

Even the most modern of Supply Chain Management systems, with all the bells and whistles,cannot automatically stop the “Bullwhip Effect”. It’s a demand management process problemwith very broad implications because it often encompasses policies, measurements systems,practices and, in some cases, the very core of an organization’s value and belief system.However, the degree of negative effect it can have on sales, market share, cost and profits can beenormous. Certainly, a tough but very necessary problem to solve.



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7. The Bullwhip Effect and its impact on supply chain

Here I am going to show the impact of Bullwhip effect on the sales of color television by a largeelectronics company through the number of graphs. These graphs will give you a better

understanding of bullwhip effect and how does it affect the market and eventually can cause thedisruption in the supply chain. Fig 7 shows the normal order stream i.e. the statistically the wayorders are placed to a manufacturer. Fig 8 shows the original data at the Point of Sales i.e. at theretailers’ location. Fig 9 and Fig 10 shows how the variance is decreased as the promotions andtrends are removed. This reduces the ripples in the chain at POS, which shows its effect at themanufacturer level.

Fig. 7 Order Stream

Fig. 8 Point Of Sales, Data Original



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Fig. 9 POS Data after removing Promotions

Fig 10. Point of Sales Data after removing Promotion and Trend



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8. Conclusion

For make-to-stock production systems, which are included in different supply chains, theproduction plans and activities are based on demand forecasting. The orders are supplied by

stock inventory, in which policy emphasizes the immediate delivery of the order, good qualityreasonable price, and the standard products. The customers expect that delays in the order areinexcusable, so the supplier must maintain sufficient stock.It has been recognized that demand forecasting and ordering policies are two of the key causes of the Bullwhip Effect.The Bullwhip effect is a wasteful phenomenon that occurs due to lack of information across thesupply chain. Basically the Bullwhip effect is the safety stock for the safety stock; becausesuppliers hold extra stock for their customers the same way retailers hold extra stock for theircustomers. Suppliers need safety stock for the safety stock.Situations where information is not shared between the manufacturer (with chained suppliers)and the retailers may cause a heavier burden on the safety stock or a greater expenditure in

shortage cost. The negative effect on business performance is often found in excess stocks,quality problems, higher raw material costs, overtime expenses and shipping costs. In the worstcase scenario, customer service goes down lead time lengthen, sales are lost, costs go up andcapacity is adjusted. An important element to operating a smooth flowing supply chain is tomitigate and preferably eliminate the Bullwhip effect.



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9. Reference

1 Wikipedia- The free encyclopedia – “The Bullwhip effect”.2 Buchmeister B, Palcic I, “Bullwhip effect problem in the supply chain”.

3 Gerard P Cachon, The Wharton School, “In search of Bullwhip Effect”4 R. Michael Donovan, “Supply Chain Management, Cracking the Bullwhip effect”.5 Jeremy Leishman, Jed Robison, Chris Rogers, “Bullwhip Effect”.

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