Counter Measures to the Bullwhip Effect
Introduction
The bullwhip effect is the unexpected distortion of the supply chain. It refers to the “variability of order rates” (Disney and Lambrecht, 2008, p. 3). This supply chain hazard has its roots in Jay Forrester’s Industrial Dynamics Theory of the late 1950s (Goldsby and Martichenko, 2005). Forrester was the first person to introduce the concept and simulate a model in 1961. There are many solutions to counter the bullwhip effect.
The reason why there are many solutions to the bullwhip effect is because it is triggered by multiple causes. For instance, the most common cause is overreacting to backlogs and lack of information sharing. The two most common solutions to counter the effects are Just in Time (JIT) and Material Requirements Planning (MRP). Both the JIT and MRP counter the bullwhip effect to a certain level but do not quite eliminate it. In JIT and unexpected large order will cause the same disruption that is the very definition of the bullwhip effect. In MRP, the accuracy of information is extremely crucial, so much so, that the user must supply the information about the time it will take for the factory to make the product. Understandably, this structure is not viable in many situations. The proposed solution is an all-encompassing one that aims at covering the loopholes that JIY and MRP have.
Thesis statement: Systems such as JIT and MRP are designed to take care of different aspects of supply chain and not necessary to counter the bullwhip effect. There needs to be a custom fit solution to counter the effects of bullwhip effect, by targeting its four major causes.
Trends
The bullwhip effect is caused by repetitive variation in demand of a product or service. The unexpected demand from the customer causes the retailer to forward this demand to the distributor, which eventually reaches the supplier. Each time it is forwarded to the other department, it is magnified. The reason it is called the ‘bullwhip effect’ is because a small distortion caused by the customer oscillates up the supply chain hierarchy, where each step is magnified from the previous one. There are four main causes of the bullwhip effect price fluctuation, order batching, shortage gaming and inaccuracy in forecasting.
Just In Time (JIT) Inventory
JIT system aims to reduce flow time in production but more importantly, it reduces the response time from suppliers. Hence, the supply chain hierarchy reacts to the changes in the customer demand in a timely manner. There is less reliance on forecasts of manufacturing and more on the actual demand. This system of inventory has been in use by some of the most popular corporate names such as Toyota and Hewlett-Packard. It helps in waste reduction and increases the ability of a company to remain competitive (Cheng & Podolsky, 1996). JIT is a very effective countermeasure to the bullwhip effect. In one way the counter effect tends to reduce the magnified state of the oscillation sent up the supply chain hierarchy.
Having mentioned the benefits of JIT, it must be noted that it is not a foolproof countermeasure. There is an inherent flaw which is unable to cover the basic trigger of the bullwhip effect, the ‘unexpected demand’. All the products are manufactured to meet the actual demands, hence an unexpectedly large order will cause the same problem. Also, JIT might increase the worker idle time and reduce production rate (Nahmias & Olsen, 2015). Similarly, to comprehensively utilize this technique there must be suppliers that are close by to meet the emergency demands, which are willing to meet the emergency demand notice.
Material Requirements Planning
New solution
The new solution is a four-pronged strategy that aims at countering; price fluctuation with low pricing every day; order batching with frequent ordering; shortage gaming with allocating units based on sales history; and inaccurate forecasting with information sharing. The four main causes of the bullwhip effect mentioned earlier needs to be addressed in a custom fit solution. The other system such as JIT and MRP are built for other purpose and not specifically to counter the bullwhip effect.
There are several factors that cause the bullwhip effect, however, the four mentioned above usually do the maximum damage (disruption of the supply chain) when they occur in unison. The four-pronged strategy comprises of the following;
Everyday Low Prices
The major reason why price fluctuation occurs is through sales promotion and discounts. The retailer might see a rise in sales of an item offered at a discount or that comes with promotion (coupons, passes etc.). However, after when the 1st batch is sold the next batch will mostly likely not have the discount or promotional coupons. It means that there will be less sale of the same product. But this temporary increase in sales will cause the oscillation effect in the supply chain. ‘Everyday low prices’ is a strategy currently being employed by Walmart, which makes sure that the retailers offer consumers low prices on a regular basis. There is no specific need to offer temporary discounts or coupons. This also works best for the retailers as it increases customer loyalty and stabilizes the buying behavior making forecasts much more accurate. There is less dependency on artificial fluctuations of prices.
Frequent Ordering
Order batching is a problem that causes the bullwhip effect. Order batching or large order placement causes more variance in the supply chain while sometimes the variations can be volatile to the point of disrupting the supply chain. Frequent ordering, on the other hand, refers to a strategy of making the smaller order on the frequent basis. This strategy keeps the supply chain flow under control while meeting the small demands. Even in cases where there are variances, it is on a relatively small scale.
Forecasts based on Sales History
One of the triggers of the bullwhip effects is in the hands of the producers, where they artificially and unethically limit the supply of a product to inflate its demand and price. This is referred to as shortage gaming. On the downside, it creates the same oscillating effect up the supply chain as an unexpected rise in customer buying activity. As a countermeasure, an in-depth study of the sales history can be used to forecasts future sales. There cannot be 100% accurate predictions but based on historical data the forecasts can be made within a safety zone that do not send disrupting oscillations up the supply chain. The inventory is filled based on proportional rational schemes.
Information Sharing
The last countermeasure discussed above can also be the cause of the bullwhip effect if the data is inaccurate. When the forecasting is done inaccurately it causes disruption in the supply chain. The countermeasure is the honest and timely information sharing. For instance, if there is a lack of demand for a product it can be shared vertically and horizontal in the supply chain with exact numbers. All the relevant departments should have access to the point of sale data to know the exact situation as to why there is a lack of demand for a product. In this way, more accurate forecasting can be done which will eventually prevent the bullwhip effect occurring due to inaccurate forecasting.
Conclusion
It is almost impossible to suggest a solution that takes care of all of the causes of bullwhip effect. For this reason, a four stage solution or a four-pronged strategy is much more effective. The four countermeasures; ‘everyday low prices’, ‘information sharing’, ‘forecasts based on sales history’ and ‘frequent ordering’, are used in the supply chain for their unique effects. However, a company utilizing all the four levels at the same time will have an excellent defense against the bullwhip effect. There will be visibly fewer disruptions in the supply chain of a company using the four-pronged strategy as compared to a firm that relies on a single solution.
References
Bhadbury, B., & Shenoy, D. (Eds.). (2003). Maintenance Resource Management: Adapting Materials Requirements Planning MRP. CRC Press.
Cheng, T. C., & Podolsky, S. (1996). Just-in-time manufacturing: an introduction. Springer Science & Business Media.
Disney, S. M., & Lambrecht, M. R. (2008). On replenishment rules, forecasting, and the bullwhip effect in supply chains (Vol. 4). Now Publishers Inc.
Goldsby, T. J., & Martichenko, R. (2005). Lean six sigma logistics: Strategic development to operational success. J. Ross Publishing.
Heisig, G. (2012). Planning stability in material requirements planning systems (Vol. 515). Springer Science & Business Media.
Nahmias, S., & Olsen, T. L. (2015). Production and Operations Analysis. Waveland Press.
