The bullwhip effect can be detrimental to the efficiency of a supply chain. Demand of a product may only slightly shift, but it can lead to a much greater shift in manufacturing a product. This is when the “variability in demand is magnified as we move from the customer to the producer in the supply chain” (Robert & Chase). It specifically relates to a lack of coordination in a supply chain as a company makes purchases from its suppliers more unpredictably than it sells to its customer (Mendelson & Bray, 2016). It also relates to a lack of coordination in the supply chain “it may be difficult for suppliers to adjust production in response to the changeable demand” (Mendelson & Bray, 2016).
There are four main cases of a bullwhip effect in a supply chain. These causes are order batching, price fluctuation, rationing and shortage gaming and demand forecasting updating (Lee, Padmanabhan, & Whang, 1997).
Order batching can be broken down into two subsections. The first type of order batching is periodic ordering. This is when ordering doesn’t happen frequently. For instance, an order may be once per month or quarter. This can make it difficult to order the correct amount. Unfortunately, you couldn’t order too frequently because it would lead to inefficient transportation (ex. Sending twice as many trucks at half of their capacity). The second type of order batching is push ordering. This occurs with a cyclical sales cycle. I work in sales and we sell about 50% of our product in the fourth quarter. This means that the supply chain is drastically different during the fourth quarter than the other three quarters (Lee, Padmanabhan, & Whang, 1997).
The second cause of the bullwhip effect is price fluctuation. If prices are low, this can entice forward buying. Forward buying is when a firm buys something in advance of needing it because of an attractive sale or offer from the seller. Demand may not be at sufficient levels, but the order is purchased anyway. By its nature it’s a complete disconnect between purchasing inventory and consumer demand. Though, it should be noted that it’s not always a bad decision if the deal to buy the goods ahead of time is significant enough (ie. lost resources storing extra goods in inventory is less costly than the savings received through purchasing the high/low price change from the supplier) (Lee, Padmanabhan, & Whang, 1997).
The third cause of the bullwhip effect is rationing and shortage gaming. This is a result of a lack of truthful communication between the buyer and the seller. If the buyer knows that the supply is less than demand, the buyer may overstate the demand to make sure that they can buy as much as possible. As a result, it could cause an overreaction on the supply side thus evidencing the bullwhip effect (Lee, Padmanabhan, & Whang, 1997).
Finally, the last cause of the bullwhip effect is demand forecast updating is when demand from a supplier is based on recent historic data. This can cause a problem because a company could have an unusually large one-time sale that increases demand. This could lead the manufactures to significantly increase inventory, even though the sale may be over and demand will resume back down to regular levels (Lee, Padmanabhan, & Whang, 1997).
Next, there are remedies and actionable tasks that can be put in place to remedy the bullwhip effect. First, to help minimize the effect of order batching, orders could be made at quicker intervals. And to counteract the issue of inefficient transportation, firms could work together to ship orders and make sure that the ship a full order each time (Lee, Padmanabhan, & Whang, 1997).
Forward buying can be remedied by keeping prices steady. This makes sure that orders are made based on demand, rather than on an attractive sale or a big discount (Lee, Padmanabhan, & Whang, 1997). If there is a promotion, a firm can engage in activity based costing. This helps show the increased costs from buying in bulk based on a promotion, rather than true demand. Some of these costs may be: increased in damage to do handling, increase in transportation costs and more inventories (Lee, Padmanabhan, & Whang, 1997).
Response 2
In regards to the definition of the phenomenon, the author used a text book definition without creating a relevant explanation in form of an example that befit their organization. The definition includes a direct quotation from the textbook an indication that the author may not be very conversant with the concept. In the explanation for the causes, the authors again quote text book definition of the terms and possible causes.
Periodic ordering cannot be responsible for bullwhip effect. This is because the monthly or quarterly orders are aligned to the demand within that particular month. The effect is brought about by failure to budget and amend the budget to align the stock to the real demand for the product. Price fluctuations in it cannot cause bullwhip effect, the real cause is the inability and lack of coordination between the budget team and the sales team to determine the real cause of the increase in the demand. With proper coordination, the budget team will be able to accurately forecast the real demand and avoid over/under stocking or overproduction. I agree with the author that the regulations and the increased length of the supply chain should be put in focus in a global expansion program.
