Bullwhip Effect
Supply chain management constitutes of complex tasks and includes companies that transfer goods from initial raw material stage to finished goods to retailers. The most common reasons that supply chain companies stumble is when the customer demands and market conditions fluctuate or shift. The bullwhip effect is caused when supply chain companies are not able to manage their orders . The change in consumer demand and market fluctuations cause different supply chain companies to order more products/goods to achieve or meet the demand. The most common reason for the difference in orders is that companies base the demand for goods on forecasts and not on actual consumer demands . The impact of the bullwhip effect is opposite and starts from the retailer to wholesaler, distributor, manufacturer, and finally, to the supplier of raw materials.
Problem/Issue of Bullwhip Effect
The increase in demand variability moves the supply chain away from the customer of the retail sector and the variability results in high changes in order place upstream. The network and supply chain companies notice huge swings in the demand and supply and are unable to overcome the issues. The issues can be caused due to the errors in the behavior of the management, operational forecasts, and other forecasting errors. Bullwhip effect is driven by the behavior of management, most of the supply chain companies do not want a stock-out situation for their most popular good, and therefore, order more from the wholesalers. The increase in supply is not by the demand for the good, and it creates a situation when companies have more goods that cannot be sold quickly. The issue of overstocking arises due to behavioral causes. Operational errors also play a major role in causing the bullwhip effect. Supply chain companies demand goods based on their forecasts that mostly do not match with consumer demands. The lack of information within the company causes the companies to order more goods which lead to improper inventory levels. Finally, forecasting errors also contribute to inventory mismanagement. Companies order foods more than its actual demand, due to demand forecasts on current market conditions. The fluctuation in market conditions can cause inventory mismanagement that results in extra inventory (more than what is required by the companies).
Countermeasures for Bullwhip Effect
The most common countermeasures for bullwhip effect include a resolution for shortage gaming and countermeasures for demand forecast inaccuracies. The countermeasure to shortage gaming includes allocation of units based on previous sales value. The companies can ignore the supply chain conditions by sharing and communicating the overall capacity and supply chain information in the organization. Order sizes can be restricted by reducing the order size and capacity reservations. Minimizing the order size may restrict the ordering capabilities of the organization. The order size restriction can be achieved by fixing the quantity for a specific year and making adjustments in orders before the actual need.
The counter measure to demand and supply forecast inaccuracies can be achieved by applying and implementing point-of-sale data. Vendor management inventory can also play a vital role in overcoming the exaggerated demand for the forecasts. Lead time management must also be applied when it provides economic advantages to the organizations.
Comparison of the Two Solutions
Supply chain functions play a major role in business activities of organizations all over the world. The most common issue that leads to bullwhip effect includes ordering goods that do not match with authentic retail sales of the business. It is highly recommended that organizations, especially the supply chain allocates must use the market and customer information with support different technologies and also use superior fuzzy estimates that are by historical sales values and future speculations. The suggested strategies can lead to reducing in Bullwhip effect .
Resolution for Shortage Gaming
It includes proportional rationing for orders and ignoring the unrestricted orders and free return policies of the business. The Shortage Gaming allows supply chain managers to overcome the issue by allocating the resources based on previous experiences (sales values), information of supply, flexibility limited time, shared capacity, and reservation of capacity . Business analysts and researchers believe that companies are provided with order-up-to policy. The strategy (order-up-to policy) helps organizations to design their capacities with knowledge of previous sales and other technical and operational information. The strategy helps to limit or minimize the shortage costs and other expected holdings. The transfer of information from one party to other allows other partners to take appropriate steps and to limit their resources in the most efficient manner. Reducing the order size and capacity reservations can help businesses to overcome the issue of ordering more than the required limits. Different business policies can create trust and excellent relationship between different stages of the supply chain processes and can reduce the overall transaction costs and duplication of organizational efforts. The countermeasure for shortage gaming is mainly concerned with limiting the bullwhip effect though restrictions of ordering size and capacity reservations for different processes of the supply chain.
Demand Forecast Inaccuracies
Demand forecast inaccuracies are a major cause of bullwhip effect and debates are undertaken to highlight the procedures to overcome the inaccuracies. The best possible countermeasure for demand forecast inaccuracies is to implement point of sale data. The process involves automatically identifying all the information of consumer purchases and transferring it into a database. In contrast to countermeasures for shortage gamming the demand forecast inaccuracies are more accurate and reliable since new technologies are integrated within organizations and manipulation errors are limited. All the manufacturers, supply chain companies, and other parties can have access to the information and can make effective decisions relating to their forecasts. The process is expensive compared to shortage gamming, but the results are beneficial for the companies. The adoption of the process helps to reduce the bullwhip effect in a more efficient manner. The countermeasure further suggests implementing the vendor managed inventory tool/model. The model allows the customers to identify and determine the levels of inventory of the company. The tool allows vendors and customers to reach an agreement on the level of inventory to be maintained. The level of inventory identified by Vendor Managed Inventory is specifically based on demand statistics of customers. The option to overcome demand forecast inaccuracies is more thorough and effective compared to countermeasures of shortage gamming since the processes allow the companies to maintain a database of customer purchase information. The level of collaboration between businesses and vendors also increases that creates trust and other beneficial results for both the parties. Forecasting helps the businesses to limit their costs and to improve the overall wastage of goods.
List of References
Chopra, S., 2007. Supply Chain Management. Delhi: Pearson Education India.
Kook, T., 2013. The Bullwhip effect. Munich: GRIN Verlag.
Kumar, M., Srinivasan, S. & Tanwar, G., 2013. Tackling Rationing and Shortage Gaming Reason of Bullwhip Effect With Fuzzy Logic Approach. International Journal of Engineering And Science, 2(10), pp. 48-52.
