Effects of Vendor-Managed Inventory on the Bullwhip Effect

Effects of Vendor-Managed Inventory on the Bullwhip Effect

Susanne Hohmann (FOM University of Applied Sciences and HAVI Global Solutions, Germany) and Stephan Zelewski (University of Duisburg-Essen, Germany)
Copyright: © 2013 |Pages: 17
DOI: 10.4018/978-1-4666-2461-0.ch009
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Abstract

The bullwhip effect means that demand variability increases as one moves up the supply chain. In the following article the bullwhip effect is quantified for each part of the supply chain which is presupposed to consist of a producer, a wholesaler, a retailer, and a consumer. After considering the causes of the bullwhip effect, it will be shown with the help of a nonlinear optimization model to what extent the bullwhip effect can be reduced using vendor-managed inventory (VMI) as one concept of Collaborative Planning, Forecasting and Replenishment (CPFR). In contrast to other studies in this field the reduction of the bullwhip effect will be accurately quantified for each part of the supply chain.
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Motivation

The bullwhip effect in supply chains represents a long recognised phenomenon in the area of logistics. The material flows of the supply chain’s participants do not correspond to the consumer demand, which, known as “demand pull”, is the decisive factor in the supply chain. The chance of a smooth running of the supply chain in view of the material and information flow is missed on a regular basis as soon as the bullwhip effect occurs. The occurrence of the bullwhip effect leads to raised costs in the supply chain (McCullen & Towill, 2002; Reddy, 2001). The reduction of the bullwhip effect and therefore the reduction of raised costs in the supply chain lead to an increased profitability of business. Estimations suggest the increase of profitability of business may be up to 8.4 – 20.1% (McCullen & Towill, 2002) or up to 10 – 30% (Metters, 1997).

The use of vendor-managed inventory (VMI) is based on a close cooperation between the producer and the participant that has point of sales data at their disposal. With this coalescence of supply chain parts the appearance of some causes that lead to the bullwhip effect can be prevented (Richardson, 2004; Waller, Johnson, & Davis, 1999). This article provides a multi-dimensional analysis of the different causes of the bullwhip effect, its impact on the different supply chain parts and its counteractions. It will, therefore, be exactly shown what impact the bullwhip effect has on the supply chain and to what extent the bullwhip effect can be reduced in each part of the supply chain by using vendor-managed inventory. This detailed approach adds a holistic, quantitative analysis to the existing literature and enables the prediction and reduction of the bullwhip effect. Vendor-managed inventory is chosen as the concept of CPFR which implies the closest collaboration between producer and retailer.

The appearance of the bullwhip effect can be attributed to five reasons in total: Demand distortion, misperceptions of feedback, batch ordering, price fluctuations, and strategic behavior (Keller, 2004). In this paper, we concentrate on two of these causes, demand distortion and misperceptions of feedback, because they are especially related to the examined topic of VMI. The analysis of these two causes provides the best approach to VMI’s efficiency evaluation. First, however, the conceptual principles will be explained.

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