The Bullwhip Effect in Supply Chains

The Bullwhip Effect in Supply Chains

Susanne Hohmann (Westfälische Hochschule, University of Applied Sciences, Germany)
Copyright: © 2014 |Pages: 6
DOI: 10.4018/978-1-4666-5202-6.ch222
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Background

The first academic description of the bullwhip effect is usually ascribed to Forrester (Forrester 1972) who asserts that lead times are an immanent part of dynamic systems. Lead times take place between different parts of a system due to the handling of material and information. Forrester analyzes stock, production and lead-time in a supply chain. According to him - and validated by empirical data - it is common practice for the variance of orders to far exceed the variance of consumer demand. The effect is amplified at each stage of the supply chain.

The most popular demonstration of the existence of the bullwhip effect is the “Beer Game” (Sterman, 1989), a simulation of rather simple supply chain, consisting of a producer, a distributor, a wholesaler and a retailer who are set up in the beer game. The bullwhip effect occurs, despite the fact that consumer demand changes only slightly at the beginning of the game and remains constant.

In general, the bullwhip effect can be characterized by three factors, which are shown in Figure 1.

Figure 1.

Characterization of the bullwhip effect (Keller 2004)

  • Oscillation: Order and inventory quantities are subject to large fluctuations in amplitude even though consumer demand remains constant.

  • Amplification: The amplitude and variance of order quantities increase steadily from consumer to producer. Despite the fact that consumer demand remains constant, retailer demands increase, while order quantities of the producer show a great variance (see vertical arrows in Figure 1).

  • Phase lag: The order rate later peaks as one moves from the retailer to the producer (see horizontal arrows in Figure 1).

The bullwhip effect can be defined as an increase of variability (measured by variances) of orders related to the variability of consumer demand. Material and information do not flow steadily through the supply chain. The orders seem to be hit by a whiplash. Consequently, the objective of supply chain management (the rapid, cost-minimized and flexible satisfaction of consumer needs with high-quality goods) can no longer be guaranteed. It is noncontroversial that a reduction of the bullwhip effect leads to a profit increase in supply chains (e.g., Metters, 1997).

Key Terms in this Chapter

Supply Chain: Network of companies that serve the same end consumer. It comprises all companies from the raw-material supplier to the retailer.

Vendor-Managed Inventory: 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. The vendor accounts for the quantity of stock and the method of replenishment.

Beer Game: Simulation of a supply chain consisting of producer, distributor, retailer and consumer. The consumer buys beer. The demand only slightly changes at the beginning of the game and then remains the same. The game is usually played over 40 periods and which each of the supply chain companies orders and delivers goods. The simulation is quite easy to play and very vivid.

Supply Chain Management: Planning and management of all sourcing, procurement, logistics, coordination and information activities for all supply chain companies.

Ordering Policy: Rule as to when material is to be purchased, such as when stock falls below minimum inventory level.

Forecast Method: Statistical technique using past data to make assumptions about future, such as sales volumes.

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