The Bullwhip Effect.

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Presentation transcript:

The Bullwhip Effect

Increasing Variability of Orders Up the Supply Chain Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

Finding …. Increase in variability as one travels upstreams in the supply chain ….Bullwhip Effect

What are the Causes…. Promotional sales (P&G) Volume and Transportation Discounts Inflated orders - IBM Aptiva orders increased by 2-3 times when retailers though that IBM would be out of stock over Christmas - Same with Motorola’s Cellular phones Demand Forecast Long cycle times

We Conclude …. Order Variability is amplified up the supply chain; upstream echelons face higher variability. What you see is not what they face.

Consequences…. Increased safety stock Reduced service level Inefficient allocation of resources Increased transportation costs

The Bullwhip Effect: Managerial Insights Exists, in part, due to the retailer’s need to estimate the mean and variance of demand. The increase in variability is an increasing function of the lead time. The more complicated the demand models and the forecasting techniques, the greater the increase. Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

Coping with the Bullwhip Effect in Leading Companies Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing Reduce Lead Times - EDI - Cross Docking Alliance Arrangements Vendor managed inventory On-site vendor representatives