1 1 The Bullwhip Effect John H. Vande Vate Fall, 2002

2 2 Diagnosis & Treatment What is it? Symptoms? Causes? Treatments Follow-up

3 3 What it is… The Bullwhip Effect describes the phenomenon in which order variability is amplified as it moves up the supply chain from end-consumers through distribution and manufacturing to raw material suppliers.

4 4 Example Procter & Gamble: Pampers Smooth consumer demand Fluctuating sales at retail stores Highly variable demand on distributors Wild swings in demand on manufacturing Greatest swings in demand on suppliers

5 5 Illustration Consumer Sales at Retailer Consumer demand Retailer's Orders to Distributor Retailer Order

6 6 Illustration Retailer's Orders to Distributor Retailer Order Distributor's Orders to P&G Distributor Order

7 7 Illustration Distributor’s Orders to P&G Distributor Order P&G's Orders with 3M P&G Order

8 8 Illustration Consumer Sales at Retailer Consumer demand P&G's Orders with 3M P&G Order

9 9 What Are the Effects? What problems, costs, challenges does this create for the players in the supply chain? What problems does this create for the product in the market place?

10 The Effects Manufacturing Cost –Capital Investment –Operating costs Inventories –Anticipatory –Cycle –Pipeline –Safety stock –Infrastructure Lead Time –New product releases –Order response time Shipping & Receiving Cost –Order processing

11 The Effects Customer Service Level –Product availability Transport Cost –Economies of scale –Variability

12 Order batching Pricing Strategies Uncertain Supply Forecasting The Causes

13 Causes Order Batching –Reduce processing costs –Exploit economies of scale in transport –Ordering cycles and planning cycles

14 Causes Pricing Strategies –Promotions Reduce margin Advance demand Diversions –Sales Targets & Revenue Targets Reduce price at end of quarter to meet plans

15 Uncertain Supply Product on Allocation Customers place extra large orders to ensure they get “their share”

16 Forecasting More variability Poorer forecasts Less reliable supply

17 Treatments Information Sharing –Wal-Mart provides POS info to P&G Channel Alignment –Coordination of promotions, transport, etc. Operational Efficiency –Reducing cost and leadtime

18 Information Sharing Chrysler makes the cars Leer makes the seats Third party cuts & sews fabric Milliken makes the fabric Dupont makes raw material … Shared schedule information

19 Information Sharing Chrysler makes the cars Leer makes the seats Third party cuts & sews fabric Milliken makes the fabric Dupont makes raw material … Shared schedule information

20 BMW & Daimler Fiber Optic controls Bosch: integration Infineon: switches Several other suppliers Shared visibility of components and alerts of shortages

21 VMI/CRP Vendor managed inventory/Continuous Replenishment Dell requires its suppliers to hold consignment inventory at a warehouse near the factory --- Vendor responsible for maintaining 2 weeks supply

22 Consumer Contact Maintain contact with end consumer (source of demand) to reduce reliability on information from channels –Loyalty programs –Coupons –BMW model of ordering Disintermediate distribution –Dell build-to-order –GM build-to-order in Brazil

23 Information Information sharing from industrial customers VMI and CRP Contact with end consumers Disintermediate distributors Faster replenishment

24 Reducing Batch Sizes Reduce the cost of ordering: automated ordering, VMI, etc. Facilitate consolidation: –multi-stop deliveries, pick-ups, milk-runs –Shared inventory and transport (Dell) –3PL’s help

25 Stabilize Prices Eliminate promotions (Everyday low prices) Stabilize Demand –Auto manufacturers produce at a constant rate and drive demand with 0% financing, rebates, etc. –Dell adjusts its offerings and pricing to reflect product availability

26 Eliminate Gaming Allocate based on historical sales rather than orders Intel case Promote orders far in advance Limit cancellations

27 Follow-up How well have these cures worked? Enormous investment of energy and money into these treatments The Bullwhip is alive and well Two “cases”

28 Dell Hard drives Relies on several sources –Competition: who gets what share –Contingency: if one has a problem –Cultivation: don’t want just 1 disk drive maker Contracts for share –X% of volume to A, Y% to B, etc. Implementation

29 Implementation Assume a 5 day production schedule 20% to A: one day a week 40% to B: two days a week 40% to C: two days a week Mondays to A Tuesdays & Wednesdays to B Thursdays & Fridays to C Comments?

30 The Auto Industry Increasingly BTO –Consumer contact –Short replenishment cycles –Small batch sizes Increasingly Lean –As little as 2 hours inventory on site –Sequencing: Send supplier locked production schedule. Supplier sends parts in that order –Frequent small deliveries (sometimes every 4 hrs) –Coordinated supply with Milk runs, etc.

31 Auto Industry Keep production level –Target daily production, e.g., 1,000/day –Promotions, rebates, low financing to drive

32 Consequences BTO and shorted order-to-delivery means smaller bucket of orders in hand to sequence with: Before After Best Schedule: 3R, 3B, 3G, 3Y

33 More Variable Usage Sequence under old method Sequence under BTO

34 Lean Prevents Pooling With releases every day or even several times per day, variability is transmitted to suppliers Study of one OEM’s in-bound supply showed up to 270% variation in day-to-day volumes ordered X today, 3X tomorrow, 1/3X next day…

35 Consequences Supplier Capacity Supplier Inventory Transportation

36 Confounding Factor Product Diversification –GM plans to launch a new vehicle every 23 days. –BMW makes versions of the 7 series sedan –…

37 Next Inventory model to temper the Bull Whip Effect in lean/BTO environments November 19 th Visitor from –Peach State Integrated Technologies –What they are doing with location models Yuri and his team are working on using those models to build low variance milk runs for Ford based on location models