1. The Bullwhip Effect

2. P&G Procter & Gamble (P&G) examined order patterns for Pampers.
Its sales at retail stores were fluctuating, but the variability was not excessive.
For the distributors' orders, P&G was surprised by the greater degree of variability.
When they looked at P&G's orders of materials to their suppliers, such as 3M, the swings were even greater.
While babies consumed diapers at a steady rate, the demand order variability in the supply chain was amplified as we move up the supply chain. P&G called this phenomenon the "bullwhip" effect.

3. ECR: Potential $30 billion opportunity
Efficient Consumer Response (ECR) initiative
One motivation for the initiative was the excessive amount of inventory in the supply chain.
Studies found more than 100 days of inventory supply from production lines to retailers' shelves.
Distorted information led to stockpiling because of demand uncertainty and variability

4. Bullwhip
As we move further away from the end-customer in the supply chain,
Distortion in demand information,
Increase in variance of orders

5. Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer
Retailer's Orders to Wholesaler
1000
1000
900
900
800
800
700
700
600
600
Consumer demand
Retailer Order
500
500
400
400
300
300
200
200
100
100 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41
Wholesaler's Orders to Manufacturer
Manufacturer's Orders with Supplier
1000
1000
900
900
800
800
700
700
Wholesaler Order
600
Manufacturer Order
600
500
500
400
400
300
300
200
200
100
100 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 1 4 7 10 13 16 19 22 25 28 31 34 37 40

6. Causes of the Bullwhip Effect
Supplier
Best illustration of the bullwhip effect is "beer game."
Participants play the roles of customers, retailers, wholesalers, and suppliers of a popular brand of beer.
They cannot communicate with each other and must make order decisions based only on orders from the next downstream player.
The ordering patterns share a common, recurring theme: the variability of an upstream site is always greater than those of the downstream site, a simple, yet powerful illustration of the bullwhip effect.
the bullwhip effect is a consequence of the players' rational behavior within the supply chains infrastructure.
Manufact.
Distributor
Retailer
Customer

7. So What?
When a supply chain is plagued with a bullwhip effect and demand information is distorted,
It results in
excessive inventory
poor product forecasts
insufficient or excessive capacities
poor customer service
Uncertain and costly production
high costs for corrections (expedited shipments and overtime)

8. General Techniques for Over-coming the Bullwhip Effect
Electronic linkages
Information sharing
Better forecasts
Real-time updates
Lower costs of procurement
More frequent deliveries
Use of cheap electronic procurement
Consolidation of loads through 3rd party logistics
Stable prices
Eg, Everyday Low Pricing (EDLP)

9. Four major causes of the bullwhip effect:
1. Demand forecast updating
2. Order batching
3. Price fluctuation
4. Rationing and shortage gaming

10. 1. The Bullwhip Effect: Information Processing Obstacles
Contributing factors
No visibility of end demand
Multiple forecasts
Long lead-time
Counter Measures
Access sell-thru or POS data
Direct sales (natural on web)
Single control of replenishment
Lead time reduction
State of Practice
Sell-thru data in contracts (e.g., HP, Apple, IBM)
CFAR, CPFR, CRP, VMI (P&G and Walmart)
Quick Response Mfg. Strategy
Notes: Direct marketing channels not subject to bull whip effect due to demand signal processing. E.g., Dell-Direct of Dell Computers. The manufacturer has control of the entire supply chain.

11. 1. Demand Forecast Updating
Companies in a supply chain usually do their own product forecasting
Forecasting is often based on the order history from the company's immediate customers.
When a downstream operation places an order,
the upstream manager processes that information as a signal about future product demand.
readjusts his/her demand forecasts and, in turn,
the orders with the upstream suppliers

12. The order sent to the supplier reflects
the amount needed to replenish the stocks to meet the requirements of future demands,
as well as the necessary safety stocks.
With long lead times, it is not uncommon to have weeks of safety stocks.
The result is that the fluctuations in the order quantities to suppliers over time can be much greater than the fluctuations in the demand data

13. 2. Bull Whip Effect - Operational Obstacles (Batching)
Contributing factors
High Order Cost
Full TL economies
Random or correlated ordering
Counter Measures
EDI & Computer Assisted Ordering (CAO)
Discounted on Assorted Truckload, consolidated by 3rd party logistics
Regular delivery appointment
Volume and not lot size discounts
State of Practice
McKesson, Nabisco, ...
3rd party logistics in Europe, emerging in the U.S.
P & G
Notes:
Also seen in NOVA; access to sell-thru data by manufacturer allows him to schedule production based on sales rather than orders.
Reduce transaction costs
- EDI
- CAO
- McKesson’s “Economost”
Discounts for ordering assortments rather than single product full-truckloads.
Coordination of delivery schedules.
Third party logistics can consolidate orders from multiple retailers.

14. 2. Order Batching
In a supply chain, each company places orders with an upstream organization using some inventory monitoring or control.
Demands come in, depleting inventory, but the company may not immediately place an order with its supplier.
It often batches or accumulates demands before issuing an order.
There are two forms of order batching:
‘economies’ of ordering and transport
push ordering

15. High Cost of Order Processing
Companies may order weekly, biweekly, or even monthly.
the time and cost of processing an order. P&G estimates customer ordering to cost $35 - $75 to process.
Many manufacturers place purchase orders with suppliers when they run their material requirements planning (MRP) systems.
MRP systems are often run monthly.
slow-moving items may be ordered infrequently

16. Economics of Transportation
There are substantial differences between full truckload (FTL) and less-than-truckload (LTL) rates,
strong incentive to fill a truckload when ordering from a supplier.
Full truckload could be a month or more product

17. Salespeople are measured quarterly or annually
Sales people fill sales quotas by "borrowing" ahead.
Sign orders prematurely
company experiences regular surges in demand.
orders "pushed" on it from customers

18. MRP Companies doing MRP or DRP oftne do so once a month
Order cycles tend to be periodic

19. 3. Bull Whip Effect - Pricing Obstacles
Contributing factors
High-Low Pricing leading to forward buy
Delivery and Purchase not synchronized
Counter Measures
EDLP
Limited purchase quantities
Scan based promotions
State of Practice
P&G (resisted by some retailers)
Scan based promotion
Notes:
EDLP
Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods.
Special Purchase contracts - E.g., discounts for total minimum commitments.

20. 3. Price Fluctuation
forward buy constituted 80 percent of transactions between manufacturers and distributors in the grocery industry
due to attractive price.
Resulted in $75 billion to $100 billion of inventory

21. Promotions
Manufacturers and distributors periodically have special promotions and trade deals like price discounts, quantity discounts, coupons, rebates, etc.
The result is that customers buy in bigger quantities that do not reflect their immediate needs and stock up for the future.

22. Results of Promotions
Factories run overtime at certain times and are idle at others.
Companies pile huge inventories to anticipate big demand swings.
With a surge in shipments, they may pay premium freight rates.
Damage also increases due to larger-than-normal volumes and stocking inventories for long periods.
Problems are self imposed

23. Stock performance Trade promotions can affect stock performance.
Bristol-Myers Squibb stockholders sued when its stock dropped as a result of disappointing quarterly sales.
Poor sales were due to the company trade deals in a previous quarter that flooded the distribution channel with forward-buy inventories.

24. Bull Whip Effect - Incentive Obstacles
Contributing factors
Incentives based on sell-in leading to forward buy
Counter Measures
Focus sales force on increasing sell-thru
Incentives based on rolling horizon
Sales force do not compete with each other but with the competition
Notes:
EDLP
Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods.
Special Purchase contracts - E.g., discounts for total minimum commitments.

25. 4. Bull Whip Effect - Operational Obstacles (Rationing Game)
Contributing factors
Proportional rationing scheme
Ignorance of supply conditions
Unrestricted orders & free return policy
Counter Measures
Allocation based on past sales.
Shared Capacity and Supply Information
Flexibility Limited over time, capacity reservation
State of Practice
Saturn, HP
Schedule Sharing (HP with TI and Motorola)
HP, Sun, Seagate
Notes:
Allocate supply in proportion to retailers market share in previous period. GM, TI, HP …
Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing.
Special contracts that restrict ordering (e.g., HP, SUN)
- our paper on forecasts and flexibility
- reserve capacity (Seagate reserves a portion of supplier’s capacity)
Free return policies and generous order cancellation can lead to gaming.

26. 4. Rationing and Shortage Gaming
When demand exceeds supply, manufacturers may ration its product to customers.
One method: allocates amounts amount in proportion to the amount ordered.
For example, if the total supply is only 50 percent of the total demand, all customers receive 50 percent of what they order.
Knowing that, customers may exaggerate their real needs.
If and when demand cools, orders will suddenly be cancelled

27. Managerial Implications of the Bull Whip Effect - Behavioral Factors
Contributing factors
Lack of trust
Local reaction
Counter Measures
Building trust and partnership
State of Practice
Wal-Mart and P&G with CFAR
Notes:
Allocate supply in proportion to retailers market share in previous period. GM, TI, HP …
Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing.
Special contracts that restrict ordering (e.g., HP, SUN)
- our paper on forecasts and flexibility
- reserve capacity (Seagate reserves a portion of supplier’s capacity)
Free return policies and generous order cancellation can lead to gaming.

28. How to Counteract the Bullwhip Effect

29. 1. Avoid Multiple Demand Forecast Updates
make downstream demand data available to the upstream sites. Both sites can update their forecasts with the same raw data.
IBM, HP, and Apple require sell-through data on withdrawn stocks from their resellers' central warehouse.
Not as complete as point-of-sale (POS) store data.

30. Electronic Data Interchange (EDI)
Supply chain partners use electronic data interchange (EDI) to share data.
In the consumer products industry, EDI is growing
in 1990, 20 percent of orders by retailers transmitted via EDI.
In 1992, 40 percent and,
in 1995, nearly 60 percent.
The increasing use of EDI
facilitate information transmission
sharing among chain members
Now moving to the internet

31. Vendor-managed inventory (VMI) or Continuous replenishment program (CRP)
Manufacturer or wholesaler has access to the demand and inventory information at retailing sites (either POS or retail warehouses)
Updates forecasts and resupplies the retail sites.
Retailers become a passive partners in supply chain.
Inventory reductions of up to 25 percent are common.
Many companies such as Campbell Soup, M&M/Mars, Nestle, Quaker Oats, Nabisco, P&G, and Scott Paper use CRP with some or most of their customers. P&G uses VMI in its diaper supply chain, starting with its supplier, 3M, and its customer, Wal-Mart.

32. ”Consumer direct" program
Apple Computer has a "consumer direct" program
sells directly to consumers without going through the reseller
Allows Apple to see directly the demand patterns.
Dell does the same.

33. 2. Break Order Batches Devise strategies that lead to smaller batches
more frequent resupply

34. Lower cost of ordering
EDI can reduce the cost of the paperwork in generating an order.
Using EDI, Nabisco perform paperless, computer-assisted ordering (CAO) and customers order more frequently.
McKesson uses EDI to lower the transaction costs from orders by drugstores and other retailers.
P&G has introduced standardized ordering terms across all business units to simplify the process and dramatically cut the number of invoices.
General Electric is electronically matching buyers and suppliers.
A paper purchase order that typically cost $50 to process is now $5.

35. Transportation alternatives
Differences in the costs of full truckloads and less-than- truckloads are great
Improvements in order efficiency are wasted due to the full-truckload constraint.
Now some manufacturers induce their distributors to order assortments of different products. Hence a truckload may contain different products from the same manufacturer instead of a full load of the same product.
P&G has given discounts to distributors that are willing to order mixed-SKU loads of any of its products.

36. Third-party logistics
Consolidate loads from multiple suppliers located near each other
a company can realize full truckload economies without the batches coming from the same supplier.

37. 3. Stabilize Prices
Reduce the frequency and the level of wholesale price discounting.
The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy.
P&G, Kraft, and Pillsbury have moved to an everyday low price (EDLP) or value pricing strategy

38. 4. Eliminate Gaming in Shortage Situations
Instead of allocating products based on orders, allocate in proportion to past sales.
Customers then have no incentive to exaggerate their orders.
General Motors uses this method of allocation in cases of short supply.