Supply Chain Management The Bullwhip Effect Commerce Essay

Supply Chain Management The Bullwhip Effect Commerce tryIn recent years in the add on located up focal point theory there has been d unity a lot of research anyplace the phenomenon c each(prenominal)(a)ed the Bullwhip pitch In brief, this damaging movement occurs when the give up company variabilities in the tot chain ar amplified as they moved up the tote up chain (Lee et. al, 1997a) and coffin nail moderate to such big inefficiencies as bem customd receiptss and poor customer service. Many of the authors in their scientific papers contributed a lot to the development of the topic by describing the Bullwhip work, explaining and evaluating its reasons, its implications and possible routes of its reduction, victimization gamyer mathematics (Chen et. al, 1999 Dejonckheere et. al, 2001 Warburton, 2004 Croson Donohue, 2003) and specialized softwargon (like SISCO) (Chatfield et al., 2004) to create simulation models. In our brief overview, however, we testament n ot consider all of these particularized numeric studies in detail, we will just try to focus on the more(prenominal) than theoretical explanation of the negative implications of the Bullwhip upshot, the possible reasons of its macrocosm, and on the ways of its reduction. In this respect, we think that among all of the respected scientists that devoted their efforts to the Bullwhip effect research, the authors Hau L. Lee, V. Padmanabhan, and Seungjin Whang in their articles The Bullwhip Effect in Supply Chains (1997) and Information Distortion in a Supply Chain The Bullwhip effect (1997) rescue not all most profoundly rund and explained the notion of the phenomenon of the Bullwhip effect and the reasons of its universe of discourse, but overly introduced the most valuable and applicable ways of how to diminish its negative consequences.The essay consists of 3 important chapters the kickoff chapter describes the notion and the implications of the Bullwhip effect, in the s econd chapter the reasons for its existence atomic number 18 discussed, and the third chapter refers to the ways how to reduce the Bullwhip effect.1. Implications of the Bullwhip effect there are some assorted definitions and ways of sagaciousness of so called Bullwhip effect (it deal also be referred to as Whiplash effect or deuce-handed saw effect in some sources). This phenomenon was first established by Forrester (1961). The Bullwhip effect corporation appear in ein truth industry and in every tally chain.The Bullwhip effect is a consequence of one or a combination of the avocation four important aspects related to summate chain management, which are, according to Lee et al., subscribe to harbinger updating by supply chain partners ball club batching price fluctuation rationing and shortage gaming. bitty redact variability on a customer take aim amplifies the ensnares for upstream players, such as wholesales and manufacturers, as the influences move up along a supply chain (Paik et al., 2007). As sh proclaim in the Figure 1, when consumer sales have really weakened fluctuations, the retailers invite fluctuates more, the wholesalers demand fluctuates more than the retailers demand and manufacturers demand fluctuates even more than wholesalers demand.(Lee et al., 1997a).According to Forrester, variability of customer orders is usually slight than variability of manufacturing orders. To his opinion the of import reason for this situation is the irrational demeanour of participants involved in a supply chain (Paik et al., 2007).The Bullwhip effect can be observed on unlike levelson macro level it repoints up in in efficacy in production, scheduling, sourcing, distribution, revenue generalization and its realization (Ravichandran, 2008).on operation level, it echos in generation of more fund and keeping it in inappropriate place, to meet a specified service level (Ravichandran, 2008).on performance level, it can reduce the velocity of cash, destroy potential revenue and erode revenue realization (Ravichandran, 2008).These are just some negative consequences of the Bullwhip effect (Carlsson Fuller, 2001)excessive inventory investmentspoor customer service disoriented revenuesthe productivity capital in operations becomes substandard as revenues are lostincreasing in transportation excite ups and sub-optimal transportation mannikindemand variability whitethorn ca use up missed production recordThe Bullwhip Effect is a result of behavior of supply chain members and is created by themselves as a result of their rational decision reservation in situation of short or not full learning near real end-customer demand. The Bullwhip Effect is an internal effect. Companies can ignore the Bullwhip effect and hurt from it extra losses or can try to reduce it.2. The reasons for existence of the Bullwhip effectThe thoroughly illustration of the Bullwhip effect is the beer game. In this experiment (it first besidesk p lace in 1980s) participants play four different roles customers, managers, wholesales and supplies of one of the fashionable beer brand. It is not tolerateed to communicate with each separate, so participants make decisions about say only based on orders from the next downstream player. The results of this experiment are variability and excitableness of upstream levels that always exceed variability and volatility of downstream levels. The interpretation of this result can be different. On one hand it can be effect of irrational decision making on each level (Lee et al., 1997a). But on the other hand, if the Bullwhip effect is a summary of rational decision making, we can indentify different main causes, and then the Bullwhip effect appears because of problems in the supply chain structure.These are the main causes of the Bullwhip Effect1. Demand forecasting updating (Lee et al., 1997a).Every company on each level of supply chain makes forecasting for production, capacity, inve ntory, material requirements and demand levels. Demand forecasting is usually based on the order memorial from the companys immediate customers, i.e. on what the company actually observes (Lee et al., 1997a). By using but forecasting methods, for example exponential smoothing (forecasting of future demand based on new daily demand and it updating when new info is received) the order that is sent to the suppliers is a resileion of safety stock plus essence that is needed to satisfy future demand. The result is that the variability of nitty-gritty of orders will increase during going on supply chain from the end-customer to the end supplier.2. hunting lodge batching (in two forms periodic club and push ordering) (Lee et al., 1997a).There often appears a situation when companies order once a week, once in two weeks, once a month, instead of ordering every day or every few days. This situation appear because sometimes suppliers cannot satisfy shop at ordering or transportation costs are too high (there is a big difference between full load and less(prenominal) than truckload rate, suppliers may even provide customers with discounts for full-truck loads) or time for processing orders is too long. Companies want to make advantages on economies of musical scale but amount of ordering varies during the time (people order more on the end of the week, end of the months, holidays etc.) The Bullwhip effect decreases when order cycles decrease.3. Price fluctuations (Lee et al., 1997a).The bullwhip effect also appears when quantity of goods that customers buy doesnt reflect their current ask. This is a result of customers buy in advance more than they need and stock some quantity because of attractive prices (it can be periodic discounts or promotions events when product prices are low). When level of prices becomes normal, customers stop get products until they have it in stock. In this case buying structure doesnt reflect the consuming structure, as a result the fluctuation of buying amount is more tremendous than the variation of consuming amount (Lee et al., 1997a). Such discounts and promotions bend negatively the supply chain. It seems like manufactures and distributors create these price fluctuations themselves, and it substance that they set up a bullwhip effect themselves.4. Rationing and shortage gaming (Lee et al., 1997a).There are situations when demand is big than supply. In this case customer needs can be satisfied only partly. So customers order bigger amounts than they actually need, and when the situation becomes stable (demand is equal to supply) orders suddenly get cancelled. This means that customers give wrong information about their real demands to the suppliers, and this effect is referred to as gaming (Lee et al., 1997a). This is a common situation for a market.5. Material and information delays (Paik et al., 2007).According to Towill and his co-authors, material and information delays might be a major(ip) contr ibuting factor to the Bullwhip effect (Paik et al., 2007).6. Supply variability (Paik et al., 2007).According to Taylor, supply variability (machine reliability problems and quality problems) is one of the possible causes of the Bullwhip effect. Output of the unreliable machines fluctuates and it pushes the variability of demands of the upstream members. Variability in production level is and then the initial trigger of demand variability, which in turn triggers the Bullwhip effect (Paik et al., 2007).7. enumerate of echelons (Paik et al., 2007).According to Towill and his co-authors and to Ackere, reducing number of one or more intermediates lead to significant reducing of the Bullwhip effect (Paik et al., 2007).3. The ways to reduce the Bullwhip effectIn the previous chapter we described the reasons for existence of the Bullwhip effect. Understanding of these reasons gives a very good base to understanding of how to counteract the negative consequences of the Bullwhip effect. M any companies developed their own successful mechanisms of fighting the outcomes of this effect, and Hau L. Lee, V. Padmanabhan, and Seungjin Whang suggest to divide these various initiatives into three categories Information share, Channel alignment, and Operational efficiency (see Table 1).Table 1 (Lee et al., 1997a)Causes of Bullwhip effectInformation sharingChannel alignmentOperational efficiencyDemand forecast updateunderstanding system dynamicsuse POS dataelectronic data replaceInternetcomputer-assisted ordering (CAO)vendor-managed inventorydiscount for information sharingconsumer directlead-time reductionechelon-based inventory go overOrder batchingEDIInternet-orderingdiscount for truck-load assortmentdelivery appointmentsconsolidationlogistics outsourcingreduction in fixed cost of ordering by EDI or electronic transactionCAOPrice fluctuationsContinuous replenishment program (CRP)Everyday low cost (EDLC)Everyday low price (EDLP)Activity-based costing (ABC)The above menti oned categories imply the followingInformation sharing the information about actual customers demand is inherited from the downstream site to the upstreamChannel alignment is about coordination of different business activities (as pricing, transportation, planning etc.) between the upstream and the downstream sites in the supply chain, andOperational efficiency implies the set of activities that help to improve performance, such as to reduce the lead-time.Lee et al. introduced a set of efficient countermeasures that were designed to diminish the negative effects of the Bullwhip effect (Lee et al., 1997a, b)Avoid multiple demand forecast updatesSince the main reason of existence of the Bullwhip effect is the fact, that every member of the supply chain makes its own demand forecasting based on the data provided to it by its immediate downstream member, the one evident way to vacate this repetitive processing of demand data in a supply chain is to make the real consumption data (tha t is known at a downstream site) available at all of the upstream sites. This would allow all of the enterprises in a supply chain (from downstream to upstream) to make and update their forecasts based on the aforesaid(prenominal) raw data.Data sharing can be implemented, for instance, by the use of the electronic data interchange (EDI) systems.But the practice shows that in some cases even though all of the organizations in a supply chain use the aforementioned(prenominal) demand data to make their forecasts, the differences in forecasting methods and/or buying practices may sleek over lead to fluctuations in the orders placed with the upstream sites.Break order batchesThe main idea here is to avoid another reason of manner of the Bullwhip effect order batching by developing the strategies that lead to smaller batches and indeed more frequent supply. integrity of the reasons of large order batches and low order frequencies is the high cost of processing the orders, which ca n be avoided, for example, by the use of electronic document circulation instead of paper-based.The other reason of large order batches is the transportation costs the differences in the costs of full truckloads and less-than-truckloads are very high, and this makes companies to wait for the full truckloads and thus stretch the replenishment times, which also creates order batching. This problem can also be avoided by inducing by the manufacturers their distributors to order assortments of different products at a time (a truckload from the same maker may contain different products instead of full load of the same product) and thus significantly increase the order frequency. This can be excited by offering discounts by manufacturers to their distributors if they order mixed loads. The other in effect(p) way to solve the problem of order batching is the use of third-party logistics companies these companies allow economies of scale by combining loads from different suppliers situat ed near each other and delivering these loads to different companies, what is especially very useful for small companies, for which full truckload replenishment times are very long.Stabilize pricesA very straightforward way of eliminating the Bullwhip effect caused by forward buying is for the manufacturers to reduce the levels and frequencies of wholesale discounts. One of the most effective ways of doing it is implementing the insouciant low price (EDLP) pricing strategy. The practice shows that this strategy is effective two for the suppliers and for the customers since it helps to decrease costs of inventory, storage, transportation etc. for every participant. Though with use of the conventional accounting systems the benefits of the EDLP strategy compared to wholesale price discounting strategy are not evident for the buyer, ABC systems in most cases explicitly show the advantages of EDLP strategy.Eliminate gaming in shortageThe aim of this measure is to reave buyers of the incentives to exaggerate their orders in hope of the partial satisfaction of these orders by the suppliers. One of the simple ways to get resign of this reason of Bullwhip effect sort is as following in case of shortage the supplier can allocate products to the customers not based on their orders, but in isotropy to past sales records. Also the buyers desire for gaming may be lessened if the supplier shares its capacity and inventory information with them. The other way of fighting with buyers gaming desire is to use strict supply contracts that leap buyers flexibility in ordering unlimited quantities of goods and free cancelling of orders.However, we have to grant that the above mentioned measures of reduction of the Bullwhip effect are not exhaustive and cannot in full eliminate the existence of this effect. A number of scientific papers mathematically prove that the Bullwhip effect still exists even when demand information is share by all stages of the supply chain and all stages use the same forecasting technique and inventory policy (Chen et al., 2000), and even if almost all of the above described causes (like batching, price fluctuations etc.) are removed (Croson Donohue, 2003). This gives us the understanding that the Bullwhip effect problem still needs to be closely scrutinized and other ways of reducing this effect are still need to be developed.ConclusionIn our concise but, we hope, substantial overview we tried to reflect different approaches to the understanding of the phenomenon called The Bullwhip effect and the negative effects that it brings to the members of a supply chain, and to describe the most sound, to our opinion, ways of reducing this effect, that were introduced by the researchers during the past two decades.We also found that though during the last years to the investigation of this matter a lot of scientists devoted a lot of their efforts, the problem of getting rid of the Bullwhip effect in a supply chain has not to date been solved completely a number of scientific papers mathematically prove that the Bullwhip effect still exists even when almost all of the detect (so far) causes of its appearance (like batching, price fluctuations etc.) are removed. This means that the Bullwhip effect problem still needs to be closely scrutinized and other ways of reducing this effect are still need to be developed.