The Bullwhip Effect - Coursework Example

CASE STUDY: THE BULLWHIP EFFECT Name: Institution affiliated: Date of submission: Tutor: Introduction The bullwhip effect is a phenomenon that is used to in the distribution channel. The effect is affected by changes in the consumer demands that lead to swings in the inventory due to the changes caused. The bullwhip effect was advanced by Forrester Jay in 1961 in his book industrial dynamics thus its popularly known as the Forrester effect. The bullwhip effect is a form of supply chain management that tries to explain the reasons that lead to the fluctuations of inventory across the supply chain even when the demands from the customers are constant. Inefficiencies in the supply chain are usually evident as a result of the bullwhip effect. While research continues to be done to identify solutions to the bullwhip effect, the role played by the human behaviour has been overlooked. The changes in demand in the market for products and services usually lead to variations in the capacity usage [Ste08]. After the discovery of the bullwhip effects, the idea of supply management was effected that was aimed at ensuring the provision of high quality and relevant information that will ensure that the suppliers provide their customers with uninterrupted flow of materials and products. However, Forrester identified that the demand of most commodities in the market is usually oscillating and this may end up creating havoc in the supply chain when the suppliers start experiencing problems such as stock outs. In most cases the major drivers of the changes in demand are not only customers but also promotions, policies, processes, suppliers and systems put in place to manage both the demand and the supply of commodities [Ste08]. The bullwhip effect is a major reason for the negative performances that businesses have and is often the reason for excess inventories, higher raw materials purchase and storage costs, quality issues and overtime expenses. In worse scenarios of the bullwhip effect, businesses are likely to lose out through lower sales reports, reduced quality of customer services and increase in costs. The bullwhip effect also forces businesses to increase their lead time thus the optimal batch order quantity is not used by the business [Bor08]. Worksheet analysis The worksheet provide for the beer game simulation provides a perfect example of the bullwhip effect. It reports the weekly demand and supply curves for a product for a twelve week period. It identifies the variations in the demand for the consumer thus bringing shortages in the market that lead to the bullwhip effect. When the consumer makes an order in the first week the retailer is forced also to make an order to the wholesaler to account for the shortage and to replenish its minimum stock and avoid stock outs. The total consumer orders were 106 whereas the retailer had a shortage of 13. The total orders that the retailer made to the wholesaler were119 but the wholesaler had a deficit of 23 still forcing the wholesaler to make an order to the distributor to replenish the stock. The wholesaler made an order of 103 to the distributor. To replenish their stock, the distributor made an order to the manufacturer of 116 yet the manufacturer had a shortage of 8 and was forced to make an order to the supplier of 119. The unpredictable changes in the consumer demand forced the retailer to run out of stock. In anticipation of an increase in demand, the retailer made an exaggerated order for more stock that forced the same sequence to occur up the ladder from the wholesaler to the distributor then to the manufacturer and finally to the supplier. Orders made Shortage consumer 106 - Retailer 119 13 Wholesaler 103 23 Distributor 116 83 Manufacturer 119 8 Supplier - The causes of the bullwhip effect Behavioural causes Forrester identified that the decisions of the different individuals who are the major role players in the supply chain are responsible for the management crisis that lead to the bullwhip effect. The decisions made determine the demand of the commodities which and its management leads to the creation of a tendency of the suppliers to over-respond to changes in demand from the customers. In an instance where the demand of the commodities in the market by the consumers increases, the supply of the commodities is increased as a replenishment of the commodities. The same form of exaggerations could occur in the where the demand of the consumers usually drops. In the process where there are changes in demand, the bullwhip effect is caused by the time laps that occur between the acquisitions of information, its processing time up until the time when the materials are introduced into the supply chain for processing [Jon13]. The flow of physical goods for the supply process moves from the supplier to the manufacturer, then to the wholesaler who provides the goods for substituted sale to the retailers who finally sell the products to the consumers. The flow of demand information moves from the consumers, to the retailers, to the wholesalers who link directly with the manufacturers who request the suppliers to have them supplier the manufacturers with the necessary materials. Due to this fact, the inventory with the wholesalers and retailers and the orders made by the consumers are subject to oscillation and instability. The inventory and orders made have an inverse relationship according to Forrester. As the inventory levels in the retailers and wholesalers decrease, the number of orders increases and the vice versa is true for an increase in inventory. Similarly as the inventory levels decrease, there effect moves up to affect even the suppliers [Jon13]. Operational causes Previous arguments have argued that the bullwhip effect has been as a result of poor decision making in the supply process. However, there is more to the bullwhip effect other than the irrational decision that are made. Other than the behaviour of the role players in the industry, there are also the operational causes of the bullwhip effect [Min13]. The operational causes to the bullwhip effect have identified that among the operational causes to the bullwhip effect are demand signal processing, price fluctuation, rationing and shortage gaming and batching order. Demand signal processing The beer game simulation provides that the orders made every time should act as a signal to help understand the demand of the products at each given season. When a game player places an order, the upstream manager is expected to process the information and use it as a signal for future product demands. The orders made for the inventory and safety stock are continuously updated until a new daily demand schedule becomes available that allows in the prediction of the goods to be ordered. Where the suppliers use the demand signal processing techniques, it may not be fully sufficient as it may not at all instances allow changes to be made in instances which oscillations occur in the demand for commodities. The fluctuations in the quantities ordered may in some cases be greater than the quantities provided by the demand signal data. In such a case, the suppliers may end up selling all their materials including the safety stock. The replenishment of their materials may take time and as a result they may be forced to increase the lead time if the manufacturers request for the supply of more materials [Oct06]. Price fluctuation In anticipation of price increases in the future, companies often buy their items in advance when the prices of the suppliers are lower due to low demand of the product. When the companies engage in the forward buying system, it results in price fluctuations as they enjoy promotional services from the suppliers such as quantity discounts, price discounts and coupons. However, when the companies purchase more stock than it is required, they end up bringing a variation as the purchase quantities are more than the consumption rate and thus results in the bullwhip effect. The high- low purchase practices that companies use for their raw materials may lead to variations between the manufacturer and the distributor. The manufacturer works in anticipation of an increase in demand for the products while the distributor only works with the demand that is available at the moment. The result is that wide swings are experienced in the market and it thus forces the companies to be idle during lower demand periods and work overtime during the high demand periods. Alternatively, the companies may pile up their stock at the time when they experience lower demand as they anticipate for increases in demand by the consumers [Oct06]. Rationing and shortage gaming Rationing by the manufacturer is done towards the customers when the demand exceeds the supply. To reduce the chaos that may be experienced in the market, the manufacturers limit the amount that each individual consumer takes according to the demand that each individual has. The manufacturer thus allocated the production for the company according to the amount that each retailer orders. The retailers however exaggerate their needs in most times by anticipating shortages in the market when they order. If demand for the commodities drop, the retailers are forced to end up cancelling their orders for those that have not received them or may end up stocking the extra materials that equally ends up increasing their expenses as they increase the storage costs. Gaming on the other hand brings in misleading information about the real demand experienced by the product. Where the manufacturer is in short supply, the wholesalers are forced to ration the products to the retailers. The effect of this is that the demand is amplified as one move up the supply chain. This also leads to the bullwhip effect being experienced in the market [Sha04]. Order batching Most companies prefer to make their orders after they have accumulated to allow them reduce some of the transportations and storage costs. In such cases, such companies choose a frequency that they use to make their orders to the suppliers. The batch ordering processes allow companies to receive discounts for the purchased goods from the suppliers, thus reducing the costs incurred and as a result increasing the profit margins. Surges in the demand of commodities by the consumers force the manufacturers to order for more materials to cover their inventory and safety stock that may in most cases have been used due to the increases in demand. The suppliers provide the manufacturers with the suppliers that they have available in their stock. Since most companies choose to order in batches, the increased demand may force them to increase the normal size of orders made and at the same time increase the frequency of the orders. In such instances, the suppliers may not have enough to provide to the manufacturers and this leads to an increase in the lead time that results to the bullwhip effect in the economy [Oct06]. The unnecessary variations in the demand of goods by the consumers bring in the complications in the chain management. The planning and execution of the processes to manage the negative effects that such variations have lead to negative operational market performances. The combinations or individual activities which create the oscillations and surges in demand lead to the explosions in lumps of demand that causes a false increase in demand for the commodity. The suppliers are therefore, forced to sell their entire inventory to the manufacturer to counter the increase in demand. Since they are not able to get new raw materials immediately for their goods, they are forced to increase the lead time for the delivery of the raw materials [Oct06]. Consequences Lower revenues The manufacturer companies are usually the most stricken by the bullwhip effect in the revenues that they record during each accounting period. The lower revenues are caused by the increased costs that the company incur as they try to adopt the changes that come with the variations in demand. Among the extra costs that the manufacturers are forced to incur include the stock out costs, the labour costs for extra periods worked to replenish the inventory used up during high demand periods. Extra shipping and transportation costs by the manufacturers also act as the extra costs that they incur that end up reducing their profits. The bullwhip effect means that there are fluctuations in the demand for commodities. In some instances there is high demand while in others there is lower demand. Where the demand decreases, the manufacturer also ends up incurring extra costs. The manufacturer may have made a high quantity of order for a given commodity and after the delivery, the demand reduced and it forces the manufacturer to rent out warehouses for storage of the inventory. In such cases the storage and holding costs are the major costs that are incurred by the manufacturers. Reduced quality of goods Starting with the manufacturers who are forced in increase their order sizes. As the quantity of production increases, the quality decreases in most cases. Unplanned changes in both the production and delivery schedules for inventory and commodities in the market usually end up disrupting the routine practices of the manufacturers. The manufacturer is forced to increase their production and may at time produce more than their technology can support which ends up lowering the quality of goods in production [Cac00]. Higher costs Higher costs experienced by the manufacturers and the retailers are a consequence of the bullwhip effect. Both the manufacturer and the retailer end up incurring higher stock out costs during the high demand periods and high carrying costs during the lower demand periods. Where there is an increase in demand, the manufacturers are forced to accelerate the orders made from the suppliers which in most times could be sold at a higher cost. Similarly, the shipping or transportation costs also increase their costs. The manufacturers are also forced to adjust their working systems to counter the increase in demand from their consumers. In such cases, the manufacturers incur higher costs for changeovers and labour as they are forced to increase the working hours. The manufacturers thus end up being forced to pay their workers for overtime. In instances where the demand of the products drops, the manufacturers are forced to invest in large warehouses to enable them store the extra inventory that they had ordered for while the demand was at its peak [Cac00]. Poor rendering of services The variation in demand causes a lot of hazards in the supply chain. In as much as there is a proper flow of information upstream about the changes in demand, the downstream flow of inventory is not as effective. As most of the role players in the supply chain work towards increasing their supply of inventory, the quality of services delivered to their customers is neglected. The bullwhip effect causes irregular and unpredictable forms of production which have a negative effect on the delivery schedules. The irregular production and irregular changes in demand also causes irregularities in the lead time for delivery of goods causing delays in delivery and finally dissatisfaction by the consumers of the products. Measures to counter the bullwhip effect Repetitive process demand data is done when members process demand signals to understand the sequences of the consumers demand so as they can predict the demands in future. In as much as the repetitive demand signals can at times lead to the bullwhip effect on some commodities in the market, when it is done well it can be a good remedy for the bullwhip effect. As counter measures to the bullwhip effect the remedies proposed include replenishment smoothing, collaboration and operational efficiency. Collaboration Collaboration has been viewed as the best form of remedy to the bullwhip effect. Enhancing collaboration between the supplies of materials among the member of the supply chain would help reduce the bullwhip. Collaboration in the supply chain management could be viewed as the transformation of sub optional solutions in the supply chain through the sharing of both the operations and customer information. Collaboration should thus be made on both the inventory replenishment and the forecasting dimensions of the demand of the commodities. The individual members of the supply chain exchange information to help align the forecasts for demands and help in the long term planning of the supply process. Understanding the sales made to the customers throughout a given period helps in improving the supply chain management and reduces the probability of the bullwhip effect. Collaboration ensures that delays in receiving signals about the changes in demand are completely reduced and uncertainties in the supply management are eliminated. Collaboration among the members of the supply chain helps the suppliers to better understand the inventory replenishment needs and forecasting of the consumers demand to help cope with the variations of demand [Hol05]. Replenishment smoothing Manufacturers tend to prefer smooth production such that they know the much to produce at each period as the retailers are expected to purchase the entire inventory. In such cases, there are well synchronized relationships that exist among all the members of the supply chain that allows them to understand the demands at each period. Replenishment smoothing entails the recovery of inventory by the manufacturers and the suppliers. In both cases, they should have information on the expected demand and ensure that they have the inventories at hand which consist of the current demand inventory and extra inventory to cover for delays in supply and the inventory ordered which has not yet arrived in the stores. The replenishment smoothing helps in modulation of the recovery of inventory to help cover even when there are variations in the demand of commodities by the consumers. Tuning the management of inventory helps reduce the bullwhip effect although at times the replenishment smoothing may have a negative impact on the quality of customer services [Dej03]. Operational efficiency Operational efficiency is usually influenced by the lead time for delivery of goods and better inventory management practices for the manufacturers and the retailers. Improving the operational efficiency would mean that the suppliers reduce the lead time to ensure that the quantities ordered by the suppliers. The reduction of the lead time allows the suppliers to be in control of the demand as they provide the manufacturers with their orders almost immediately after they make the order. An effective means to provide efficiency in operations include such factors as the just in time management (JIT), vendor managed inventory (VMI), information sharing and strategic partnership. The just in time is an inventory control system that is part of the Japanese pioneered lean manufacturing system. The lean production is a management approach that has its focus on ensuring that they cut down waste while at the same time ensuring quality in production. With the synchronization of all the inventory management systems, all the players in the management will enjoy proper flow of inventory and information to reduce the effects of the bullwhip in the market [Sha04]. Conclusion The bullwhip effect can be controlled but it is until the players in the supply chain understand the root causes of the bullwhip effect. Both the behavioural and operational causes have so many negative consequences in the market. The reduces in profits and revenues are usually discouraging to the retailers, manufacturers, wholesalers and suppliers while the reduced quality of goods and service rendering becomes a discouraging factor to the customers. However, adopting the remedies provided in the study into the supply chain could significantly control divergent from the supply chain and thus reduce the consequencies of the bullwhip effect. REFERENCES Ste08: , (Stephen & Marc, 2008), Bor08: , (Borut, et al., 2008), Jon13: , (Jonathan, 2013), Min13: , (Mina, et al., 2013), Oct06: , (Octavio & Felipe, 2006), Sha04: , (Shang, et al., 2004), Cac00: , (Cachon & Fisher, 2000), Hol05: , (Holweg, et al., 2005), Dej03: , (Dejonckheere, et al., 2003), Read More