The Bullwhip Effect - Essay Example

Research Proposal Bullwhip effect first identified by Forrester and subsequently named as such by the Procter and Gamble is the cumulative effect of distortions in demands due to inaccurate forecasts resulting in piling up of unwanted inventories and at the same time shortage of and out of stock situation of inventories that are in actual demand. This effect translates into lost sales and loss of significant margins. One method of alleviating this is implementation vendor managed inventory (VMI) explained at the end of this paper. This research proposal further details the research methodology to be undertaken to find answers for the research question for controlling the bullwhip effect right from manufacturer’s level to retailer’s level. And VMI is just one of the methods and the research has to a long way to identify an ideal method. . Introduction According to the survey of the U.S. Commerce Department reported in 2002, trade in the United States is characterized by $ 1.1 trillion inventory for just $ 3.2 trillion of retail sales per year. The value of inventory in each of the supply chain is $ 400 billion at retail outlets, $ 290 billion at the wholesalers’ or distributors’ warehouses and $ 450 billion with manufacturers’ factory or warehouses locations. Where as, such a stockpile should be of a comfortable reserve in stock in trade, there is actually out-of-stock situation at all the points. It has been reported that 8.2 % of the shoppers still go without buying what they need and thus out-of-stock position represents 6.5 % of retail sales as a whole. Even if the retailers manage to supply alterative products, lost sales on account of this situation turn out to be 3.1% of the total sales. Though 3.1 % appears negligible, it is a substantial loss of retail margins at micro as well as macro level. And loss of customers’ goodwill is beside the point. It is noteworthy that this situation is not due to want of inventory or resources (Lee, 2002). This situation is brought about by what is called bullwhip effect which this research proposes to study. Aims and Objectives The seemingly negligible impact of bullwhip effect actually translates into lost sales and loss of profit of significant proportions and is therefore an important area in a supply chain that needs to be analyzed for being avoided. Accurate demand forecasting is apparently the possible solution . Therefore aim and objective of this research is to ascertain how to reach an accurate demands forecasting to avoid bullwhip effect in the manufacturing level and loss of sales in the retailer level in the supply chain for finished goods. This proposal contains a brief literature review, followed by a chapter on research methodology and finally a conclusion. Literature Review Bullwhip effect The above said phenomenon refers to what Forrester (1958) identified in his Industrial Dynamics. Also known as Whiplash effect, it is a phenomenon observed in the distribution chain driven by forecast. The demand variation from what is forecast is characterized by increases as the chain moves upwards from customer to manufacturer. Needless to say that this effect results in inefficiencies in the relative links of the supply chain because of increased overheads on logistics telling upon the competitiveness of the supply chain. Variation in demand prompts upward usage of production capacities, increased inventory levels at each point of the supply chain. The cumulative effect of this results in avoidable cost inflations (Rathore, n.d). When the demand from customer for a particular product remains constant without much variation, each participant in the supply chain tends to demand even more as one moves up the supply chain ladder. In Procter & Gamble diapers case, it was found that while sales remained flat, distributor down the supply chain line had ordered more than what retailers had actually required. The Supplier chain who is next to the Distributor chain ordered even more than the orders of the Distributors (Simichi Levi et al,2008, p101-103 ). It was Procter & Gamble which first named this effect as bullwhip effect (Disney and Lambrecht, 2008, p8). How does this variability occurs and how it can avoided Causes of this effect can be behavioral and organizational. Behavioral is on the part of managers who over-react as well as under-react to the changes in demand as they cannot be expected to be completely rational. The supply chain managers read too much into the demand history. They become over-enthusiastic and mistake targets as forecasts. Those who are in charge of decision making take customers’ complaints seriously and read into their negative reactions. Thus, cognitive limitations in the complicated nature of supply chain net works, operations under highly uncertain environment and limited accessibility to data are the reasons for the distortions in the demand stimulated by optimistic forecasts (Disney and Lambrecht, 2008, p8). Croson and Donohue (2006) state that managers without being aware of what is in the pipeline, make an under-weight of the supply chain leading to a form of decision bias. They suggest this problem can be solved through sharing of Point-Of-Sales data, sharing inventory and demand information, centralizing the ordering decision and use of correct forecasting techniques. Lee et al (1997) say that there are five major causes of the bullwhip effect. They are incorrect of application of demand forecasting, shortages in supply, lead time variations, batch ordering and fluctuations in prices. While demand forecasting distorts the manner in which target stock levels, safety stock levels are changed, lead time due to physical as well as information delays can vary the resulting computing the levels of safety stocks, recorder points and order-up-to levels. This can be tackled by compressing the lead time by application of latest information technologies to avoidance of information delay and investment in production technology and engaging in supplier partnerships to guard against physical lead time increase. Vendor Managed Inventory (VMI) Portes and Viera (2006) have suggested a new approach of VMI by which a centralized link between the suppliers and customers is enabled towards making transactions faster and less complex. VMI is an alterative to traditional supply chain whereby the manufacturer monitors the stock levels with the distributor /retailer as explained by Nachiappan et al (2005) This can be achieved only by information sharing that should take place between the supply chain participants.(Angulo et al, 2004) When the VMI is implemented, the supplier decides for the buyer as to how much is to be replenished so that quantity dispatched results in stock availability, better customer service and mitigation of stock out situations. Through the integration of technology, networking, replenishment logic that is customizable and internal linking, a relationship is formed wherein the buyers give up control over recouping of supplies to the supplier and even the buyer’s financial responsibility over the inventory is taken care of by the supplier. Here the supplier is either the manufacturer or distributor/wholesaler who makes the inventory decisions for all concerned. Research Methodology Research is a way to find answers to the questions in a study. By undertaking a research, the researcher uses a frame work consisting of a set of philosophies. He also applies procedures, methods and techniques already tested for their validity and reliability. The research design should be objective and unbiased. The philosophical framework stated above maybe positivist, interpretive, phenomenolist, action or participatory, feminist, qualitative and quantitative and also the branch of the study relating to. Thus, research techniques, procedures and methods are part of the research methodology. The research question of this study being bullwhip effect, the research methodology shall involve a detailed literature review on the subject of research, case studies involving large scale businesses having a supply chain starting from the manufacturer to the retailer. Literature review is part of qualitative research. Bullwhip effect which can be measured by statistical/empirical testing may also subjected to quantitative research. This research will be combination of both qualitative and quantitative research. The empirical testing found in the exiting case studies may also be examined as part of the literature review and if found inadequate to find answers to the research question, a fresh empirical testing shall be conducted through another case study afresh.(Kumar,2005) Conclusion The Bullwhip effect discussed above is all pervasive and should therefore be tackled at all the levels in a supply a chain. The research question being how to reach an accurate demand forecasting to avoid bullwhip effect in the manufacturing level and loss of sales in the retailer level in the supply chain for finished goods, it appears that the bullwhip effect can be controlled if number of participants in the supply chain is either controlled or minimized. Although the foregoing literature review has found a method of VMI for controlling the bullwhip effect, the review is not exhaustive and therefore the VMI is not the final answer. The final answer to the question will be arrived at after making case studies, discussion of pros and cons of traditional methods of controlling the bullwhip effect, besides conducting a fresh empirical testing if need be. References Angulo, Andres, Nachtmann, Heather And Waller, Matthew A.(2004). Supply Chain Information Sharing in a Vendor Managed Inventory Partnership. Journal of Business Logistics, Vol. 25, No. 1, p.101-120. Croson R.and Donohue K .(2006). Behavioral Causes of the Bullwhip Effect and the Observed Value of Inventory Information. Management Science, 52 (3) 323-336. Disney M. Stephen and Lambrecht Marc R. (2008). On Replenishment Rules, Forecasting and the Bullwhip Effect in Supply Chains, Now Publishers Inc. Forrester, J. W. (1958). Industrial Dynamics. A major breakthrough for decision makers. Harvard Business Review, 36 (4), pp. 37-66. Lee, H. L., V. Padmanabhan, and S. Whang.(1997). The bullwhip effect in supply chains. Sloan Management Review 38 (3):93-102 Kumar Ranjith.(2005). Research methodology: a step-by-step-guide for beginners, Sage 2 Ed. Lee Calvin B. (2002). Demand Chain Optimization: Pitfalls and Key Principles, White Paper Series, Nonstop Solutions Inc, Retrieved from Nachiappan, S.P., Jawahar, N., Calwin Parthibaraj, S. And Brucelee, B. (2005). Performance Analysis of Forecast Driven Vendor Managed Inventory System. Journal of Advanced Manufacturing Systems, Vol.4. (2) p.1-18. Portes Allan Neves and Vieira Guiherme Ernani. (2006). The Impact Of Vendor Managed Inventory (Vmi) On The Bullwhip Effect In Supply Chains, Third International Conference on Production Research – Americas’ Region 2006 (ICPR-AM06) Rathore Abhay.(No Date). The Bullwhip Effect, Retrieved from Simchi-Levi, Kaminsky Philip, Simichi-Levi Edith and Shankar Ravi. (2008). Chapter 5, The Value of Information, Designing and Managing the Supply Chain, McGraw Hill Companies, Read More