The Bullwhip Effect

1. The Bullwhip Effect Rob Buchanan

2. Definition As one looks further and further upstream in a supply chain, information visibility becomes ever distorted and skews demand forecasts; thisskewness results in production swings that do not follow product demand

3. History Proctor and Gamble first used this term to describe demand variability in their supply chain The company noticed that demand for baby diapers remained constant over time but orders from retailers were uneven and orders from suppliers had even greater inconsistency

4. 4 Main Causes (1) Forecasting issues – Each intermediary along the supply chain creates forecasting results that get sent upstream; the end result is that forecasting errors are magnified by each level Order Batching – The cost to place an order preempts some companies from ordering only when absolutely necessary and causes a spike in the supply chain that occurs infrequently

5. 4 Main Causes (2) Price fluctuations – Discounts manipulate buyers toorder beyond their needs, thus creating supply spikes Product Rationing – If, in a past demand season, there was not enough product, a company might ration what they sell to the buyer; next season buyer orders a multiple of what they need and they actually receive it because there was enough

6. Mitigation Shorten lead times Total information visibility Retail demand data shown to all intermediaries Information velocity

7. How to Look at the Bullwhip Variance lens Graph shows retail sales as the dark line and production as the dotted; order batching is the result of this swing Volume Time

8. How to Look at the Bullwhip Shock lens Graph shows that a price discount sends a shock to the system; large inventory now then nothing Orders are the solid line and consumption is the dotted Volume Time

9. How to Look at the Bullwhip Filter lens • Graph demonstrates that as • Stocks diminish, orders rise, and a “rogue seasonality” appears; as one can see this is not the case because demand has not fluctuated as wildly as orders are placed Volume Time Red – Stocks Green - Orders Blue - Demand