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Sasmita,Darwin Jaya

Supply Chain and Information Systems, Bullwhip Effect





Information Systems

Information Systems


Information system (IS) is a group of components that interact with each other to produce information. The systems exist to help people achieve their goals and objectives of their business. The components are hardware, software, data, procedures and people(1).

There are many measurements need to be taken before a company comes with a perfect combination of these components. For example, a company has to evaluate the right hardware, the right programs to be licensed, choose which databases have to be created, which procedures will need to be developed for use and also to take measurements on the impact on people(2). But, once a company managed to gather the appropriate components, the use of information system can be extremely beneficial. One of the examples is eliminating Bullwhip Effect.




Bullwhip Effect

The Bullwhip Effect, also called whiplash effect, happens when there is a drastic change of demand along a distribution channel. It refers to a flow of bigger and bigger swings in inventory in response to demand changes. One typical consequence of bullwhip effect is leaving a great amount of safety stocks(3). Holding safety stocks too long will do harm to one's business. This leads to a low utilization of the distribution channel.


                                                                 


                                                                                                                                                                                                                                                                               


Take one example of beer industry’s supply chain. There is the customer, warehouse, distribution center and the supplier in the supply chain. Contacts exist only in between each other. This means the customer could not contact the distributor and the supplier, the warehouse could not contact the supplier, the distributor could only be in contact with the warehouse and the supplier, and the supplier could only be in contact with the distributor. The orders were only being made by the people that they are in contact with, and have no clue about the demands requested by the people they are not in contact with. The inconsistency of the order pattern will eventually emerge. The upstream site seems to be always being greater than the downstream site. This phenomenon is a dynamic exemplification of the bullwhip effect.

 


Three Bullwhip Effect Causes

There are three factors in correspond to the chain’s infrastructure and the order managers’ rational decision making that form bullwhip effect(4).By understanding these factors, managers can design and develop plans to counter them. These causes are:

  1. Demand forecast updating
  2. Order batching
  3. Rationing and shortage gaming


1. Demand Forecast Updating

A typical mistake that is done by all managers is forecasting customers’ following order based on customers’ order history. This is done by managers’ thought process in planning the demand pattern based on what they observe. Upstream managers process information from downstream’s order as a signal about future product demand. The demand signal processing is a major contributor to the bullwhip effect(5). In another words, managers use demand forecasting suck as exponential smoothing to conclude how much to order from supplier. With exponential smoothing, new daily demand data become more accessible as future demands are constantly being updated. This means, the stocks that are needed to be replenished are exactly of the same amount of the order made. And with long lead times, it is common to store weeks of safety stocks. The result is having more order quantities than those in the demand data.

2. Order Batching

In a supply chain, when demands come in due to inventory depletion, company may not place an order with its supplier right away. It often batches and holds, accumulating demand before issuing an order. In this case, there are two types of order batching: Periodic Ordering and Push Ordering(6).

In Periodic Ordering, a company has its designated day to issue its order. It could be based on a weekly basis or monthly. For instance in a company that places its order on a monthly basis from its supplier, the supplier faces a highly erratic stream of orders. The spike in demand only occurs once a month. The variability becomes higher than the demands the company faces itself, hence this contribute to the bullwhip effect.

Push Ordering is a bit different from periodic ordering. Inventory replenishment arrangement in which a central distribution center sends stock items to each department, subsidiary, or warehouse on a fixed amount and time basis(7).

No matter what, bullwhip effect is resulted from customers using periodic ordering.

3. Rationing and shortage gaming

Rationing and shortage gaming occurs when the supplier only get a little information out of customers’ orders on the product’s real demand. This means product demand has to be exceeding supply. For example, in a case when customers are receiving only 50 percent of what they order because of the total supply is only 50 percent of the total demand, manufacturer will ration because the product is in short supply. By then, the customers would overstate their real needs when ordering. However, when the demand cools, order could go down as low as cancellations. This seeming overreaction by customers anticipating shortages results when organizations and individuals make sound, rational economic decisions and “game” the potential rationing(8).




The Bullwhip Effect Prevention



One effective way to prevent bullwhip effect from happening is by implementing innovative programs that partially address the effect. Carrying out the appropriate information system is able to prevent the causes that are mentioned above. With information sharing, downstream site of demand information will be channeled to upstream site soon enough that it is not too late.

 







Use of Information System (Information Sharing) for:

Demand Forecast Update 
  • Understanding system dynamics
  • Use point of sale (POS) data
  • Electronic data interchange (EDI)
  • Internet - communication
  • Computer-assisted ordering (CAO)

Order Batching
  • Electronic data interchange (EDI)                                                                              
  • Internet Ordering
Shortage Gaming
  • Sharing sales capacity, and inventory data

The use of information system will provide manufacturers with considerably more information from the resellers' stores. in a case of the use of Electronic Data Interchange (EDI), the exchange of data between chain members will be able to eliminate unnecessary fluctuations by controlling the resupply of the downstream site(9). To add on, with the help of information system, manufacturers could fulfill consumer's demand by selling their products directly to customers without undergoing distribution channels. This way, the information that manufacturers get will be a direct information from consumers, and there won't be any production fluctuations. Products will be made when a demand is requested.








References


(3)http://en.wikipedia.org/wiki/Bullwhip_effect
(4)Lee, Hau L. "The Bullwhip Effect In Supply Chains." . N.p., Spr1997. Web. 8 Dec 2011. <http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf>.
(5)Lee, Hau L. "The Bullwhip Effect In Supply Chains." . N.p., Spr1997. Web. 8 Dec 2011. <http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf>.
(6)Lee, Hau L. "The Bullwhip Effect In Supply Chains." . N.p., Spr1997. Web. 8 Dec 2011. <http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf>.
(7)http://www.businessdictionary.com/definition/push-ordering-system.html
(8)Lee, Hau L. "The Bullwhip Effect In Supply Chains." . N.p., Spr1997. Web. 8 Dec 2011. <http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf>.
(9)Lee, Hau L. "The Bullwhip Effect In Supply Chains." . N.p., Spr1997. Web. 8 Dec 2011. <http://profit-chain.com/images/The_Bullwhip_Effect_in_Supply_Chains.pdf>.



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