Oleg Wolwacz

Supply Chain and Information Systems, Bullwhip Effect


Supply Chain Management
    Effective management of supply chain processes are important to improving service levels to customers and retailers and lowering costs incurred by an organization. Through their research, Simchi-Levi & Kaminsky, (2008) point out that proper Supply chain management is the set of tactics an organization employs to resourcefully integrate manufacturers, warehouses, suppliers, and stores, in order to ensure that products are manufactured and allocated at the precise capacities, to the correct locations, and at the precise time, in order to reduce system wide expenses while sustaining service level requirements. Furthermore, risk and uncertainty are inherent in every supply chain. Machines are prone to breaking down and therefore cause delays along the supply chain. Travel times can vary and be delayed due to poor weather conditions, trucks breaking down, and even political unrest in certain nations. Furthermore, forecasts on customer demand are never 100% accurate and they are always wrong. However, even when customer demand for specific products shows no historic variation and remains consistent, an occurrence called the “bullwhip effect” poses a threat to organizations along the supply chain. Here's a link to a scholarly journal which helps explain the Bullwhip Effect in its entirety. 

Bullwhip Effect
    The bullwhip effect is an occurrence when, order procedures are established on percentage of overall demand subsequently lead to sizeable variations in that demand from the vendor up the supply chain across the raw materials supplier, manufacturer, wholesaler, and distributor (Johnson, Leenders & Flynn, 2011). Organizations and scholars have studied methods to combat the bullwhip effect occurrence, and have concluded that four key methods to curtail the overall effects of the bullwhip effect are:
  • Reducing uncertainty - By centralizing demand information.
  • Reducing variability - By offering "Everyday Low Pricing."
  • Lead-Time reduction - Through order and information lead times.
  • Strategic partnerships - By using Vendor Managed Inventory (VMI) systems (Simchi-Levi & Kaminski, 2008).
    By managing information through strategic partnerships, organizations can work with each other to eliminate the bullwhip effect. Those that choose to embark on such a task, must be open to transparency and sharing information about their organization with supply chain members. Those organizations that are open to aligning their objectives with those of their supply chain members tend to benefit more from information sharing. 
Here's a link to an article from NC State University, which further explains how to combat the bullwhip effect


    Here is another informative link about the severity of the bullwhip effect along the supply chain. The research was done by Seungjin Whang and colleague Hau Lee at the Stanford Business School. 




    The "Beer Distribution Game" is a widely used game created by a group of MIT professors in the 1960's. It is an interactive game used today in many universities with teams competing to distribute beer along each level of the supply chain eg: (Manufacturers, Wholesalers, Distributors, and retailers). Here is a link to Wikipedia's explanation of the "Beer Distribution Game": 




References:

Johnson, P., Leenders, M. & Flynn, A. (2011). Purchasing and Supply         

    Management. Fourteenth Edition. New York, NY. McGraw-Hill/Irwin


Simchi-Levi, D. & Kaminski, P. (2008). Designing and Managing the Supply

    Chain. Concepts, Strategies and Case Studies. Third Edition. New York,

    NY. McGraw-Hill/Irwin





    This is a video of a simplified explanation of the bullwhip effect. It uses everyone's favorite drink (Beer) to illustrate just what happens when orders fluctuate along the supply chain. Hope you enjoy it!

YouTube Video


    Another insightful video is of Professor Hau Lee known as, "The Supply Chain Master" of The Stanford Graduate School of Business. It is a very informative and lively explanation by Professor Lee of what the bullwhip effect is. Please feel free to enjoy watching it!

YouTube Video


Here's another short video that illustrates the bullwhip effect along the supply chain. Please feel free to enjoy watching it!

YouTube Video


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