The Bullwhip Effect in the

Supply Chain

What is the Bullwhip Effect?

Distortion of demand information as

it is transmitted up the supply chain

It results in the stockpiling of inventory

at every point of the chain, due to a
high degree of demand uncertainty &
variability

1
 The bullwhip effect - Small changes can
reverberate through a supply chain,
causing huge swings of inventory and
production levels.

RETAILER WHOLESALER MANUFACT SUPPLIER

URER

DOWNSTREAM UPSTREAM

Consumer Sales
Order Quantity

200
150
100
50
0

Order Quantity

Retailer's Order
Order Quantity

200
150
100
50
0

Order Quantity

2
 Order Quantity
Wholesaler's Order

200
150
100
50
0

Order Quantity
Order Quantity

Manufacturer's Order

200
150
100
50
0

Order Quantity

What causes the Bullwhip Effect?

Sterman’s Experiment
Variability in the amplified order is attributable
to the irrational decision making of the
participants

Bullwhip effect is a consequence of

human irrationality

3
 What causes the Bullwhip Effect?
However…
Rational behaviour of the participants
within the supply chain infrastructure
causes the Bullwhip effect

Hence,
In order to control the supply chain, the
focus needs to be on modifying the
chain’s infrastructure, rather than the
decision maker’s behaviour

What causes the Bullwhip Effect?

Demand Forecast Order Batching

Updating

Price Fluctuation Rationing & Shortage

Gaming

4
 Demand Forecast Order Batching
Demand Forecast
Updating
Updating
What causes the Bullwhip
Effect?
Price Fluctuation Rationing & Shortage
Gaming

Forecasting is based on the order history from

Demand Forecast Updating

the company's immediate customers

Supplier Manufacturer Stockist Retailer

Upstream Downstream

Demand Signal Processing

When a retailer places an order, the stockist processes
that order as a signal about future product demand
The stockist readjusts his demand forecast and in turn
places orders with the manufacturer

Successive exponential smoothing for demand and

safety stocks translate to wider swings in orders,
as one moves upstream of the supply chain

5
 Demand Forecast Order Batching
Updating Order Batching
What causes the Bullwhip
Effect?
Price Fluctuation Rationing & Shortage
Gaming

Companies normally accumulate demand &

place orders in batches

Periodic Ordering
Companies place orders in bulk either weekly/monthly
Order Batching

Major deterrent to frequent ordering is the

economics of transportation
A supplier receiving an order from a company once a
month faces a highly erratic stream of orders
There is a spike in demand once a month, followed by
no demands
This variability is higher than the demand faced by the
company

Periodic Ordering amplifies variability &

contributes to the Bullwhip Effect

6
 Companies normally accumulate demand &
place orders in batches

Push Ordering
Order Batching

Companies experience regular surges in demand

Orders are pushed onto it from customers periodically
This ordering pattern from customers is more erratic
than the consumption that their customers face

Overall,
If order cycles were evenly spread out, the bullwhip
effect would be minimised
But, more often than not, order cycles overlap, mostly
at the beginning of the month, compounding the
bullwhip effect

Demand Forecast Order Batching

Updating
What causes the Bullwhip
Effect?
Price Fluctuation Rationing & Shortage
Price Fluctuation Gaming

7
 Forward Buying

Results from price fluctuations in the marketplace

Trade Deals & Consumer Promotions encourage

Price Fluctuation

forward buying (Price discounts, quantity discounts,

coupons, rebates)

Customers buy in quantities that are not

representative of their immediate needs;
they buy in bigger quantities & stock up
for the future

Forward Buying

Consume till inventories are depleted

Price
Price Fluctuation

Purchase in bigger quantities than required

Buying pattern does not reflect its consumption

pattern

Variation of the buying quantities is much

bigger than the variation in the
consumption rate – The Bullwhip Effect

8
 Forward Buying

Pitfalls

Erratic demand fluctuations force factories to run

Price Fluctuation

overtime at certain times & remain idle on others

Need to build inventories to anticipate big

demand swings

Pay premium freight rates to transport products

Ironically,
These variations are induced by price
fluctuations that the manufacturers set up
themselves!
“Dumbest marketing ploy ever”

Demand Forecast Order Batching

Updating
What causes the Bullwhip
Effect?
Price Fluctuation Rationing
Rationing& Shortage
&
Gaming
Shortage Gaming

9
Rationing & Shortage Gaming
When demand for a product exceeds
supply, manufacturers ration products to
customers
Knowing this, customers exaggerate their
real needs when they order
They place duplicate orders with
multiple suppliers, buy from the first one that
can deliver, and then cancel all duplicate
orders

Hence, customers’ orders give the supplier

little information about the product’s real
demand

Countering the Bullwhip Effect

Avoid Multiple Demand Break Order Batches

Forecast Updates

Eliminate Gaming in
Stabilise Prices Shortage Situations

10
 Demand
Avoid Forecast
Multiple Break Order Batches
Updating
Demand Forecast
WhatUpdates
causes the Bullwhip
Effect?
Stabilise Prices Eliminate Gaming in
Shortage Situations
Avoid Multiple Demand Forecast Updates

Supply chain members process demand input

from their immediate downstream member in
producing their own forecasts
Make demand data from downstream
available to upstream sites
All sites will update forecasts using the
same raw data

Upstream site would control re-supply

from upstream to downstream
Upstream site would have demand &
inventory information of the downstream site &
update the forecasts and re-supplies for the
downstream site

11
Avoid Multiple Demand Forecast Updates

Bypass the downstream site while getting

demand information

Just In Time Replenishment

Avoid Multiple Demand Forecast Updates

What is Information Visibility?

It is the process of sharing critical data

required to manage the flow of products,
services & information in real time between
suppliers & customers

If information is available, but it cannot be

accessed by the parties, its value degrades
exponentially

12
Avoid Multiple Demand Forecast Updates
Information Visibility

Traditional supply chains are evolving into “dynamic

trading networks” made of groups of independent
business units sharing planning & execution
information to satisfy demand with an immediate,
coordinated response
Avoid Multiple Demand Forecast Updates

Information Visibility in the Supply

Chain

Initiatives:

Efficient Consumer Response (ECR)

Collaborative Planning, Forecasting &
Replenishment (CPFR)
Quick Response
Vendor Managed Inventory

13
Avoid Multiple Demand Forecast Updates Efficient Consumer Response (ECR)

It is the realization of a simple, fast and consumer

driven system, in which all links of the logistic
chain work together, in order to satisfy consumer
needs with the lowest possible costs

Focus Areas of ECR

Product Category Enabling

Replenishment Management Technologies

Demand Forecast Break Order Batches

Updating
Break Order
Batches
What causes the Bullwhip
Effect?
Stabilise Prices Eliminate Gaming in
Shortage Situations

14
 Devise strategies for smaller batches or
more frequent replenishment
Large order batches/Low order frequencies result
from:
Break Order Batches

High cost of order placement & replenishment

High transportation cost
Mixed SKU truckloads can be delivered to
the warehouse for direct delivery to retailer
Engagement of third party logistic
companies will make small batch size
economical
When customers spread replenishment
orders over time, negative effect of batching
is reduced

Demand Forecast Break Order Batches

Updating
What causes the Bullwhip
Effect?
Stabilise Prices Eliminate Gaming in
Stabilise Prices Shortage Situations

15
 Reduce forward buying by reducing the
frequency & level of wholesale pricing

Practices such as CRP, Rationalised

Stabilise Prices

Wholesale Pricing & Computer Assisted

Ordering (CAO) helps to reduce forward
buying

Activity Based Costing (ABC) systems help

companies to ascertain the costs
associated with forward buying

Demand Forecast Break Order Batches

Updating
What causes the Bullwhip
Effect?
Eliminate Gaming
Stabilise Prices Eliminate Gaming in
in Shortage
Shortage Situations
Situations

16
Eliminate Gaming in Shortage Situations

When a supplier faces shortages, it can

allocate products in the proportion of past
sales record, instead of orders placed
Customers then have no incentive to
exaggerate orders
Eliminate Gaming in Shortage Situations

“Gaming” – Exaggerated order placing by customers

Gaming peaks when customers have

inadequate information about the
manufacturer’s supply situation

Sharing of capacity & inventory

information reduces customers’ propensity
to indulge in gaming

17
Eliminate Gaming in Shortage Situations

The generous return policies offered by

manufacturers to retailers accentuate gaming

Stringent Cancellation Policies

In Summary…

Rational decision making by the members of

the supply chain results in the Bullwhip Effect

Integration of new information systems

Defining new organisational relationships

Implementing new incentive & measurement

systems

could result in the conquer of the Bullwhip

Effect…

18
The Bullwhip Effect in the
Supply Chain

19