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According to APICS, the definition of supply chain is: the flow of information, services and materials from raw materials suppliers through factories and storage locations such as warehouses, to the end customer.
One of the most common issues supply chain managers face is known as the “bullwhip effect” in which small fluctuations in demand at the downstream end of the supply chain may cause outsized variations at upstream suppliers. The effect is a bloated and ineffective supply chain with too much inventory. An effective supply chain manager will want to use strategies to reduce the bullwhip effect to improve the overall efficiency of the supply chain. Some proven strategies are:
1.Collaborate with customers and suppliers
Another strategy to improve supply chain effective is through better collaboration with customers and suppliers. When companies work with customers to understand their plans and forecasts, they can build promotions and seasonality into the forecast and then provide more insight to their suppliers to help prevent the buildup of unnecessary inventory due to the bullwhip effect.
Supply chain management software often has capabilities to aid in collaboration. Supplier portals, EDI transactions, event alerts and project portals are some of the most common ways to increase visibility and collaboration.
2. Improve forecast accuracy
Even if a company tries to become more demand driven, it still need a forecast to plan long lead time items or to cover demand from new customers, new products or in-house promotions. While it’s a given that a forecast will be inaccurate, there are steps that can improve accuracy. Ensuring that you use the right algorithm to project demand is one way to increase accuracy; taking input from sales and customers is another.
3.Enable fast decisions with visibility and insight
The most important benefit of supply chain management applications is the visibility and insight they provide. Without the right degree of insight, a supply chain manager must rely on guesswork or rules of thumb to make decisions. The result will nearly always be sub-optimization of the supply chain that results in higher costs, excess inventory, and slow deliveries.
4.Adopt a demand driven supply chain management approach
Demand driven supply chain management is one of the most effective ways to reduce the bullwhip effect. It is a known fact that most forecasts are inaccurate, so when actual demand materializes it is almost certain to differ from forecast quantities. This causes companies to place emergency orders on suppliers. Without effective communication, those suppliers’ supply chain management systems will overreact, setting off a chain reaction of excess inventory that increases cost and slows velocity. In contrast, a demand driven supply network will have less overall inventory and be more responsive.
The keys to effective supply chain management are visibility, open communication, and fast access to information and insight. With these five attributes, your supply chain will be more effective, and you will have minimized the risk of excess inventory as well as inventory shortages. Without them, you will feel the sting of the bullwhip effect.
by following these steps
Share information
Align your supply chain
Implement an everyday-low-price policy
Establish long-term contracts with suppliers
Improve operational efficiency
Like the weapon from which it takes its name, the bullwhip effect's impact on the supply chain can inflict pain on businesses that don't manage it well.
Shifts in demand, projections that prove inaccurate and delivery delays all can cause the bullwhip effect. Guarding against its effects is essential to keep a business' supply chain moving smoothly.
The goal of a supply chain is to get goods and services to customers as efficiently as possible. To do this, each link along the chain must function as efficiently as possible, as well as coordinate and integrate with the rest of the links up and down the chain.
The key to a lean supply chain is accuracy in demand planning. Unforeseen spikes in or overestimations of demand stimulate the supply end of the chain to respond with changes in production. Production and supply issues then impact consumers and the effects ripple up and down the chain -- hence, the bullwhip effect.
What Causes the Bullwhip Effect?
Several issues can lead to the bullwhip effect. Those issues can be exacerbated by delays in transmitting information, and a lack of coordination up and down the supply chain. Some causes of the bullwhip effect include:
Delivery delay, also known as lead time, is the time between an order being placed and its delivery. The longer the delay, the more likely the bullwhip effect will occur, as orders will increase throughout the supply chain while everyone awaits delivery.
Order batching occurs when an organization accumulates larger orders before processing them in an effort to reduce costs and create transportation economics. They may also wait to place larger orders to benefit from lower prices offered during a promotion. This inconsistent demand is another cause of the bullwhip effect.
Sales and price discounts cause a bullwhip effect by creating a boom-or-bust cycle: Sales surge during the discount period and drop afterward. Also, stock can run low during sales, meaning customers can leave empty-handed and disappointed in the business. Further, customers can come to expect sales, and wait until one is announced to buy.
Another cause is shortage gaming, which occurs when customers purchase more than they need during periods of short supply, can cause a bullwhip effect. Customers also can bring about the effect by taking advantage of liberal return policies. This can make accurate demand forecasts difficult.
How to Minimize the Bullwhip Effect
The first step in minimizing the bullwhip effect is understanding customers' demand planning and inventory consumption. Lack of demand visibility can be addressed by providing all key players in the supply chain with access to point of sale (POS) data. Suppliers and customers must then collaborate to improve the quality and frequency of communication throughout the supply chain.
They also can share information through an arrangement such as vendor-managed inventory (VMI). Eliminating practices that cause demand spikes, such as order batching, also can help. The higher order cost associated with smaller or more frequent orders can be offset with Electronic Data Interchange (EDI) and computer aided ordering (CAO).
Pricing strategies and policies can also help reduce the bullwhip effect. Eliminating incentives that cause customers to delay orders, such as volume transportation discounts, and addressing the causes of order cancellations or reductions can help create smoother ordering patterns. Offering products at stable and fair prices can prevent buying surges triggered by temporary promotional discounts. Special purchase contracts can be implemented to encourage ordering at regular intervals to better synchronize delivery and purchase.
Adopting Supply Chain Management Best Practices
Using sound chain management processes and systems can keep goods flowing efficiently from the raw stage to the consumer while enhancing the company's return on investment (ROI).
Reviewing case studies and other resources detailing best practices can suggest opportunities for improvement. Adopting successful practices such as Walmart’s use of cross docking, or Dell’s process of bypassing the middle man by offering made-to-order computers directly to customers, can contribute to a lean supply chain and minimize the bullwhip effect.
Reducing the bullwhip effect requires a thorough evaluation of organizational policies, measurements, systems, and practices. Based on the positive implications an efficient supply chain can have on costs, sales, profits and customer satisfaction, it’s an undertaking well worth the investment and effort.
