Demand Variability: The Bullwhip Effect

Demand Variability:
The Bullwhip Effect

Dr. Joe Hage

© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

1

Demand Variability – 1/2
• Increases as one moves up the supply chain away from
end customers
• Small changes in customer demand may result in large
variations in orders placed upstream
• Network can oscillate in very large
swings as each organization in the
supply chain seeks to solve the
problem from its own narrow, often
self-serving, perspective

2

Demand Variability – 2/2
• Sources of Variability
–
–
–
–

Demand Variability
Quality Issues
Strikes and Disruptions
Plant Shutdown

• Variability coupled with time delays in the transmission of
information up and down the supply chain and time
delays in manufacturing and shipping goods up and
down the supply chain create the Bullwhip Effect

3

Bullwhip Effect – 1/2
• Distortion of orders along the supply chain, where
small fluctuations in end customer demand result
in amplification of demand upstream, aka Demand
Amplification
• The term „bullwhip‟, where just a small flick of the
wrist at the handle will create a large crack of the
whip at its tip


4

Bullwhip Effect – 2/2
Quantities Ordered by
Distribution Centers

Quantities Ordered
by Retailers

time
Manufacturers

Quantities Ordered
by End Customers

time

time

Distribution Centers
Fluctuation
Increases


Retailers

Fluctuation
Increases

5

Cracking the Whip


6

The Bullwhip Effect – Orders
Bottled Water Corporation – Orders

50

Orders (Thousand Cases)

45
40
35
30

25
20
15
10
5
0
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

Weeks
Consumers

Retailer


Wholesaler

Distributor

Factory
7

The Bullwhip Effect – Cost
Bottled Water Corporation – Inventory Cost
160
140

Cost (Million $)

120
100
80
60
40
20
0
1

2

3

4

5

Retailer

6

7

8

Wholesaler

9

Weeks

10

Distributor

11

12

13

14

15

16

17

Factory
8

The Bullwhip Effect – Stockouts
Bottled Water Corporation – Stockout

50

Quantity (Thousand Cases)

40
30
20
10
0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

-10
-20
-30

Weeks
Retailer


Wholesaler

Distributor

Factory

9

Bullwhip Effect Creates Problems –
1/2
• High
– Inventory Levels
– Inventory Cost
– Demand Fluctuation / Variability

• Low
– Service Level (Backorders / Backlogs)
– Efficiency
– Customer Satisfaction

• Friction among Supply Chain Partners

10

Bullwhip Effect Creates Problems –
2/2
• To cope with peaks and valleys, variation in demand along
the supply chain requires:
– Shipment Capacity
– Production Capacity
– Inventory Capacity

• Most of the time capacity is idle
– Resulting in significant costs and investments

• Conclusion
– High overall cost in the supply chain
– Unhealthy competition between supply chains and
networks, not just between individual companies!

11

Structure Creates Behavior
• Different people in the same organizational structure
produce the same (or at least similar) results
Losses

Events
(Backlogs/Surges/Friction)

Behavior
(Process Oscillation/Demand Variation)

Structure


12

Reactions
• Typical organizational response is to find “the
person responsible”, i.e. the person placing the
orders or the inventory manager, and blame him or
her
• However, such a response is inappropriate
because different people following different
decision rules for ordering have created similar
variations and oscillations
• The structural setup must be changed

13

Factors Contributing to Bullwhip Effect –
1/2
• Demand Forecasting
– Usage of aggregate and thus inaccurate data does not allow for
good predictions
– High variability leads to continuous adaptations of order
policies, thus increasing variability upstream

• Lead Time
– Longer lead times create uncertainty
– Requires high safety stock levels
– Reduces flexibility and adaptability to unforeseen changes in
demand

• Inflated Orders
– In time of shortages, suppliers place big orders when the
expectation is to be on proportional allocation

14

Factors Contributing to Bullwhip Effect –
2/2

• Batch Ordering
– At one stage in supply chain leads to observing high
variability at next stage upstream
– One week large order followed by weeks with no order
– Contributors: fixed ordering costs, transportation and
price discounts

• Price Fluctuation
– Stock up when prices are lower
are leading to large orders
– Promotions and discounts

15

Lessons
• In traditional supply chains, information about consumer
demand is only passed upstream through the orders
placed with aggregated figures
• Information is therefore lost resulting in high buffer stocks
• Even if each partner acts “optimally” individually, the
result is less than optimal for the entire supply chain
• Result is higher prices, lower sales, less margins
• However, competition is now supply chain against supply
chain and network against network

16

Dr. Joe Hage’s Contact Info
•
•
•
•
•
•
•

E-mail: DR@JOE.ME
Skype: joe_hage
Web: www.joe.me
LinkedIn: http://www.linkedin.com/in/joehage
Twitter: http://twitter.com/DrJoeHage
Facebook: http://facebook.com/DrJoeHage
Amazon: http://www.amazon.com/author/joe-hage


17

Demand Variability: The Bullwhip Effect

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