THE IMPACT OF WORLD-CLASS MANUFACTURING PRACTICES ON SMALL MANUFACTURERS - by
David K. Johnson

Minimizing The Bullwhip Effect

Many of the benefits of supply-chain integration result from minimizing the bullwhip effect. The phenomenon known as the bullwhip effect is the result of amplification of variation in demand as it moves upstream in the supply-chain. , For example, suppose that a retailer experiences a constant customer demand of ten items per week. In order to satisfy demand the retailer decides to place an order for thirteen items, ten plus another three (just in case). The distributor now perceives demand as thirteen items per a week. The distributor fills the order from their warehouse and then places an order of its own to the manufacturer. To assure that the distributor can satisfy the retailer’s demand, the distributor decides to order a total of eighteen items, thirteen plus another five (just in case). Consequently, the manufacturer sees demand as eighteen items per week and his suppliers see demand as even greater. Once the week is up the retailer discovers that they have ordered more than they really needed so they cut their next order to eight items. The distributor sees that demand has suddenly dropped from thirteen to eight items and that they over ordered the week before so they decide to only order three items this week. To the manufacturer it appears that demand has really dropped (from eighteen to three items), and unfortunately the problem is amplified by the fact that they overproduced the week before. As this cycle continues from week to week, variation in demand experienced by upstream suppliers is amplified.

Consequences of the Bullwhip Effect:

• Variation is amplified as it travels up stream
• The bullwhip effect disrupts supply-chain product flow
• The bullwhip effect results in excessive inventory as well as stock outs
• Increased risk of inventory damage and obsolescence
• Even though up stream suppliers feel the direct results of the bullwhip effect, the costs associated with the bullwhip effect are passed on downstream (the bullwhip effect is everyone’s problem)

Solutions to the Bullwhip Effect:

• Communication between members of the supply-chain reduces the bullwhip effect
• Reducing layers in the supply-chain reduces the number of amplifications
• Reducing lead times in the supply-chain reduces additional items ordered, just in case, which reduces variation in perceived demand
• Higher reliability (quality, on time delivery, etc.) reduces the number of additional items ordered, just in case, which also reduces variation in perceived demand
• Smaller more frequent orders reduces variation

By reducing the bullwhip effect companies within a supply-chain gain a strategic advantage over other supply-chains. Minimizing the bullwhip effect reduces inventory costs, as well as waste, by more closely matching capacity with demand. This decrease in costs increases available profit pools within the supply-chain.

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Copyright © 2005. David K. Johnson. All Rights Reserved.