The Bullwhip Effect
John H. Vande Vate
Fall, 2002
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Diagnosis & Treatment
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What is it?
Symptoms?
Causes?
Treatments
Follow-up
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What it is…
The Bullwhip Effect describes the
phenomenon in which order
variability is amplified as it moves up
the supply chain from end-consumers
through distribution and
manufacturing to raw material
suppliers.
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Example
Procter & Gamble: Pampers
• Smooth consumer demand
• Fluctuating sales at retail stores
• Highly variable demand on distributors
• Wild swings in demand on manufacturing
• Greatest swings in demand on suppliers
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Illustration
Consumer Sales at Retailer
Consumer demand
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Retailer's Orders to Distributor
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Retailer Order
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Illustration
Retailer's Orders to Distributor
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Retailer Order
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Distributor's Orders to P&G
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Distributor Order
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Illustration
Distributor’s Orders to P&G
Distributor Order
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P&G's Orders with 3M
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P&G Order
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Illustration
Consumer Sales at Retailer
Consumer demand
1000
900
800
700
600
500
400
300
200
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39
37
35
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P&G's Orders with 3M
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P&G Order
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What Are the Effects?
What problems, costs, challenges does
this create for the players in the
supply chain?
What problems does this create for the
product in the market place?
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The Effects
• Manufacturing Cost
– Capital Investment
– Operating costs
• Inventories
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Anticipatory
Cycle
Pipeline
Safety stock
Infrastructure
• Lead Time
– New product releases
– Order response time
• Shipping & Receiving Cost
– Order processing
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The Effects
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Customer Service Level
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Product availability
Transport Cost
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Economies of scale
Variability
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The Causes
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Order batching
Pricing Strategies
Uncertain Supply
Forecasting
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Causes
• Order Batching
– Reduce processing costs
– Exploit economies of scale in transport
– Ordering cycles and planning cycles
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Causes
• Pricing Strategies
– Promotions
• Reduce margin
• Advance demand
• Diversions
– Sales Targets & Revenue Targets
• Reduce price at end of quarter to meet
plans
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Uncertain Supply
Product on Allocation
• Customers place extra large orders to
ensure they get “their share”
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Forecasting
More variability
Poorer forecasts
Less reliable supply
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Treatments
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Information Sharing
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Channel Alignment
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Wal-Mart provides POS info to P&G
Coordination of promotions, transport, etc.
Operational Efficiency
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Reducing cost and leadtime
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Information Sharing
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Chrysler makes the cars
Shared schedule information
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Leer makes the seats
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Third party cuts & sews fabric
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Milliken makes the fabric
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Dupont makes raw material
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Information Sharing
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Chrysler makes the cars
Shared schedule information
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Leer makes the seats
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Third party cuts & sews fabric
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Milliken makes the fabric
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Dupont makes raw material
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BMW & Daimler
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Fiber Optic controls
Bosch: integration
Infineon: switches
Several other suppliers
Shared visibility of components and alerts
of shortages
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VMI/CRP
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Vendor managed inventory/Continuous
Replenishment
Dell requires its suppliers to hold
consignment inventory at a warehouse
near the factory --- Vendor responsible
for maintaining 2 weeks supply
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Consumer Contact
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Maintain contact with end consumer (source of
demand) to reduce reliability on information
from channels
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Loyalty programs
Coupons
BMW model of ordering
Disintermediate distribution
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Dell build-to-order
GM build-to-order in Brazil
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Information
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Information sharing from industrial
customers
VMI and CRP
Contact with end consumers
Disintermediate distributors
Faster replenishment
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Reducing Batch Sizes
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Reduce the cost of ordering: automated
ordering, VMI, etc.
Facilitate consolidation:
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multi-stop deliveries, pick-ups, milk-runs
Shared inventory and transport (Dell)
3PL’s help
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Stabilize Prices
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Eliminate promotions (Everyday low
prices)
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Stabilize Demand
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Auto manufacturers produce at a constant
rate and drive demand with 0% financing,
rebates, etc.
Dell adjusts its offerings and pricing to
reflect product availability
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Eliminate Gaming
• Allocate based on historical sales rather
than orders
• Intel case
• Promote orders far in advance
• Limit cancellations
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Follow-up
• How well have these cures worked?
• Enormous investment of energy and
money into these treatments
• The Bullwhip is alive and well
• Two “cases”
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Dell
• Hard drives
• Relies on several sources
– Competition: who gets what share
– Contingency: if one has a problem
– Cultivation: don’t want just 1 disk drive maker
• Contracts for share
– X% of volume to A, Y% to B, etc.
• Implementation
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Implementation
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Assume a 5 day production schedule
20% to A: one day a week
40% to B: two days a week
40% to C: two days a week
Mondays to A
Tuesdays & Wednesdays to B
Thursdays & Fridays to C
Comments?
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The Auto Industry
• Increasingly BTO
– Consumer contact
– Short replenishment cycles
– Small batch sizes
• Increasingly Lean
– As little as 2 hours inventory on site
– Sequencing: Send supplier locked production
schedule. Supplier sends parts in that order
– Frequent small deliveries (sometimes every 4 hrs)
– Coordinated supply with Milk runs, etc.
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Auto Industry
• Keep production level
– Target daily production, e.g., 1,000/day
– Promotions, rebates, low financing to drive
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Consequences
• BTO and shorted order-to-delivery means
smaller bucket of orders in hand to
sequence with:
Before
After
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Best Schedule: 3R, 3B, 3G, 3Y
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More Variable Usage
• Sequence under old method
• Sequence under BTO
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Lean Prevents Pooling
With releases every day or even several times
per day, variability is transmitted to
suppliers
Study of one OEM’s in-bound supply
showed up to 270% variation in day-to-day
volumes ordered
X today, 3X tomorrow, 1/3X next day…
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Consequences
• Supplier Capacity
• Supplier Inventory
• Transportation
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Confounding Factor
• Product Diversification
– GM plans to launch a new vehicle every 23
days.
– BMW makes 1017 versions of the 7 series
sedan
–…
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Next
• Inventory model to temper the Bull Whip
Effect in lean/BTO environments
• November 19th Visitor from
– Peach State Integrated Technologies
– What they are doing with location models
• Yuri and his team are working on using
those models to build low variance milk
runs for Ford based on location models
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