Bull-Whip Effect“…lack of trust in information” – Hau Lee, Professor, Stanford University’s business school

“…consumer demand is rarely stable.”

“errors in demand forecasting.”

“Fluctuations are not a result of market characteristics but rather caused by an inefficient supply chain …inefficient reactionary decision making in manufacturing operations.”

Beer Game and Bull-Whip

• Demand Fluctuations• Gaps in the actual and estimated• Gaps in communication• Lack of knowledge about the workings of the

industry• High Costs due to Surpluses and/or Shortages

Real-Life Examples• P&G’s, Pampers Diaper unit complained while babies used the

disposable diapers at a steady rate, orders showed increasingly wide swings as they moved up from consumer to retailer, distributor, P&G, and P&G’s materials suppliers

• Barilla (pasta makers) lacked the material time to be able to respond quickly to a certain type of pasta that has been stock out with their production process. Also, Barilla as well as its distributors were needed to carry tremendous amounts of inventory to match/respond to the demand swing, which showed to be very costly.

• HP’s Inkjet Printer Division faced excessive and mismatched inventory. In Europe, printers were needed to be “localized” to meet unique needs in a dozen European countries.

Bullwhip Effect: Definition …the standard deviation of orders divided by the standard deviation of demand

What is expected?

What happens actually?

Real-Life Examples - Solutions• P&G’s, Pampers Diaper unit

– Solution: A software that correlated sales, demand and other data that saw parents of newborns are less price-sensitive about diapers than parents of older babies, so it might price newborn diapers with higher profit margins than toddler diapers.

• Barilla (pasta makers) – The company came up with a system to take over inventory

management at a large distributor’s site• HP’s Inkjet Printer Division

– Solution: Build mostly complete printers at the factory and let local distribution centers add the power supplies, manuals, software, paper trays, and packaging appropriate for each country. Thus, the “point of differentiation” and the “personality” of the product were postponed

Projects – SCM Quotes• If you can not describe what you are doing as a process, you do not know what you are doing - Deming• I consider a bad bottle of Heineken to be a personal insult to me – Freddy Heineken• All we are doing is looking at the time line from the moment the customer gives us an order to the point

when we collect the cash. And we reduce that time line by removing non-value-added wastes – Taiichi Ohno, Initiated TPS

• Our supply chain information views are mostly narrow in scope - more trees than forest. – Bill Copacino Former head Accenture

• So often we bring in a new person into a supply chain job with little or no training and expect they can just do the job to the same level the prior person did. – Joe Andraski

• A lot of transportation decisions were being made, and they weren’t always in the best interests of McDonald’s.” – Tom Covelli

• “Why do you look tired and haggard at the end of a shift? “Because I walk 9 miles a day,” was the answer. But then you have to ask: Why do you walk nine miles a day?” – Robert Martichenko of LeanCor

• Sometimes no problem is a sign of a different problem – Mark Rosenthal• Be passionate about solving the problem, not proving your solution.• You are in the business of testing your guesses, not convincing yourself that you are right. • We didn’t have time for mistakes, so we had to spend extra time planning.• Stop production so you don’t have to stop production.• The essential question is not, ‘How busy are you?’ but ‘What are you busy at?• Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with

improving your other innovations.• A manufacturer or retailer that responds to changes in sales in hours instead of weeks is no longer at heart a

product company, but a service company that has a product offering.”

Project Requirements• Pick a quote• Explain the quote with reference to a real-life business • Determine whether the meaning of the quote and the workings of business

match or do not match (BOTH ARE FINDINGS)• Whether the quote has significance with real life• Whether the quote is relevant for the real-life business considered for the project• Document the report• Present the findings as a presentation• Report and presentation should be submitted in a CD • NO hard copies will be accepted• There MUST be relevance to logistics and supply chain in your projects

(irrespective of the quote…And we have discussed this across PMM, PQM courses as well)

• Word limit 2500

Demand Forecasting Techniques

bhaktij@gmail.comwww.headscratchingnotes.net

www.pramaanam.com

sources

• http://www.gsb.stanford.edu/news/bmag/sbsm1008/feature-lee.html