Week 4: The Bullwhip Effect
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Transcript of Week 4: The Bullwhip Effect
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Week 4:Week 4:The Bullwhip EffectThe Bullwhip Effect
MIS 3537: Internet & Supply Chains
Prof. Sunil Wattal
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Learning ObjectivesLearning ObjectivesUnderstand the “bullwhip effect”
Learn what causes the effect
Learn ways to counteract the bullwhip
Have some fun with the beer game
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The “Pampers” problemThe “Pampers” problem Pampers – a P&G products
Mild fluctuations in retail sales; excessive fluctuations at distributor level
The orders of materials to the Pamper’s suppliers, eg: 3M, fluctuated even more
Yet, Pampers were “consumed” at the same steady rate
What explains the variability?
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At Hewlett-PackardAt Hewlett-PackardSimilar problem at HP – major
printer manufacturer
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Fluctuations at HPFluctuations at HPSome fluctuations at retailer level
– understandable
More fluctuations at reseller level
Much greater fluctuations in the manufacturing division’s orders to the IC division
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Fluctuations along the Fluctuations along the chainchain
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Fluctuations along the Fluctuations along the chainchainConsumer sales are relatively stable
The retailer’s orders show more variability
The wholesaler’s orders show even more variability
The manufacturer’s orders show much greater fluctuations
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The bullwhip effectThe bullwhip effectDistorted information from one
end of the supply chain to another creates a fluctuation in the way the various entities behave
The resulting variability in forecasts, orders and inventory levels is called the “bullwhip effect”
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Learning ObjectivesLearning ObjectivesUnderstand the “bullwhip effect”
Learn what causes the effect
Learn ways to counteract the bullwhip
Have some fun with the beer game
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What causes the bullwhip What causes the bullwhip effect?effect?Demand forecast updating
Order batching
Price fluctuation
Rationing and shortage gaming
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Demand forecast updatingDemand forecast updating Forecasts are generally made using the
exponential smoothing technique
At each level in the supply chain, the input to the demand forecast is the orders from one level below in the supply chain
As orders from the level below keep changing, so does your forecast
Your forecast is the input to the forecast of the entity one level above
As your forecasts vary, their forecasts vary even more
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Order batchingOrder batchingA retailer orders products in batches
When demand comes in, the retailer does not order immediately, but accumulates demand and then orders again in batches
This causes a constant ebb and flow
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Price fluctuationPrice fluctuation On average, 80% of transactions in the grocery
industry is “forward buy”
Forward buying results in price fluctuations
Also, there are price discounts, quantity discounts, coupons, rebates etc
Hence customers buy in quantities that doesn’t reflect immediate needs
How often have you bought an extra box of corn flakes or an extra bottle of juice because of a temporary price reduction?
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Rationing and Shortage Rationing and Shortage GamingGamingScenario: Demand exceeds supply
Manufacturer can ration product supplyIf total supply is only 50% of total demand,
customers will receive only 50% of their order
Knowing this, customers exaggerate their real needs when they order
When demand cools, orders get cancelled
Examples: Sales of DRAM chips in the 1980s; disappearance of HP Laserjet orders
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Learning ObjectivesLearning ObjectivesUnderstand the “bullwhip effect”
Learn what causes the effect
Learn ways to counteract the bullwhip
Have some fun with the beer game
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Counteracting the Counteracting the bullwhipbullwhipAvoid multiple demand update
forecasts
Break order batches
Stabilize prices
Eliminate gaming in shortage situations
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Avoid multiple demand order Avoid multiple demand order forecastsforecastsWhat causes multiple demand order
forecasts?◦Forecast from one entity becomes input
for higher-level entity◦Simply put, different entities in the
supply chain work with different demand data
To counteract◦Share data◦Create demand forecasts using same
raw data
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Avoid multiple forecasts Avoid multiple forecasts (contd.)(contd.)Tools & techniques
Use point-of-sale dataThe actual sale data becomes the raw
data for forecast updates along the system
Electronic Data Interchange / InternetEDI or Internet web services ensures that
the same data is shared across multiple entities at frequent intervals
Computer-assisted ordering
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Break order batchesBreak order batchesOrders involve paperwork and red
tape
Also companies offer differential pricing between full-truckload and less-than-truckload transportation
How to counteract?EDITruckloads with different products
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Stabilize pricesStabilize pricesProblem
Forward buying leads to price fluctuations
Price discounting leads to uneven demand patterns
How to counteract?Reduce frequency and level of
wholesale price discountingEveryday Low Price / Value pricing
strategy
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Eliminate shortage Eliminate shortage gaminggamingProblem
Demand exceeds supplySuppliers order more to counteract
lower supply
How to counteract?Do no allocate products on the basis
of orders aloneAllocate in proportion to past sales
records
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Eliminate shortage gaming Eliminate shortage gaming (contd.)(contd.)Information sharing
◦“Shortage gaming” arises due to lack of trust
◦Sharing information can help overcome this
Stop generous return policies!◦Penalties for returns to manufacturers;
this ensures that retailers will not exaggerate needs, and later cancel orders
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SummarySummary
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Learning ObjectivesLearning ObjectivesUnderstand the “bullwhip effect”
Learn what causes the effect
Learn ways to counteract the bullwhip
Have some fun with the beer game
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The beer gameThe beer gameOriginally conceived at MIT
A very good exercise in understanding the bullwhip effect
The rules…
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Setting the contextSetting the contextThe picture shows a simplified beer
supply chain
The arrows show the direction in which the beer flows
Demand information flows in the opposite direction
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The rules of the gameThe rules of the gameYou, the player, can play one of the
four roles; you are the manager at theRetailerWholesalerDistributorFactory
The factory has access to unlimited amounts of raw materials, labor etc.
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The rules (contd.)The rules (contd.)Each player has to work with the
following parametersOrder: this is the order that you have
received from the next level down your supply chainA retailer’s orders are dependent on the
perceived demand; a wholesaler’s order number is that which has been demanded by the retailer and so on.
Inventory: the numbers in stockBacklog: unfulfilled orders from past
week(s)
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The rules (contd.)The rules (contd.)Inventory costs: For every item in
the inventory, the holding entity (retailer etc) is charged $ 0.50
Backorder costs: For every item that is unfulfilled, the entity unable to fulfill the order is charged $ 1.00
It takes two weeks for an order information to move one level up the supply chain
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The rules (contd.)The rules (contd.)An example:
◦An order from the retailer reaches the wholesaler in week 2, the distributor in week 3, and the factory in week 4.
◦Each entity tries to fulfill the order with the inventory on hand
◦If not, it becomes a backlog◦It can take as many as 12 weeks to
fulfill an order (retailer wholesaler distributor factory distributor wholesaler retailer)
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The rules (contd.)The rules (contd.)The objective of the game
◦To minimize the total supply chain cost (i.e. inventory costs + backorder costs)
Let’s play the game!
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Your thoughtsYour thoughtsWhich role did you play?
What were your individual costs? What was the total supply chain cost?
Share your thoughts about the game
What could have helped you bring down the costs?
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Next week…Next week…In class Beer Game