| A supply chain management is the broad concept | | | | exaggerate their real needs when they order for |
| which includes the management of the entire supply | | | | fear that the orders might be in short |
| chain from the supplier of raw materials through the | | | | supply.Customers' overreaction in anticipation of |
| manufacturer, wholesaler, and retailer to the end | | | | shortages results when organisations and individuals |
| consumer. However, certain dynamics exist among | | | | make sound, rational economic decisions and 'game' |
| firms in the supply chain thereby causing inaccuracies | | | | the potential rationing. The effect of this gaming is |
| and volatility of orders from the retailer to the | | | | that little information is given to the supplier on the |
| primary suppliers and that these cause for | | | | product's real demand by the customers' orders. The |
| operations, say, readjustments further upstream in | | | | gaming practice is very common. Increases in orders |
| the supply chain. The Forrester effect and the | | | | are made not because of an increase in consumption |
| bullwhip effect influence the supply chain directly or | | | | but due to anticipation. |
| indirectly through the components in the supply chain | | | | Actually, the bullwhip or the Forrester effect is not |
| like manufacturers, suppliers, wholesalers, distributors, | | | | just an economic error. Its influence on a company's |
| retailers, and customers in many ways. | | | | supply chain management could be felt as well in a |
| Bullwhip effect, also known as Forrester effect | | | | positive way. Thus, these four major causes of |
| occurs when the demand order changes in the supply | | | | bullwhip effect somewhat influence or affect the |
| chain are amplified as they moved up the supply | | | | supply chain management in number of ways: |
| chain. It is termed as bullwhip effect because of the | | | | - Conflict between supply chain players. This is |
| large magnitude of disturbances in the chain caused | | | | brought about as a result of no coordination amongst |
| by a small disturbance at one end of the chain.Thus, | | | | individual demand forecasts based on each supply |
| in a typical supply chain for a consumer product, with | | | | chain player's sales history or strategy. |
| less sales variation, there seem to be a pronounced | | | | - Large demand and supply fluctuations result in the |
| variability in the retailers' orders to the wholesalers. | | | | need for high inventories to prevent stock outs. |
| Considerably, four major causes of the bullwhip | | | | Because of the fluctuations in the supply chain, |
| effect have been identified. These are: | | | | companies try to keep more stock than needed in |
| 1. Demand forecast updating: this is the readjustment | | | | order to avoid stock out and its attendant problems |
| of demand forecasts by upstream managers as a | | | | like loss of profit, customers and market share in |
| result of future product demand signal. Forecasting is | | | | some situations. |
| usually based on the order history from a company's | | | | - There is poor customer service as all demand might |
| immediate customers.Traditionally,every company in a | | | | not be met. Customers are upset when their |
| supply chain usually prepares product forecasting for | | | | demands are not met especially from the suppliers |
| its production scheduling, capacity planning, inventory | | | | they seem to rely on .This is as a result of the |
| control and material requirement planning. It is | | | | bullwhip effect. |
| contended that the signal from demand forecasting is | | | | - Production scheduling and capacity planning |
| a major contributor to the bullwhip effect. For | | | | becomes difficult due to large order swings. Because |
| example, if a manager uses, say, exponential | | | | of the large distortions in demand due to bullwhip |
| smoothing (future forecast is always updated as | | | | effect, capacity planning-the task of setting effective |
| demand increases) the order sent to the supplier | | | | capacity of the operation in order that it can stand |
| reflects the amount needed to replenish the stocks | | | | any demands placed on it-and production scheduling |
| to meet the requirements for future demands and | | | | which is a detailed timetable in planning showing at |
| safety stocks which might be considered necessary. | | | | what time or date jobs should start and when they |
| 2. Order batching: Companies place orders with | | | | should end to ensure that customers demand is met, |
| upstream organisations in a supply chain, using some | | | | are largely affected. This is known to usually affect |
| inventory monitoring or control. As demand comes in, | | | | several other performance indicators like costs, say |
| inventory is depleted but the company may not | | | | due to under-utilization of capacity; revenues, |
| immediately place an order with the supplier. It often | | | | working capital due to building up finished goods |
| batches or accumulates demands before issuing an | | | | inventory prior to demand; quality by hiring |
| order. Sometimes the supplier cannot handle frequent | | | | temporary staff; speed could also be enhanced by |
| order processing because of the substantial time and | | | | surplus provision; dependability of supply will also be |
| cost involved so instead of ordering frequently, | | | | affected due to any unexpected disruptions; and |
| companies may order weekly or fortnightly. | | | | flexibility will also be enhanced due to surplus capacity. |
| This leads to two forms of order batching; periodic | | | | - Extra plant expansion to meet peak demand. |
| and pushing ordering. Many manufacturers place | | | | Another influence on the supply chain brought about |
| purchase orders with suppliers when they run their | | | | by the Forrester effect or the bullwhip effect is to |
| materials requirement planning (MRP) systems | | | | look for an additional plant capacity or expansion to |
| monthly; resulting in monthly ordering with suppliers. | | | | cater for demand either as a result of low stock or |
| This is a periodic ordering. As an illustration, for a | | | | increased demand which were distorted as the |
| company that places orders once a month from its | | | | bullwhip effect struck. The implication is it can lead to |
| suppliers, the supplier faces a highly erratic stream of | | | | large distortions and high costs. |
| orders. Demands go up at one time during the | | | | - High costs for corrections-large unexpected orders |
| month, followed by no demands for the rest of the | | | | or supply problems necessitate expedited shipments |
| month. This periodic ordering amplifies distortions and | | | | and overtime. This might also affect the planning of |
| disruptions and contributes to the bullwhip effect. A | | | | the company's transport and logistics in terms of |
| similar effect becomes prevalent in push ordering | | | | additional handling and administrative costs though |
| phenomenon.Here, a company experiences regular | | | | there will be some benefits, the supply chain is |
| surge in demand. As a result, customers 'push' orders | | | | affected. |
| on the company periodically. Although the periodic | | | | - Other influences are the following: collaboration, |
| surges in demand by some customers would be | | | | direct sales, smaller order batches or more frequent |
| insignificant suppose all ordering are not made at the | | | | re-supply, unexpected shortages in inventory, price |
| same time, however, it does not happen that way. | | | | fluctuation, demand behaviour, stock market trading, |
| The orders are more likely to overlap and cause the | | | | information-sharing and profit variation. |
| bullwhip effect to be felt most. | | | | Notwithstanding these,there are some possible ways |
| 3. Price Fluctuations: Because of attractive offers like | | | | and means to minimise or reduce the bullwhip effect. |
| 'buy one get one free'(BOGOF),price and quantity | | | | The various initiatives for possible solution to the |
| discounts, rebates and so on usually provided by | | | | bullwhip effect are based on the underlying |
| manufacturers to distributors in the grocery industry, | | | | coordination mechanism. These mechanisms are |
| items are bought in advance of what is actually | | | | namely, information sharing,;by this demand |
| needed. This is referred to as 'forward-buying' which | | | | information at a downstream site is relayed upstream |
| is known to account for about $75bn to $100bn of | | | | in time for processing; channel alignment, this is the |
| inventory in the grocery industry in the United States. | | | | coordination of pricing, transportation, inventory |
| The result is that customers buy in bigger quantities | | | | planning, and ownership between the upstream and |
| that do not reflect their immediate needs with the | | | | downstream sites in a supply chain; and operational |
| view to stock for future use.Thus,these special price | | | | efficiency, are the activities that are pursued to |
| schemes, lead to speculative buying which is | | | | improve performance like reduced costs and |
| considered as costly to the supply chain. For example, | | | | lead-time. |
| Kotler reports that trade deals and consumer | | | | In the light of these three mechanisms, some of the |
| promotion constitute 47% and 28% of distributors | | | | critical areas that can be looked at to reduce the |
| and manufacturers respectively of their total | | | | impact of variability on the supply chain include aligning |
| promotion budgets. Considering a situation when a | | | | incentives to overall supply chain performance |
| product's price is pegged low through the price | | | | objectives; developing trust and contractual |
| schemes, more would be bought by the customer | | | | agreements between supply chain partners; approach |
| than actually needed. As the price returns to normal, | | | | such as delayed differentiation, designing for |
| the customer stops buying in order to use up its | | | | commonality; direct sales, vendor managed inventory, |
| inventory. This triggers an irregular buying pattern of | | | | continuous replenishment; multi-echelon inventory |
| the customer which does not reflect its consumption | | | | control policies; lead time reduction through |
| pattern, and the variation of the buying quantities is | | | | operational efficiency and design; lot size reduction |
| much bigger than the variation of the consumption | | | | using efficient transportation and distribution systems; |
| rate leading to the bullwhip effect or Forrester | | | | price stabilization and uniform pricing. |
| effect. Such a practice was called "the dumbest | | | | First and foremost understanding the causes of the |
| marketing ploy ever". | | | | bullwhip effect can help managers to find strategies |
| 4. Rationing and short gaming: rationing usually | | | | to combat or curb it. Companies must make |
| becomes the norm when demands exceed supply. | | | | concerted efforts through various means available in |
| Manufacturers allocate the amount in proportion to | | | | their supply chain management in order to deal with |
| the amount ordered. During rationing customers | | | | these inconsistencies. |