The Bullwhip Effect John H Vande Vate Fall 2002 1 1 Diagnosis Treatment What is it Symptoms Causes Treatments Follow up 2 2 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 3 3 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 4 4 Illustration Consumer Sales at Retailer Consumer demand 1000 900 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 9 7 5 3 0 1 100 Retailer s Orders to Distributor 1000 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 9 7 5 0 3 100 1 Retailer Order 900 5 5 Illustration Retailer s Orders to Distributor 1000 Retailer Order 900 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 9 11 7 5 3 0 1 100 Distributor s Orders to P G 900 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 9 7 5 0 3 100 1 Distributor Order 1000 6 6 Illustration Distributor s Orders to P G Distributor Order 1000 900 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 9 11 7 5 3 0 1 100 P G s Orders with 3M 1000 900 800 600 500 400 300 200 40 37 34 31 28 25 22 19 16 13 10 7 0 4 100 1 P G Order 700 7 7 Illustration Consumer Sales at Retailer Consumer demand 1000 900 800 700 600 500 400 300 200 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 9 7 5 3 0 1 100 P G s Orders with 3M 1000 900 800 600 500 400 300 200 40 37 34 31 28 25 22 19 16 13 10 7 0 4 100 1 P G Order 700 8 8 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 9 9 The Effects Manufacturing Cost Capital Investment Operating costs Inventories Anticipatory Cycle Pipeline Safety stock Infrastructure Lead Time New product releases Order response time Shipping Receiving Cost Order processing 10 10 The Effects Customer Service Level Product availability Transport Cost Economies of scale Variability 11 11 The Causes Order batching Pricing Strategies Uncertain Supply Forecasting 12 12 Causes Order Batching Reduce processing costs Exploit economies of scale in transport Ordering cycles and planning cycles 13 13 Causes Pricing Strategies Promotions Reduce margin Advance demand Diversions Sales Targets Revenue Targets Reduce price at end of quarter to meet plans 14 14 Uncertain Supply Product on Allocation Customers place extra large orders to ensure they get their share 15 15 Forecasting More variability Poorer forecasts Less reliable supply 16 16 Treatments Information Sharing Channel Alignment Wal Mart provides POS info to P G Coordination of promotions transport etc Operational Efficiency Reducing cost and leadtime 17 17 Information Sharing Chrysler makes the cars Shared schedule information Leer makes the seats Third party cuts sews fabric Milliken makes the fabric Dupont makes raw material 18 18 Information Sharing Chrysler makes the cars Shared schedule information Leer makes the seats Third party cuts sews fabric Milliken makes the fabric Dupont makes raw material 19 19 BMW Daimler Fiber Optic controls Bosch integration Infineon switches Several other suppliers Shared visibility of components and alerts of shortages 20 20 VMI CRP 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 21 21 Consumer Contact Maintain contact with end consumer source of demand to reduce reliability on information from channels Loyalty programs Coupons BMW model of ordering Disintermediate distribution Dell build to order GM build to order in Brazil 22 22 Information Information sharing from industrial customers VMI and CRP Contact with end consumers Disintermediate distributors Faster replenishment 23 23 Reducing Batch Sizes Reduce the cost of ordering automated ordering VMI etc Facilitate consolidation multi stop deliveries pick ups milk runs Shared inventory and transport Dell 3PL s help 24 24 Stabilize Prices Eliminate promotions Everyday low prices Stabilize Demand 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 25 25 Eliminate Gaming Allocate based on historical sales rather than orders Intel case Promote orders far in advance Limit cancellations 26 26 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 27 27 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 28 28 Implementation 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 29 29 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 30 30 Auto Industry Keep production level Target daily production e g 1 000 day Promotions rebates low financing to drive 31 31 Consequences BTO and shorted order to delivery means smaller bucket of orders in hand to sequence with Before After Best Schedule 3R 3B 3G 3Y 32 32 More Variable Usage Sequence under old method Sequence under BTO 33 33 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 34 34 Consequences Supplier Capacity Supplier Inventory Transportation 35 35 Confounding Factor Product Diversification GM plans to launch a new vehicle every 23 days BMW makes 1017 versions of the 7 series sedan 36 36 Next Inventory model to temper the Bull Whip Effect in lean BTO environments November 19th Visitor from Peach State