7 Challenges        

Not long ago, supply chain executives at P&G examined the order patterns for one of their best- selling products, Pampers. Its sales at retail stores were fluctuating, but the variability was certainly not excessive. However, as they examined the distributors’ orders, the executives were surprised by the degree of variability. When they looked at P&G’s orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variability did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variability in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the “Bullwhip Effect”. (In some industries, it is known as the “Whiplash” or “Whipsaw effect”).

The bullwhip effect describes the phenomenon that the variation of demand increases up the supply chain from customer to supplier. The further away a company from the end customer (in terms of lead time), the larger is this variation. Considering a supply chain that consists of an OEM (Original Equipment Manufacturer) and a 1st-, 2nd- and 3rd-tier supplier, the OEM faces the lowest and the 3rd-tier supplier the largest variation of demand (see the following figure)

Bullwhip Effect and Supply Chain Performance:
  Increased inventory levels throughout the supply chain  
  Scheduling becomes more complex – Insufficient production capacity in some weeks because batch sizes increase as we move up the supply chain.  
  Extra plant expansion to meet peak demand.  
  Conflicts between supply chain players.  
Causes of Bullwhip Effect:
  Sub-optimization – each supply chain partner manages the inventory optimally with respect to only one player at a time.    
  Demand forecasting updates on the basis of downstream orders, not customer demand.    
  Fixed Costs and Economies of Scale encouraging large-sized orders.    
  Calendar effects due to end of month and quarterly sales targets (hockey stick effect).    
  Price promotions and forward buying.    
  Supply chain partners not always aware of the consequence of their actions.    
Mitiquation of Bullwhip Effect:
  Information sharing (POS) through EDI and e-methods  
  Vendor Managed Inventory  
  Align incentives to overall supply chain performance  
  Developing trust and contractual agreements between supply chain partners  
  Innovative approaches such as delayed differentiation (logistics postponement / manufacturing postponement), designing for commonality, direct sales to customer  
  Implementation of multi-echelon inventory control policies.  
  Lead time reduction through operational efficiency  
  Lot size reduction through efficient transportation systems; 3PL, consolidation  
  Price stabilization, uniform pricing, everyday low pricing  
  Cross player performance metrics  
  Demand Allocation proportional to past orders in the event of scarcity