Download - Bullwhip Effect & Value of Information
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Bullwhip effect & value of
information
By
Dr. Debadyuti Das
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Bullwhip Effect
Fluctuations in orders increase as theymove up the supply chain from retailers towholesalers to manufacturers to suppliers
Distorts demand information within thesupply chain, where different stages havevery different estimates of what demandlooks like
Results in a loss of supply chaincoordination
Eamples! "roctor & #amble $"ampers% '"$printers% Barilla $pasta%
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Figure 1. Point-of-sales
Data-Original
Figure 2. POS Data After
Removing Promotions
(he Bullwhip Effect and its)mpact on the *upply +hain
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Figure 3. POS Data After Removing Promotion & Trend
(he Bullwhip Effect and its)mpact on the *upply +hain
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'igher ariability in -rders "laced by+omputer Retailer to anufacturer than
/ctual *ales
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)ncreasing ariability of -rders
0p the *upply +hain
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1e +onclude 2.
-rder variability is amplified up
the supply chain upstreamechelons face higher variability.
1hat you see is not what they
face.
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1hat are the +auses of Bullwhipeffect3
Demand forecasting & )nventorymanagement -rder4up4to points are modified as
forecasts change
5ong cycle times 5ong lead times magnify this effect
"romotional sales Forward buying
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1hat are the +auses of Bullwhipeffect3
"rice fluctuation
olume and transportation discounts
Batch ordering )nflated orders )B /ptiva orders increased by 647 times
when retailers thought that )B would
be out of stock over +hristmas
otorola cell phones
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1hat are the +auses2.
*ingle retailer, single manufacturer. Retailer observes customer demand, Dt.
Retailer orders 8tfrom manufacturer.
Retailer Manufacturer Dt qt
L
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'ow big is the increase3
*uppose a " period moving average is used.
2
2221
)
)
P
L
P
L
DVar
qVar ++
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ar$8%9ar$D%!For arious 5ead (imes
L=5
L=3
L=1
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30
L=5
L=3
L=1
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+onse8uences2.
)ncreased safety stock
Reduced service level
)nefficient allocation ofresources
)ncreased transportation costs
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ulti4*tage *upply +hains
+onsider a multi4stage supply chain! *tage iplaces order qi to stage i+1.
Liis lead time between stage iand i+1.
RetailerStage 1
Manufacturer Stage 2
SupplierStage 3
qo
=D q1 q2
L1 L2
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ulti stage systems
+entrali:ed! each stage bases orders onretailer;s forecast demand.
Decentrali:ed! each stage bases orders onprevious stage;s demand
2
2
11 221)
)
P
L
P
L
DVar
qVar
k
ii
k
iik
++ ==
=
++
k
i
ii
k
P
L
P
L
DVar
qVar
12
222
1)
)
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ulti4*tage *ystems!
ar$8k
%9ar$D%
0
5
10
15
20
25
30
0 5 10 15 20 25
Dec, k=5
Cen, k=5
Dec, k=3Cen, k=3
k=1
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(he Bullwhip Effect!anagerial )nsights
Eists, in part, due to the retailer;s need toestimate the mean and variance of demand.
(he increase in variability is an increasing
function of the lead time. (he more complicated the demand models
and the forecasting techni8ues, the greaterthe increase.
+entrali:ed demand information cansignificantly reduce the bullwhip effect, butwill not eliminate it.
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+oping with the Bullwhip Effect 9/chieving *+ +oordination
Reduce uncertainty
*haring "-* data
*haring forecasts and inventory policies
)mplementing +"FR Designing single stage control of
replenishment
Reduce variability
Eliminate promotions
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+oping with the Bullwhip Effect 9/chieving *+ +oordination
Reduce lead times $order lead time & deliverylead time%
ED)
+ross docking
/*=
Reduce lot si:es
+ombine shipments of different products
+ombine shipments for several retailers
+ombine shipments from multiple suppliers
Distribute demand evenly over time
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+oping with the Bullwhip Effect 9/chieving *+ +oordination
Rationing based on past sales(urn and earn)nformation sharing
*trategic partnerships endor managed inventory $)% +ontinuous replenishment programs $+R"%
/ligning goals and incentives /lign incentives across functions
"ricing for coordination/lter sales force incentives from sell4in $to theretailer% to sell4through $by the retailer%
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Eample! >uick Response at Benetton
Benetton, the )talian sportswearmanufacturer, was founded in ?@A. )n?@C Benetton had 6 stores across
)taly. (en years later, the company epanded
to the 0.*., apan and Eastern Europe.*ales in ?@@? reached 6 trillion.
any attribute Benetton;s success tosuccessful use of communication andinformation technologies.
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Eample! >uick Response at Benetton
Benetton uses an effective strategy, referred toas >uick Response, in which manufacturing,warehousing, sales and retailers are linked
together. )n this strategy a Benetton retailerreorders a product through a direct link withBenetton;s mainframe computer in )taly.
0sing this strategy, Benetton is capable ofshipping a new order in only four weeks,several week earlier than most of itscompetitors.
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'ow Does Benetton+ope with the Bullwhip Effect3
?. )ntegrated )nformation *ystems
#lobal ED) network that links agents withproduction and inventory information
ED) order transmission to '>ED) linkage with air carriers
Data linked to manufacturing
6. +oordinated "lanning
Fre8uent review allows fast reaction
)ntegrated distribution strategy
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)nformation for +oordination of*ystems
)nformation is re8uired to move from local toglobal optimi:ation
>uestions!
1ho will optimi:e3 'ow will savings be split3
)nformation is needed ! "roduction status and costs (ransportation availability and costs )nventory information +apacity information Demand information
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5ead4(ime Reduction
1hy3 +ustomer orders are filled 8uickly
Bullwhip effect is reduced
Forecasts are more accurate
)nventory levels are reduced
'ow3
ED) "-* data leading to anticipating
incoming orders.
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)nformation to /ddress +onflicts
5ot *i:e G )nventory! /dvanced manufacturing systems
"-* data for advance warnings )nventory 44 (ransportation! 5ead time reduction for batching
)nformation systems for combining
shipments +ross docking
/dvanced D**
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)nformation to /ddress +onflicts
5ead (ime G (ransportation! 5ower transportation costs
)mproved forecasting
5ower order lead times
"roduct ariety G )nventory! Delayed differentiation
+ost G +ustomer *ervice! (ransshipment