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11
The Bullwhip Effect
John H. Vande Vate
Fall, 2002
22
Diagnosis & Treatment
• What is it?
• Symptoms?
• Causes?
• Treatments
• Follow-up
33
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.
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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
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IllustrationConsumer Sales at Retailer
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IllustrationRetailer's Orders to Distributor
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Distributor's Orders to P&G
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IllustrationDistributor’s Orders to P&G
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P&G's Orders with 3M
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IllustrationConsumer Sales at Retailer
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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?
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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
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The Effects
• Customer Service Level– Product availability
• Transport Cost– Economies of scale
– Variability
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• Order batching• Pricing Strategies• Uncertain Supply• Forecasting
The Causes
1313
Causes
• Order Batching– Reduce processing costs – Exploit economies of scale in transport– Ordering cycles and planning cycles
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Causes
• Pricing Strategies– Promotions
• Reduce margin• Advance demand• Diversions
– Sales Targets & Revenue Targets• Reduce price at end of quarter to meet
plans
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Uncertain Supply
Product on Allocation• Customers place extra large orders to
ensure they get “their share”
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Forecasting
More variability
Poorer forecasts
Less reliable supply
1717
Treatments
• Information Sharing– Wal-Mart provides POS info to P&G
• Channel Alignment– Coordination of promotions, transport, etc.
• Operational Efficiency– Reducing cost and leadtime
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Information Sharing
• Chrysler makes the cars
• Leer makes the seats
• Third party cuts & sews fabric
• Milliken makes the fabric
• Dupont makes raw material• …
Shared schedule information
1919
Information Sharing
• Chrysler makes the cars
• Leer makes the seats
• Third party cuts & sews fabric
• Milliken makes the fabric
• Dupont makes raw material• …
Shared schedule information
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BMW & Daimler
• Fiber Optic controls
• Bosch: integration
• Infineon: switches
• Several other suppliers
• Shared visibility of components and alerts of shortages
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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
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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
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Information
• Information sharing from industrial customers
• VMI and CRP• Contact with end consumers• Disintermediate distributors• Faster replenishment
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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
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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
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Eliminate Gaming
• Allocate based on historical sales rather than orders
• Intel case
• Promote orders far in advance
• Limit cancellations
2727
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”
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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
2929
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?
3030
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.
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Auto Industry
• Keep production level– Target daily production, e.g., 1,000/day– Promotions, rebates, low financing to drive
3232
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
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More Variable Usage
• Sequence under old method
• Sequence under BTO
3434
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…
3535
Consequences
• Supplier Capacity
• Supplier Inventory
• Transportation
3636
Confounding Factor
• Product Diversification– GM plans to launch a new vehicle every 23
days.– BMW makes 1017 versions of the 7 series
sedan– …
3737
Next
• Inventory model to temper the Bull Whip Effect in lean/BTO environments
• November 19th Visitor from – Peach State Integrated Technologies– What they are doing with location models
• Yuri and his team are working on using those models to build low variance milk runs for Ford based on location models