May 06, 2006
The Bullwhip Effect
Much discussion has been stirring within the IMR community regarding my post on Wal-Mart's suppliers.
As I mentioned in my last post, I have decided to devote an entire article to the bullwhip effect. This will be a solid foundation for next week's post which responds to long-time reader, Jack Vinson of Knowledge Jolt, and his recent comment.
But first, the bullwhip effect.
I will refrain from entering a mathematical discussion regarding the bullwhip effect and instead will stick to the basics.
So first of all, what is the bullwhip effect?
The bullwhip effect is a wasteful phenomena that occurs due to a lack of information across the supply chain. The result is excessively high inventory levels increasing as you get further from the end customer.
Basically, the bullwhip effect is safety stock for safety stock, because suppliers hold extra stock for their customers the same way retailers hold extra stock for their customers. Suppliers need safety stock, for the safety stock.
Great! How does it work?
Essentially, it's like I said. Incongruent information across the supply chain. If a retail store that typically sells 100 units a week all of the sudden sells nearly 200 per week, then this is going to result in the supplier producing more than 200 in order to have a safety stock for its customer.
Now the supplier is producing 200+x.
The supplier's supplier now needs to ramp up in order to have a safety stock that results in 200+x+y.
As you go down the supply chain, more variables are tagged onto the end of that equation.
The problem is, the supply chain as a whole needs to be able to satisfy the same demand. If the retail store needs 200 units, then everyone in the chain should be prepared to supply 200 units. If this isn't enough then it isn't enough, but if it is, then it is.
With the bullwhip effect, the retailer wants 200. If it is enough, then good...except, the supplier has too much, and the supplier's supplier way too much. If 200 isn't enough, then it's good that the supplier has extra, but if 200 is the optimal inventory level determined by proper ROP formulas that is needed to supply the actual demand with as little excess inventory required to satisfy a particular service level, then 200 is the amount the entire chain should use.
This is a very simplified version of the bullwhip effect, but ultimately, this is what is occurring. Suppliers ramp up in order to prevent stock-outs. Unfortunately, they are ramping up to prevent a stock-out for their customer, not to prevent a stock-out for the supply chain as a whole.
The result?
Waste. Small movements at the end of the supply chain trigger exponential movements down the chain. Oh, I get it, like moving the handle of a whip.
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