Bullwhip Effect Assignment

Bullwhip Effect Assignment

Introduction

The Bullwhip Effect always happens when demand variation in supply chain is increased as we move laterally in supply chain. The distortion in information from one supply chain partner is increased tremendously as they move from one end of supply chain to other parts.  This leads to inefficiency in supply chain. Companies like KSPICO can prevent bullwhip effect by trying to understand the reasons behind the same. Bullwhip Effect Assignment brings you innovative solutions which are being implemented for counteracting Bullwhip effect.

  • Use of new age information systems.
  • Defining New business structure to make supply chain more flexible and responsive
  • Implementation of new kind of incentivisation as well as measurement systems

Bullwhip effect can case higher inefficiencies to get in the supply chain which will lead to high investment in investors, poorer service to customers, revenue being lost, capacity expansion being not constructed thoroughly, and transportation being inactive and missing schedules of production planning (Crawford, 1994).

Reasons of Bullwhip Effect

The best illustration for a bullwhip effect can be given the commonly played “beer game”. In this game, the participants should not communicate with its fellow members and should take order decisions only upon the orders from its upper partner. This game is a very powerful show of what bullwhip effect can do (Sterman, 1989). The ordering patterns in this game share a common pattern which is recurring in them; it is that variation in upstream are always higher than those of downstream. This is attributed to illogical decision making of partners. This shows that human behaviour which is made by misconceptions of inventory as well as demand patterns in future will always cause bullwhip effect.  The bullwhip effect is the outcome of players’ rational decisions which are taken within supply chain and its infrastructure. Companies like KSPICO who want to control bullwhip effect should be more focused on changing supply chain infrastructure and other similar processes rather than the supply chain partner behaviour (Kotler, 1997).

There are four major causes of Bullwhip effect-

1) Updating in demand forecasting

2) Batching of orders

3) Fluctuation in prices

4) Rationing as well as shortage game

These work in parallel to supply chain infra of KSPICO as well as rational decision of Supply chain partners, thus creating bullwhip effect. Once, we understand the reasons behind bullwhip effect we will always be better equipped to design and develop strategies for supply chain to counter bullwhip effect (Sellers, 1992).

Demand Forecast Updating

KSPICO uses product forecasting in its supply chain for production scheduling as well as in capacity financial planning, control of inventory and material requirement planning. These forecasts have been based on past history of customer orders for various products of KSPICO. The important factor in supply chain is the projection of demand pattern as observed by various partners of Supply chain of KSPICO. They use the demand coming so as to adjust the future demand pattern so as to keep up with the changing demand pattern (Lode, 1992).  They take the orders as the signal about the future demand. They then adjust his individual demand pattern, and in turn paces demand orders for his supplier in the supply chain.  Demand signal processing is a major contributor to bullwhip effect.  The use of exponential smoothening future demand patterns are always changing as the new regular demand patterns arise. The orders sent by supply chain partners to their respective suppliers address their supply demand which is regularly changed in addition to the need of safety stocks. The future demands as well as needed safety stocks are changing as per the consumer demand. Sometimes it leads to having inventory of weeks as safety stocks the fluctuations in demand data can be less than those in order quantities (Schiller, 1994).

Order Batching

In supply chain of KSPICO, they place orders with the upstream organization having some monitoring on inventory. Demands regularly come with reducing inventory but company doesn’t planned order in immediate effect with supplier. They always issue batch orders from suppliers which are known as periodic ordering and push ordering, KSPICO orders in different internals for its different products depending on the forecast for them in different time frame frequencies There are multiple reasons to use such an inventory system for its order cycle by KSPICO, Many a times the supplier cant give frequent orders and processing related to it since, the time needed for an order as well as cost of processing the order can be huge (Sellers, 1992). Some Pharmaceutical companies have estimated that due to human interventions in order, billing and shipping systems of order, it costs them in the range of $50 for every order processing. Supply chain partners of KSPICO place their orders when they start their MRP systems. , these are mostly run monthly which gives monthly orders to suppliers of KSPICO. A company like KSPICO will need a regular cycle based ordering system as it isn’t enough to warrant resupply if consumed items are their but it will be better if frequency is increased so that resupply is warranted (Millstein, 1994).

Price Fluctuation

According to industry surveys, 90% of the transactions happening in industry between customers and suppliers are the result of ”forward buy” procedure. In “Forward buy” arrangements, products are purchased in advance of their demand. This is because the supplier tries to attract the customer with better prices. Forward buying is the major contributor to inventory of pharmaceutical industry. Forward buying always comes up from price changes in the market. Suppliers and distributors try to give specific promotions like discounts, rebates, coupons and schemes. These offers give rise to price changes in the market place. Also, trade deals like payment terms, pricing terms also form a basis of price discounts. Hence, customers don’t buy what they need but they try and stock up for future needs (Millstein, 1994)

Rationing and Shortage Gaming

When demand is more than supply, producer tries to ration products to its customers.  Many a times , this happens in supply chain, In a case, if total supply is only 25% of total demand, all customers receive only 25% of what they order. Hence, hey know that customer will do rationing; they exaggerate their real demand when they place orders. When the demand reduces, orders will go away and cancellations will come forward. This overreaction of customers happens when shortage is predicted while companies try and take rational product decisions trying to game the rationing. The effect of “gaming” is that the supplier gets very less info regarding the product demand from the customer, which will be a big problem in introduction stages of a product for KSPICO. This gaming procedure is practiced everywhere. Orders always increased not on real demand but on forecast that demand will grow. Customers also place duplicate orders from various suppliers and take from them who deliver first and cancel other duplicate orders (Cooke, 1993).

Read about Logistics Management .

Recommendations

The following recommendations are suggested to KSPICO to be implemented in supply chain process of KSPICO

  • KSPICO should make more usage of simplistic forecasting procedures in the maturity phase of the product life cycle. The analysis done by experts has proven that these procedures help in better results in forecasting. For different products, KSPICO should use different averages for product maturity. Rapid response procedure is expected to be facilitating for giving best results of these forecasting methods.
  • The performance of these forecasts should be closely monitored for the period of 6 to 12 months. KSPICO should also plan for midterm forecasts for reliable performances for products of KSPICO. Short term forecasts should not be stopped. Long term forecasts should be appending this effort.
  • Forecast bias should also be introduced as a major key performance indicator in addition to forecast accuracy. Forecast accuracy gives the difference in absolute terms, bias tells the long term difference in different forecasts. In longer term forecast bias, will help in better designing of supply chain as it will help in adjusting the forecast  accuracy and remove seasonal as well as cyclical biases and redundancies for KSPICO
  • The order policy for KSPICO products which have stationary demands should be reviewed. This stationary demand should help in making the order pattern a stationary one. This will reduce the involvement costs at the same time. The standing order procedure which is the form of stationary order pattern should be help in making best possible solution to this situation.
  • The usage of scrap to be used as an incentivisation procedure should not be limited. Scrap costs are very less when KSPICO compare them in front of turnover and cost of goods produced. KSPICO want to reduce them to very low levels but this can’t be done without increasing the risk of having higher stock out risks. Also, when KSPICO are trying to stabilize the supply chain, KSPICO shouldn’t tighten it. It gives a good way to balance inventories in a correct way which is high.
  • KSPICO should also review the batch sizes of all the products. Small batch sizes shouldn’t be used as it increases the import, testing and logistics costs. But, changing order quantities and demand patterns will help in supply chain planning. Smaller batches will increase higher stability and will help in better management of higher shelf life needs of customers.
  • Also, in addition of inventory policy as well as demand forecasting changes, some other factors like changing demand pattern due to human interferences should be changed. Human interferences reduce the accuracy of forecasts as well as load the supply chain with unnecessary redundancies. These should be discussed with supply chain partners and be synonymously implemented among all so as to reduce bullwhip effect across all supply chain partners of KSPICO.

References

  • Crawford, 1994, "ECR: A Mandate for Food Manufacturers?" Food Processing, volume 55, February 1994, pp. 34-42.
  • Cooke, 1993, "The $30 Billion Promise," Traffic Management, volume 32, December 1993, pp. 57-59.
  • Sterman, 1989,"Modeling Managerial Behavior: Misperception of Feedback in a Dynamic Decision-Making Experiment, 2001," Management Science, volume 35, number 3, pp. 321-339.
  • Sterman and P. Senge,1990, The Fifth Discipline: The Art and Practice of the Learning
Organization, New York: Doubleday/Currency.
  • Millstein, 1994, "P&G to Restructure Logistics and Pricing," Supermarket News, 27 June 1994, pp. 1, 49.
  • Carroll, H.L. Lee, and A.G. Rao, 1986, "Implications of Sales force Productivity, Heterogeneity and Demotivation: A Navy Recruiter Case Study", Management Science, volume 32, number 11, pp. 1371-1388.
  • Sellers, 1992, "The Dumbest Marketing Ploy," Fortune, volume 126, 5 October 1992, pp. 88-93.