Question

An ineffective management of a logistics system can produce instability. One of the effects due to mismanagement is known as the bullwhip effect : a small fluctuation in customer demand can cause amplified fluctuations in material flows orders over time via the upstream supply chain itself. This particular phenomenon was first recognized by the managers of Procter & Gamble who noticed significant variability of sellers’ orders despite the fact that consumer demand remained constant; this is because the orders were issued on the basis of limited information regarding the final demand of the product (in this case, Pampers disposal diapers). In general, distorted information along the logistics system gives rise to a growing imbalance between demand and supply; a distorting effect creates the same problems throughout the supply chain

For example, decisions about the management of the CDC in a company are, in general, based on the level of stocks and on the orders issued in a logistics node immediately downstream of the CDC, such as an RDC, without knowing the end-user demand. The orders issued by the RDC are used to estimate the mean and standard deviation of demand. These estimates are the basis of decisions on reorganization issues. For example, an order is issued whenever an inventory level falls below a given reorder point (r) and the inventory level is then increased to an order-up-to-level (R). As the perceived demand varies, the parameters R and r are updated and order quantities are also changed.

In light of this, show that a typical bullwhip effect in a logistics system, made up of a production plant, a CDC, a RDC and a retailer, is like the one reported in Figure 1.23 (where it is assumed that a sudden 10% increase in end-user demand occurs).

Question: Can this effect be reduced through more and better information sharing? Why?

Production plant CDC RDC Retailer Customers Customers demand +10% Time Retailer demand +18% Time RDC demand ↓ +34% Time CDC demand ++51% Time Production plant output -45% ↓ +12% 1-3% Time Figure 1.23 The bullwhip effect for the logistics system of Problem 1.15

Answer 1

Fluctuations in the orders place as we move up the supply chain from the retailer to the wholesaler to the manufacturer is known as Bullwhip effect. This is mainly caused due to lack of information sharing between various stages of the supply chain. More and better information sharing reduces the bullwhip effect in an effective way :

Sharing the Point of Sales Data : If the retailer shares point of sales data to the various stages of the supply chain, the demand forecast is done based on the actual scenario and not on the basis of imaginative scenario of orders placed. Thus the bullwhip effect can be reduced.

Collaborative Forecast of the orders : Once the Point of Sales data is shared, if all the partners of the supply chain forecast the order collaboratively, the bullwhip efefct can be reduced.

Designing single stage control of replenishment : There should be a single stage control of replenishment and thus the bullwhip effect can be reduced.