A supply chain management is the broad concept that includes the management of the entire supply chain from the supplier of raw materials through the manufacturer, wholesaler and retailer to the final consumer. However, there are certain dynamics between companies in the supply chain that cause inaccuracies and volatility of orders from the retailer to the main suppliers and that this causes operations, say, readjustments further up the supply chain. The Forrester effect and the bullwhip effect influence the supply chain directly or indirectly through the components of the supply chain such as manufacturers, suppliers, wholesalers, distributors, retailers, and customers in many ways.
The Bullwhip effect, also known as the Forrester effect, occurs when changes in the order of demand in the supply chain are amplified as they move down the supply chain. It is called the bullwhip effect because of the large magnitude of disturbances in the chain caused by a small disturbance at one end of the chain. Thus, in a typical supply chain for a consumer product, with less variation in sales, there appears to be a pronounced variability in orders from retailers to wholesalers.
Considerably, four main causes of the bullwhip effect have been identified. These are:
1. Update of demand forecasts: it is the readjustment of demand forecasts by upstream managers as a result of the signal of future demand for the product. The forecast is usually based on the order history of a company’s immediate customers. Traditionally, each company in a supply chain typically prepares product forecasts for its production scheduling, capacity planning, inventory control, and material requirements planning. It is argued that the demand forecast signal is an important factor contributing to the bullwhip effect. For example, if a manager uses, say, exponential smoothing (the future forecast is always updated as demand increases), the order sent to the supplier reflects the quantity needed to replenish stock to meet future demand and stock requirements. security that could be considered. necessary.
2. Order Batches: Companies place orders with upstream organizations in a supply chain, using some form of inventory control or tracking. As demand increases, inventory is depleted, but the business may not immediately place an order with the supplier. It often bundles or accumulates demands before issuing an order. Sometimes the vendor cannot handle frequent order processing due to the considerable time and cost involved, so instead of ordering frequently, businesses may order weekly or bi-weekly.
This leads to two ways of order batching; regular and urgent orders. Many manufacturers place purchase orders with suppliers when they run their material requirements planning (MRP) systems on a monthly basis; resulting in monthly orders with suppliers. This is a periodic sort. For example, for a company that orders once a month from its suppliers, the supplier is faced with a very erratic flow of orders. Demands increase at one point during the month, followed by no demands for the rest of the month. This periodic ordering amplifies distortions and interruptions and contributes to the bullwhip effect. A similar effect prevails in the push order phenomenon, where a company experiences a regular increase in demand. As a result, customers periodically submit orders to the company. While periodic surges in demand by some customers would be insignificant, let’s assume that not all orders are placed at the same time, however, it doesn’t happen that way. Orders are more likely to overlap and cause the bullwhip effect to be felt more.
3. Price fluctuations: Due to attractive offers such as ‘buy one get one free’ (BOGOF), prices and quantity discounts, rebates, etc., which are generally provided by manufacturers to distributors in the grocery industry, items are bought earlier than it really is. necessary. This is known as ‘buy forward’, which is known to account for about $75 billion to $100 billion of inventory in the grocery industry in the United States. The result is that customers buy in larger quantities that do not reflect their immediate needs with an eye to stockpiling for future use. Therefore, these special pricing schemes lead to speculative purchases that are seen as costly to the supply chain. For example, Kotler reports that trade deals and consumer promotion make up 47% and 28% of distributors and manufacturers, respectively, of their total promotion budgets. Considering a situation where the price of a product is set low through pricing schemes, the customer would buy more than he really needs. As the price returns to normal, the customer stops shopping to deplete their inventory. This triggers an irregular customer buying pattern that does not reflect his consumption pattern, and the variation in purchase amounts is much greater than the variation in the rate of consumption leading to the bullwhip effect or Forrester effect. Such a practice was called “the dumbest marketing plot in history”.
4. Rationing and short game: Rationing often becomes the norm when demand exceeds supply. Manufacturers allocate the quantity in proportion to the quantity ordered. During rationing, customers exaggerate their actual needs when placing an order for fear that orders may be in short supply. Customer overreaction in anticipating shortages occurs when organizations and individuals make sound, rational economic decisions and “game” potential rationing. The effect of this game is that little information is given to the supplier about the actual demand for the product by customer orders. The practice of the game is very common. The increases in orders are not due to an increase in consumption but to anticipation.
Actually, the bullwhip or Forrester effect is not just an economic mistake. Their influence on a company’s supply chain management could also be felt in a positive way. Therefore, these four main causes of the bullwhip effect somehow influence or affect supply chain management in various ways:
– Conflict between actors in the supply chain. This occurs as a result of a lack of coordination between individual demand forecasts based on the history or sales strategy of each actor in the supply chain.
– Large fluctuations in supply and demand result in the need for high inventories to avoid stockouts. Due to fluctuations in the supply chain, companies try to hold more stock than necessary to avoid stockouts and their attendant problems, such as lost profits, customers, and market share in some situations.
– Customer service is poor as all demand may not be met. Customers get upset when their demands are not met, especially by providers they seem to trust. This is due to the bullwhip effect.
– Production scheduling and capacity planning become difficult due to large swings in orders. Due to the large distortions in demand due to the bullwhip effect, capacity planning (the task of establishing the effective capacity of the operation so that it can support whatever demand is placed on it) and production scheduling, which is a detailed schedule in the planning that shows when or by what date work needs to start and when it needs to finish to ensure customer demand is met, are greatly affected. This is known to often affect various other performance indicators such as costs, for example due to underutilized capacity; income, working capital due to the accumulation of inventory of finished products before demand; quality by hiring temporary staff; speed could also be improved by provision of surplus; supply dependency will also be affected by any unexpected interruptions; and flexibility due to excess capacity will also be improved.
– Expansion of additional plant to meet maximum demand. Another influence on the supply chain caused by the Forrester effect or the bullwhip effect is seeking additional plant capacity or expansion to meet demand, either as a result of low stock or increased demand that was distorted when the shock occurred. whip effect. The implication is that it can lead to large distortions and high costs.
– High cost of corrections: unexpected large orders or supply problems require fast shipments and extra time. This could also affect the company’s transportation and logistics planning in terms of additional handling and administrative costs, although there will be some benefits, the supply chain is affected.
– Other influences include: collaboration, direct sales, smaller order lots or more frequent replenishment, unexpected inventory shortages, price fluctuations, demand behavior, stock market trading, information sharing, and price fluctuations. Profits.
Despite this, there are some possible ways and means to minimize or reduce the bullwhip effect.
The various initiatives for a possible solution to the bullwhip effect are based on the underlying coordination mechanism. These mechanisms are, namely, the exchange of information; by this demand, information at a downstream site is transmitted upstream in time for processing; channel alignment, this is the coordination of pricing, transportation, inventory planning, and ownership between upstream and downstream sites in a supply chain; and operational efficiency, are the activities that are pursued to improve performance, such as reducing costs and delivery time.
In light of these three mechanisms, some of the critical areas that can be considered to reduce the impact of supply chain variability include aligning incentives with overall supply chain performance goals; develop contractual and trust agreements between supply chain partners; approach such as delayed differentiation, common element design; direct sales, vendor managed inventory, continuous replenishment; multi-tier inventory control policies; lead time reduction through operational efficiency and design; lot size reduction using efficient transportation and distribution systems; Price stabilization and uniform prices.
First, understanding the causes of the bullwhip effect can help managers find strategies to combat or stop it. Companies must make concerted efforts through the various means available in managing their supply chain to address these inconsistencies.
