Abstract

The bullwhip effect refers to the phenomenon of demand distortion in a supply chain. By eliminating or controlling
this effect, it is possible to increase product profitability. The main focus of this work is to apply a control technique,
based on the divergence of system, to reduce the bullwhip effect in a single-product one echelon supply chain, in
which an Order-Up-To (OUT) order policy is applied. First the relationships between bullwhip, stability of the supply
chain and the total costs are analyzed. Second the divergence-based control strategy is applied to stabilize the
supply chain.
Introduction
Even industries with reliable demand patterns waste millions of dollars each year because they
arent able to match production to demand. A major cause of supply chain inefficiency has been
dubbed the bullwhip effect.
Proctor & Gamble coined the term bullwhip effect by studying the demand fluctuations for
Pampers (disposable diapers). This is a classic example of a product with very little consumer
demand fluctuation. P&G observed that distributor orders to the factory varied far more than the
preceding retail demand. P & G orders to their material suppliers fluctuated even more.
Babies use diapers at a very predictable rate, and retail sales resemble this fact. Information is
readily available concerning the number of babies in all stages of diaper wearing. Even so P&G
observed that this product with uniform demand created a wave of changes up the supply chain
due to very minor changes in demand.

dynamics with a considerable reduction of the total costs (> 30%) and, in relevant cases, of the bullwhip
effect.

BULLWHIP EFFECT IN SUPPLY CHAIN

An effective supply chain management means efficient flow of quality and timely information between
customer and suppliers which shall enable the supplier to uninterrupted and timely delivery of material to
the customer

But in practical life, there are situations which are never planned, and create oscillations in demand
resulting in distortions in the supply chain. There can be a single cause or combinations of many factors.
Suppliers, manufacturers, sales people, and customers have their own, often incomplete, understanding
of what real demand is. Each group has control over only a part of the supply chain, but each group can
influence the entire chain by ordering too much or too little. This lack of coordination coupled with the
ability to influence while being influenced by others leads.
Drivers of bull whip effect can be from Customers, suppliers, systems, processes, sales, manufacturing,
external factors etc.

The unplanned demand from retailer oscillates back to distributor to the organization and finally to the
supplier with increased degree of magnitude at each leveling supply chain.

Demand oscillation becomes higher while traveling up the supply chain resulting in overestimation at
each level of the chain.

The effect of Bullwhip effect is found in excess inventories, quality issues, higher manufacturing and over
head costs, lost sales, lower levels of customer service , high transportation costs, lead time variations
etc. For an ideal supply chain operations elimination of bullwhip effect is necessary .

Though, bullwhip effect cannot be eliminated completely as there are other factors which are beyond the
influence of suppliers and organizations like strikes, change in government policies, environmental
factors, etc
Causes of the Bullwhip Effect

Sources of variability can be demand variability, quality problems, strikes, plant fires,
etc. Variability coupled with time delays in the transmission of information up the supply
chain and time delays in manufacturing and shipping goods down the supply chain
create the bullwhip effect. The following all can contribute to the bullwhip effect:

Overreaction to backlogs
Neglecting to order in an attempt to reduce inventory
No communication up and down the supply chain
No coordination up and down the supply chain
Delay times for information and material flow
Order batching - larger orders result in more variance. Order batching occurs in
an effort to reduce ordering costs, to take advantage of transportation economics
such as full truck load economies, and to benefit from sales incentives.
Promotions often result in forward buying to benefit more from the lower prices.
Shortage gaming: customers order more than they need during a period of short
supply, hoping that the partial shipments they receive will be sufficient.
Demand forecast inaccuracies: everybody in the chain adds a certain percentage
to the demand estimates. The result is no visibility of true customer demand.
Free return policies

Countermeasures to the Bullwhip Effect

While the bullwhip effect is a common problem, many leading companies have been
able to apply countermeasures to overcome it. Here are some of these solutions:

Countermeasures to order batching - High order cost is countered with

Electronic Data Interchange (EDI) and computer aided ordering (CAO). Full truck
load economics are countered with third-party logistics and assorted truckloads.
Random or correlated ordering is countered with regular delivery appointments.
More frequent ordering results in smaller orders and smaller variance. However,
when an entity orders more often, it will not see a reduction in its own demand
variance - the reduction is seen by the upstream entities. Also, when an entity
orders more frequently, its required safety stock may increase or decrease; see
the standard loss function in the Inventory Management section.
Countermeasures to shortage gaming - Proportional rationing schemes are
countered by allocating units based on past sales. Ignorance of supply chain
conditions can be addressed by sharing capacity and supply information.
Unrestricted ordering capability can be addressed by reducing the order size
flexibility and implementing capacity reservations. For example, one can reserve
a fixed quantity for a given year and specify the quantity of each order shortly
 before it is needed, as long as the sum of the order quantities equals to the
reserved quantity.
Countermeasures to fluctuating prices - High-low pricing can be replaced with
every day low prices (EDLP). Special purchase contracts can be implemented in
order to specify ordering at regular intervals to better synchronize delivery and
purchase.
Countermeasures to demand forecast inaccuracies - Lack of demand
visibility can be addressed by providing access to point of sale (POS) data.
Single control of replenishment or Vendor Managed Inventory (VMI) can
overcome exaggerated demand forecasts. Long lead times should be reduced
where economically advantageous.
Free return policies are not addressed easily. Often, such policies simply must
be prohibited or limited.
References

http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-supply-chain.html

http://www.quickmba.com/ops/bullwhip-effect/