SUPPLY CHAIN DYNAMICS

THE BULLWHIP EFFECT

It was demonstrated in the 1960s by Jay Forrester that certain dynamics exist between
firms in supply chains that cause errors, inaccuracies and volatility and that these cascade
for operations upstream in the supply chain. This effect is known as the Forrester Effect,
or the Bullwhip Effect. It is called the Bullwhip Effect because a small disturbance or
fluctuation at the customer end (at the bottom of the supply stream) causes
increasingly large disturbances as it works its way towards the upstream end. Its
main cause is a perfectly understandable and rational desire by the different links in the
supply chain to manage their production rates and inventory levels sensibly. To
demonstrate this, examine the production rate and stock levels for the supply chain shown
in the table below which is a 4 stage supply chain where an OEM (Original Equipment
Manufacturer) is served by three tiers of suppliers.

FLUCTUATIONS OF PRODUCTION LEVELS ALONG SUPPLY CHAIN IN

RESPONSE TO SMALL CHANGE IN END-CUSTOMER DEMAND
Period Third-Tier Second-tier First-tier Original Demand
Supplier Supplier Supplier Equipment
Manufacturer
Prodn. Stock Prodn. Stock Prodn. Stock Prodn. Stock
1 100 100 100 100 100 100 100 100 100
100 100 100 100
2 20 100 60 100 80 100 90 100 95
60 80 90 95
3 180 60 120 80 100 90 95 95 95
120 100 95 95
4 60 120 90 100 95 95 95 95 95
90 95 95 95
5 100 90 95 95 95 95 95 95 95
95 95 95 95
6 95 95 95 95 95 95 95 95 95
95 95 95 95

The demand from the OEM’s market has been running at a rate of 100 items per period,
but in period 2 demand reduces to 95 items per period. All stages in the supply chain
work on the principle that they will keep in stock one period’s demand. This is a
simplification but not a gross one. Many operations gear their inventory levels to their
demand rate. The column headed ‘stock’ for each level of supply shows the starting stock
at the beginning of the period and the finish stock at the end of the period.
At the beginning of period 2, the OEM has 100 units in stock (that being the rate of
demand up to period 2). Demand in period 2 is 95 and so the OEM knows that it would
need to produce sufficient items to finish up at the end of the period with 95 in stock (this
being the new demand rate). To do this, it need only manufacture 90 items; these together
with five items taken out of the starting stock will supply demand and leave a finished
stock of 95 items.
The beginning of period 3 finds the OEM with 95 items in stock. Demand is also 95
items and therefore its production rate to maintain a stock level of 95 will be 95 items per
period. The OEM now operates at a steady rate of producing 95 items per period.
Note, however that a change in demand of only 5 items has produced a fluctuation of 10
items in the OEM’s production rate.

Now carry this same logic through to the first-tier supplier. At the beginning of period 2,
the second-tier supplier has 100 items in stock. The demand which it has to supply in
period 2 is derived from the production rate of the OEM. This has dropped down to 90 in
period 2. The first-tier supplier therefore has to produce sufficient to supply the demand
of 90 items ( or the equivalent) and leave one month’s demand (now 90 items) as its
finish stock. A production rate of 80 items per month will achieve this. It will therefore
start period 3 with an opening stock of 90 items, but the demand from the OEM has now
risen to 95 items. It therefore has to produce sufficient to fulfil this demand of 95 items
and leave 95 items in stock. To do this, it must produce 100 items in period 3. After
period 3 the first-tier supplier then resumes a steady state, producing 95 items per month.
Note again, however, that the fluctuation has been even greater than that in the OEM’s
production rate, decreasing to 80 items a period, increasing to 100 items a period, and
then achieving a steady rate of 95 items a period.

In this simple case, the decision of how much to produce each month was governed by
the following relationship:

Total available for sale in any period = total required in the same period

Starting stock + production rate = demand*closing stock

Starting stock + production rate = 2*demand(because closing stock = demand)

Production rate = 2* (demand – starting stock)

Questions

1. Extend the logic right back to the third-tier supplier and complete the table above

2. Can you generalize that the farther back up the supply chain an operation is
placed, the more drastic are the fluctuations caused by the relatively small change in
demand from the final customer?

This relatively simple exercise does not include any time lag between a demand
occurring in one part of the supply chain and it being transmitted to its supplier. In
practice there will such a lag, and this will make the fluctuations even more marked.
Furthermore, the way different entities in the supply chain batch their manufacturing
quantities (EOQ or other) can cause distortions which make production volumes fluctuate
in upstream suppliers.
 DISTORTION OF BATCHING IN THE SUPPLY CHAIN
Manufacturer Area Distributor Local Distributor Retail Store
100 50 10 5
5
5
5
5
5
5
5
5

In the table above there is reasonably steady end-customer demand at a rate of 5 items per
week. The end customer (a retail store perhaps) orders from a local distributor at this rate
and this local distributor, perhaps because of custom and practice, places bi-weekly
orders with the area distributor. The area distributor delivers at this bi-weekly rate, but, to
replenish its stock, places monthly orders back to the manufacturer. The manufacturer
actually makes them in economic batches (EBQ) of 100 and therefore makes them only
occasionally.

3. Complete the above table in accordance with what is described above.

Whenever two operations in a supply chain arrange for one to provide products or
services to the other, there is the potential for misunderstanding and miscommunication.
This may be caused simply by not being sufficiently clear about what a customer expects
or what a supplier is capable of delivering. There may also be subtle reasons stemming
from differences in perceptions of seemingly clear agreements. The effect is analogous to
the children’s game of Chinese whispers. The more children the message passes between
the more distorted it tends to become. When the game finishes and the last child says out
loud what the message is, the first child and all intervening children are amused.

Given the disruptive nature of the supply chain dynamics described previously, an
important aspect of supply chain planning and control is the attempt by operations
managers to improve supply chain performance.

The first step is to understand the dynamics – which is what you are doing as students

The proactive actions which operations can take are all concerned with coordinating the
supply chain activities

Efforts to coordinate supply chain activity fall into three categories

1. Information sharing – We will see how Green Gear Cycling attempts to do this
This is also the reason why lack of information drives plans and people crazy.

2. Channel Alignment – This can be done through vendor managed inventory to

harmonize decision making ensuring that differences in forecasting methods
 or purchasing practices don’t lead to fluctuations. Another important source of
misalignment between operating practices of adjacent operations in a supply chain
come from the economics of transporting truckloads of products. If there is a
mismatch between the volume-variety characteristics of the supplier (high-
volume, low variety) and those of its immediate customer (low volume, high
variety) then it can lead to conflicts.

3. Operational Efficiency – This means the efforts that each operation in the
chain can make to reduce its own complexity, reduce the cost of doing
business with other operations in the chain and increase throughput time.
For example, a chain of operations whose performance level is relatively poor
– quality defects are frequent, lead times to order products and services is
long, delivery is unreliable and so on will spend a lot of wasted effort in re-
planning to compensate for the errors. Poor planning will mean extra and
unplanned orders being placed, and unreliable delivery and slow delivery lead
times would mean high safety stocks. Just as important most operations
managers’ time would be spent coping with the inefficiency. (Just like I end up
doing when students keep walking in late, which also cascades causing me to eat
into the break time and sometimes into the next session and not be able to take
attendance in the beginning of the session) By contrast, a chain whose operations
had high levels of operations performance would be more predictable and have
faster throughput, both of which would help to minimize supply chain
fluctuations.
REASONS:
 The Bullwhip Effect is caused to an extent due to the slowness of information
moving back upstream
 Lack of synchronization among supply chain members
 Coz the supply patterns do not match the demand patterns, inventory
accumulates at various stages, and shortages and delays occur at others

One of the most important approaches to improving the operational efficiency of supply
chains is known as time compression. This means speeding up the flow of materials
down the chain from the suppliers to the end-customers and the flow of information
back up the chain.

The Agility of a supply chain is a measure of how flexibly it responds to fluctuations.

The TQM and JIT techniques address the ultimate goal of Lean by -

adopting working practices,

designing for ease of processing,
emphasizing an operations focus,
using small simple machines,
using layouts like cellular and U shaped lines to allow smooth flow,
adopting total productive maintenance,
reducing setup times through concepts such as Single Minute Exchange of Dies,
stopping production when problems occur,
ensuring visibility through KANBAN and SPC control charts and open workplaces and
extending these concepts outward to the suppliers through partnerships such as keiretsu

- produce in small lots a mix of products that are pulled through (called level scheduling
and mixed modeling) to establish a uniform and even rhythm that is predictable thereby
reducing uncertainty in the supply chain and increasing flexibile response.