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Latest blog entries www.supplychainer.ruhttp://supplychainer.ru
In this post, I continue to describe the “key” terms adopted in the field of supply chain management. One of the main concepts is the so-called "Bullwhip" effect, or "bullwhip effect". This is the name of the situation in which minor changes in end-user demand lead to significant deviations in the planning of stocks and production for other participants in the supply chain (distributors, manufacturers, their suppliers, etc.).
One of the obvious reasons for such “planning distortions” is that managers, faced with a sharp surge in incoming orders, reinsure themselves and, in turn, place such an order in the “upstream” link of the supply chain (the supplier of the goods - that is, the distributor or manufacturer). to meet the increased demand with some margin. When such an inflated order arrives (after some time, of course), the surge in demand for the product has already given way to a recession, the stock is overstocked, and the next order will either be delayed until the stock is used up or significantly reduced in volume. The supplier of the goods, receiving such uneven orders, in turn makes forecasts with an even greater spread of values and thereby further increases the amplitude of the “jump” by placing an order “with an even larger margin” from his component supplier.
A more detailed analysis of the bullwhip effect highlights several causes:
- increasing errors in forecasting demand in the supply chain;
- creation by enterprises of additional insurance stocks;
- increase in the size of batches of deliveries;
- price fluctuations;
- delays in obtaining the necessary information about needs;
- deviations from planned terms and volumes of production and deliveries.
Forecast errors
The company forms a plan of its orders based on forecasting the demand of its customers. As a rule, the forecast is based on the data of the past period. At the same time, statistical methods of data processing extrapolate the data of uptrends and downtrends a little further, beyond the real limiting points of ups and downs in demand. Given this error, both upward and downward, the company forms its orders to the supplier. At the same time, it also proceeds from the level of its current stocks, subtracting or adding the volume that was overestimated or underreceived in the previous order. Accordingly, the supplier, analyzing the time series of company orders, predicts his needs with an even greater spread:
Increasing the size of the minimum supply lots
As a rule, customer orders are consolidated into minimum lots, most often according to the load rate. vehicle(truck, wagon, container). Thus, the degree of deviation The larger the size of such an order and, accordingly, the less frequently an order is made, the greater will be the degree of its deviation.
Price cuts and promotions
During periods of price cuts or promotions, customers can build up significant inventory, so it is natural that after the end of the promotion, there will be a drop in orders as customers begin to use up their inventory made during the price reduction period. Such a policy artificially “swings” the demand and increases the discrepancy with the actual need.
Quoting of order fulfillment volumes
Distributors under supply shortages often deliberately over-order in response to quota policies. Often such a policy is driven by the "good intentions" of manufacturers consolidating their logistics and wishing to achieve reductions in distribution costs by assigning "mandatory quotas" to be "selected" by the distributor. Negative side this approach is also a significant distortion of the real picture of demand.
Order delivery period
The longer the period of delivery of the goods, the higher the uncertainty with the execution of the order and the value of the safety stock generated by the consumer. As a result, when calculating the reorder point and the level of safety stock (in days of sales), we actually multiply the values of the average daily demand and the corresponding square deviation by the number of days of delivery, which naturally increases the deviations of the real demand pattern in each link of the supply chain proportionally. At the same time, the more links in the supply chain, the more pronounced the Bullwhip effect will be.
As mentioned earlier, the whip effect is a phenomenon in supply chains that increases the amplitude of fluctuations in demand or order volume as it moves away from the real source of demand in the supply chain. This means that supply chain fluctuations closer to the consumer are much weaker compared to the other side of the supply chain closer to the manufacturer or supplier.
Fluctuations in demand increase as they move along the supply chain from the retailer to the end of the supply chain, such as a supplier. It should be noted that the more counterparties in the supply chain, the more extensive the effect of the whip, namely, the increase in lead time
The more links in the supply chain and the longer the lead time, the greater the amplitude of the fluctuation. This term was first used by J. Forrester. In the 1950s, he first demonstrated mathematical model increasing demand as it moves up the supply chain. The term was coined around 1990 when Procter & Gamble sensed a misguided order fluctuation in their baby diaper supply chain. However, the greatest contribution to the development of the concept of the whip effect was made by H. Lee in 1997 in his work entitled "The bullwhip effect in supply chains". The whip effect has an extremely negative impact on the efficiency of supply chain management, namely, it leads to an excessive increase in safety stocks, an increase in logistics costs, an unnecessary increase in production costs and overhead, potential product degradation, and worse, poor customer service and lost sales.
In my essay, I will try to give the most accurate definition of the whip effect (Bullwhip effect), identify the most important causes and consequences, and find the most effective ways overcoming this problem. This topic seemed to me quite interesting and important, since it poses a danger to any, without exception, supply chain.
The bullwhip effect was identified by specialists from the American company Procter & Gamble Procter & Gamble Co. -- an American company, one of the leaders in the global consumer goods market, when they wondered why the volume of orders for baby diapers (one of the best-selling products) fluctuated so much. The specialists analyzed the sales statistics of retail stores; orders received by distributors; orders received by the company; orders received by suppliers of raw materials, and in this sequence, after which it was revealed that the magnitude of the fluctuation in demand grows from end consumers to suppliers of raw materials. In other words, the whiplash effect is a situation in which small changes in demand entail more and more changes in the plans of each subsequent participant in the supply chain.
Having analyzed what the whip effect is, let's move on to the reasons for its occurrence. One of the main reasons is an error in the demand forecast. For example, with a sharp increase in demand for a certain product, due to a promotion in the store, the manager wants to cover the increased demand with a margin; when the product arrives at the store (it takes time for the request to go through the entire supply chain, and the finished product is delivered to the store), demand returns to normal. Consequently, the goods will be idle in the warehouse, and therefore, the manager will either have to make the next order much smaller in volume compared to the previous one, or not place an order at all.
Also in the example above, you can see such reasons as the reaction time of the system (supply chain), price fluctuations, arbitrary increase in the size of supply lots. Another rather important reason is the lack of transparency of the entire chain. Its essence lies in the fact that each participant in this chain focuses only on the orders received by him and chooses a strategy that is optimal for himself, but not for the entire chain as a whole.
It is equally important to understand the implications of the whiplash effect. Thus, a producer of raw materials, receiving a larger order, is forced to increase production volumes, which entail the expansion of personnel and the availability of more equipment. When receiving a small order, part of the staff remains without work, as well as part of the equipment is idle. In both cases, the manufacturer bears losses. Moreover, having received an urgent order, the manufacturer may not have enough raw materials (materials) available, and an unplanned order leads to unnecessary transaction costs.
Consequences for retail stores: either the lack of goods on the shelves (the demand for the goods increased, but there was not enough safety stock), or the goods were idle in the warehouse. Which leads to lost profits, or to extra costs for renting a warehouse (additional space in a warehouse).
Finding ways to overcome the whiplash effect is one of the most pressing logistics challenges today. After all, the Bullwhip effect has a negative impact on the productivity of the operations of the participants in the supply chain.
The American company WalMart Wal-Mart Stores, Inc. managed to find a way out. is an American company, the world's largest retail chain. The company ranks 1st in the Fortune Global 500, which has so developed information exchange among participants in the supply chain that the manufacturer can analyze the data on the demand of the product it produces, sold in retail stores.
It is unlikely that all supply chains will be able to achieve such success, but in order to avoid an erroneous forecast, it is advisable for participants to agree with the customer on the periodic provision of data on demand and with the client on joint calculation and safety stocks; critical reflection on the compliance of the client's application with his needs also plays an important role.
The problem of price fluctuations is solved through interaction with the marketing and sales department; finding the tightness of the relationship between changes pricing policy and fluctuations in demand.
In addition, there is an alternative solution to the problem of the whiplash effect - work on VMI technology, when not the client manages his stocks, but the seller himself. In this case, the whip effect will be stopped at the initial stage. But unfortunately the implementation this project requires large financial investments, and, moreover, the “maturity” and great experience of the company.
Thus, the whiplash effect is a logistics problem that occurs at the last stage of the supply chain, but it is almost impossible for most companies to solve this problem, since logistics appeared not very long ago, which means that companies do not have enough experience to completely eliminate the Bullwhip effect. . At the moment, the most relevant solution to this problem, in my opinion, lies in the direct strengthening of relations among the participants in the chain, which will lead to a better understanding by each participant of the entire system as a whole.
demand effect whip supply
Bibliography
· “Logistics: personnel, technologies, practice”, Panasenko E.V.
· “The book on supply chain management”, Ivanov D.A.
Beer game described by Peter Senge in The Fifth Discipline. On the example of beer supplies, a distribution chain is modeled with four stages of supply: retailer, wholesaler, distributor and manufacturer. For each seller plays one, and preferably two or three players. Thus, the entire supply chain is usually played by 8-12 players. The master can control several circuits in one class at the same time. It is possible to record the results of each move manually in a special table, or you can use the online resource with the game.
A task
The task of the supply chain is to produce and deliver beer to the end consumer: the factory produces, and the other three links in the supply chain move the beer until it reaches the end consumer at the end of the supply chain.
The goal of the players is simple: each link must properly fulfill the incoming orders for beer.
Structure
Orders flow up to the manufacturer, while supplies flow down the supply chain to the retail customer (see Figure 1).
An important element of the game is the time delay for the execution of the order, which consists of the time for delivery and for the production of goods. Each delivery (and production order) requires two rounds until they are finally delivered to the next link (see Figure 2).
Let's play
The game is played in rounds that simulate weeks.
Using the materials (see Figure 2), players must complete the following steps in each round:
- take orders from their customers;
- receive goods from your supplier;
- update the game table;
- send the goods to your customer further down the chain;
- place a new order with your supplier.
The choice of order quantity in each round is the only decision that players make during the game.
Rules
Each order must be completed right now (level inventory players must be large enough), or later in subsequent rounds.
Stocks in stock and overdue (backorders) incur costs – each item in stock costs EUR 0.5 per week, while each overdue item costs EUR 1.00. Therefore, the main goal of every seller is to keep their costs as low as possible.
Thus, the players' optimal strategy is to run their business with the lowest possible inventory (minimum orders to their suppliers), while avoiding non-fulfillment of orders from their customers.
Players are not allowed to communicate. The only information they are allowed to exchange is the order quantity; there is no transparency as to what stock levels or actual consumer demand is; only the retailer knows the external demand.
consumer demand
External demand is predetermined and usually does not vary significantly. At the start of the game, the supply chain starts up with the same inventory levels (eg 15 units), order volumes (eg 5 units) and some amount of beer in transit and in production (eg 5 units).
To induce a whip effect, external demand first remains stable for several rounds (eg 5 units for 5 rounds). Then it suddenly increases (a jump of 9 units), then it stabilizes again at this more high level until the end of the game (usually only 52 rounds by the number of weeks in a year, one round lasts less than one minute).
Just one sharp increase in external demand inevitably creates a whip effect and destabilizes the placement and fulfillment of orders throughout the supply chain.
Bullwhip effect is a well-known consequence of coordination problems in traditional supply chains. It is expressed in the fact that even with small variations in demand in retail, the level of fluctuation in orders tends to increase significantly downstream in the supply chain. As a result, the total order becomes very volatile [with steady demand], and can be very high this week and almost zero next. The term was coined around 1990 when Procter & Gamble sensed misordering fluctuations in their baby diaper supply chain. The bullwhip effect is a well-known consequence of coordination problems in traditional supply chains. It is expressed in the fact that even with small variations in demand in retail, the level of fluctuation in orders tends to increase significantly downstream in the supply chain. As a result, the total order becomes very volatile [with steady demand], and can be very high this week and almost zero next. The term was introduced around 1990 when Procter & Gamble sensed a misguided order fluctuation in their baby diaper supply chain. As a result of the whip effect, there are problems throughout the supply chain:
While the whip effect is not new, it is still a current and pressing issue in modern chains supplies. |
Typical Results
In order to learn from Beergame, it is necessary to collect and study the data received by the players. Here are the typical results of one game.
Figure 1 shows the distribution of orders over 40 weeks and a typical bullwhip effect. It becomes clear that retailers were reacting to the surge in consumer demand with a two-week time delay.
In the next phase, everyone placed larger orders, each one getting larger, thus creating the typical bullwhip effect.
Inventory fluctuation
Figure 2 shows stock fluctuations with negative stock indicating a delayed order.
Obviously, the players are faced with a delay in orders. Over-reacting to demand led to rapid overstocking at 20-30 weeks.
Summing up the game
The debriefing usually begins with a brief discussion of the students' experiences throughout the game. As a rule, the following questions are discussed:
- Have you ever felt like you weren't in control of the situation?
- Have you blamed your chain partners for your problems?
- Have you felt despair at some point?
This discussion usually shows that people really blame their supply chain partners for not doing their job right (either making unreasonable orders or failing to deliver your order).
Desperation and disappointment are common feelings during the last round of the game.
Structure creates behavior
The main takeaway from this discussion is that the structure of the game (i.e., the structure of the supply chain itself) dictates behavior.
Thinking about the game
The second group of questions can be devoted to discussing how Beergame simulates real conditions:
- What is unrealistic in this game?
- Why are there order delays?
- Why are there production delays and delivery delays?
- Why do we need distributors and wholesalers? Why can't retail beer be shipped directly from the factory?
- Should a beer producer interact with its raw material supplier?
Please pay attention! By emphasizing the fact that real supply chains are much more complex (there is a huge variety of products and supply chain partners, as well as complex cross-links), students can quickly see that real conditions favor the whip to a much greater extent, and that the Beer Game really good tool for simulating the whip effect.
The discussion of the results
Usually this discussion leads to a very lively discussion. For example, the concept of “accumulated supply chain costs” is introduced, indicating that until the product reaches the final customer, no one in the supply chain will earn; this understanding is the first step in creating the idea of global thinking and optimization of the whole chain, which essentially require cooperation.
Then you can move on to identifying the causes of the whip effect.
Reasons for the whip effect
The bullwhip effect is mainly driven by three basic problems: 1) lack of information, 2) supply chain structure, and 3) lack of collaboration.
Three reasons can be identified in an interactive session with students discussing the Beergame experience and then validated with practice and literature references.
1. Lack of information
In the Beer Game, no information is stored, except for the size of the order. Consequently, much information about consumer demand is quickly lost on the way upstream in the supply chain.
This feature of Beergame models supply chains with low levels of trust, where the parties share only a minimum of information among themselves. Without actual customer demand data, all forecasting must rely solely on incoming orders at every stage of the supply chain. In such a situation, traditional forecasting methods and stock-holding strategies tend to create a bullwhip effect.
2. Structure of the supply chain
The very structure of the supply chain contributes to the whip effect. We have a long lead time, i.e. it takes a long time for an order to arrive upstream and next delivery went downstream. The more time it takes, the more likely a whiplash effect will occur.
Usually, when placing an order, they are guided by the forecasted demand during the replenishment of the order, adjusted for safety stock, in order to guarantee the level of service (no shortage of goods) during the time until the next order arrives.
Therefore, than longer time replenishment, the more clearly order volume will respond to increased forecast demand (especially when combined with the need to update safety stock levels, see above), which contributes to the bullwhip effect.
3. Local optimization
Local optimization, expressed in local forecasting and local cost optimization in the absence of cooperation in the supply chain, also underlies the whip effect.
Lots to order are a good example of local optimization. In practice, the size of the order is fixed and determined by the method of delivery, since, for example, the cost of delivery for delivery by a full truck or container is lower than for delivery of a smaller volume. In addition, many suppliers offer volume discounts to encourage large orders.
Therefore, there is some incentive for individual players to take on more (and thus delay some of the orders) from their customers and only place large aggregate orders with their supplier. This behavior, however, worsens the problem of demand forecasting, because each such order contains very little information about real demand. And delivering orders in batches, of course, does contribute to the bullwhip effect by inflating orders unnecessarily.
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