Whiplash effect in real firms. "Effect" of the whip: causes, consequences and ways to overcome. — Low level of demand satisfaction
As a result of studying chapter 6, the student should:
know
- the concept and causes of the whiplash effect in supply chains;
- the relationship between the causes of the whiplash effect: the effects of Forrester, Burbidge, Halligan;
- negative consequences of the whiplash effect in the supply chain and ways to eliminate it;
- definition of the concepts of "sustainability" and "reliability" of supply chains;
- the impact of sustainability on the performance of the supply chain;
- the concept of supply chain flexibility;
- principles of supply chain dynamism;
be able to
Determine the quantitative parameters of the reliability and sustainability of supply chains;
own
a methodology for building a flexible and dynamic supply chain.
The whiplash effect in supply chains and the issue of sustainability
The essence and causes of the whip effect
In traditional business, inventory management is disintegrated, i.e. each company only controls the level and consumption of its inventory and places purchase/production orders on that basis. Each counterparty of the supply chain, based on the current level of only their own stocks and on data on customer orders, tries to adjust the inventory management system in such a way as to ensure standard profitability and the desired level of service to their customers (local optimization). When predicting the future consumption of its stocks, each participant in the supply chain is based on data on customer orders placed over a certain period, while not taking into account their nature. Without understanding the nature of orders and not having up-to-date information about their consumption (sales), the supplier cannot accurately explain certain fluctuations in demand, resulting in the so-called culture of guesswork ( double-guessing culture), which is the primary reason for the increase in fluctuations in orders up the supply chain, i.e. the emergence of the so-called whip effect (Fig. 6.1).
whip effect (bullwhip effect) is a relatively new term, first systematically used in relation to DRM in the works of H. L. Lee. This effect consists in a situation where the orders received by the supplier from the buyer have more pronounced fluctuations than the sales of the buyer to his customers. Further, these deviations with an increase (in the form of a wave) spread up the supply chain to its initial link, thereby reducing the stability of the supply chain in relation to the optimal level of stocks (Fig. 6.2) .
Interpretation of the stability of the supply chain in relation to the volumes of inventory available from various counterparties of the chain
Rice. 6.1.
Rice. 6.2.
The aim of the strategy is to maintain a balance between the overall level of inventory in terms of value (in terms of working capital optimization) and an acceptable level of customer service (required assortment / nomenclature and ensuring the availability of stocks) in the supply chain. With respect to the situation depicted in Fig. 6.1, the cybernetic analogy with resilience is also relevant. technical systems, when small fluctuations of external factors at the input of the system can cause resonant self-oscillations of the monitored (controlled) parameters of the system and bring it out of the equilibrium state (set setting) .
There are four causes of the whiplash effect: deviations from planned dates and volumes of production and deliveries, misinterpretation of demand signals, price fluctuations, arbitrary increase in the size of supply lots. The relationship of these reasons is shown in Fig. 6.3.
In my essay, I will try to give the most accurate definition of the bullwhip effect, identify the most important causes and consequences, and find the most effective ways to overcome 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 order volume 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 is ranked 1st in the Fortune Global 500, which has developed information interaction among the participants of the supply chain so much that the manufacturer can analyze the data on the demand of the product that he 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 in 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 of 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.
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The article discusses the whip effect, the history of its existence, the causes of occurrence, ways to reduce the influence of the effect.
Modern reality requires enterprises to make the most effective decisions that will lead them to the top of the competitive chain. For this purpose, information is analyzed, on the basis of which forecasts and analytical calculations are made. In particular, such forecasts are necessary to determine the optimal volume of product orders. However, even with correct forecasts and correct conclusions, the uninterrupted movement of material and information flows in the logistics chain is disrupted. This, in turn, creates the risk of non-fulfillment of the customer's order. Thus, in modern conditions it is important to determine the cause of this phenomenon and find ways to solve this problem.
This problem was dealt with by T. Meshchakina (article “The whiplash effect, or imaginary fluctuations in demand”), J. Fern and Lee Sparks (“Logistics and management retail sales”), V. A. Kamyshnikov (“Introduction to Logistics”), Yu.G. Belousov (“Supply chain management: the current stage of development”).
Procter & Gamble once wondered why the company's orders for one of its best-selling products, baby diapers, were skyrocketing. After all, their consumption by the end client, that is, the baby, is uniform and constant. Consistently studying the statistics: sales of retail stores; orders received by distributors; orders received by the company from distributors, and finally; orders that P&G places with a raw material supplier, company managers were surprised to find that order fluctuations increase as they move up the supply chain.
This phenomenon has been called the bullwhip effect.
It was hypothesized that this effect is due to irrational decision-making on replenishment and stock formation. That is, faced with a sharp surge in incoming orders, managers tend to play it safe and, in turn, place such an order that it will allow to satisfy the increased demand with some margin. When such an inflated order arrives (of course, after some time), the surge in interest in the product, as a rule, has already given way to a recession, and an excess of goods is formed in the warehouse. Consequently, the next order will either be delayed until the stock is used up, or significantly reduced in volume. The supplier of the product, receiving such uneven orders, in turn makes forecasts with even greater scatter of values and puzzles his supplier of components with even larger jumps. However, a closer look at the problem showed that the matter is not only in the behavioral characteristics of those responsible for determining the need. The Bullwhip-effect revealed a number of objective reasons, among which are: errors in forecasting demand; arbitrary 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.
Each 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 the company's orders, predicts his needs with an even greater spread.
In real practice, it is very difficult to find a company that would unambiguously transform incoming orders into outgoing orders without processing and generalization. The demand of the company's customers forms the input data for the inventory management system, which, as an output, gives a decision on when and how much to buy goods. As a rule, customer orders are consolidated down to the size of the minimum lot, which may correspond to either the optimal order size or the vehicle load rate. The larger the size of such an order and, accordingly, the less often an order is made, the greater will be the degree of its deviation.
On the other hand, when analyzing the demand of its customers, the company can observe large jumps, on the basis of which a conclusion will subsequently be made about a high degree of demand uncertainty. In fact, the company analyzes not the total demand of its customers, but the flow of applications, each of which is formed on the basis of individual replenishment systems. In this case, the "transformed" demand has a pronounced unevenness.
Excessive fluctuations in demand can be provoked and pricing policy companies. Periods of price cuts or special promotions usually attract a lot of customers who, in a rush to get the most out of the “chance that has fallen”, form speculative stocks. Naturally, after the end of the promotion, an inevitable decline in orders follows, as customers begin to spend their stocks, perhaps waiting for the next period of discounts.
The Western press also mentions situations when, in conditions of shortage, clients submit deliberately inflated bids in response to a policy of partial execution. And when the level of supply finally catches up with demand, a series of order cancellations follows.
The bullwhip effect has an extremely negative effect on the efficiency of the operations of the participants in the supply chain, primarily because it provokes the accumulation of excessive safety stocks for each participant in the chain. Therefore, the development of measures to smooth this effect is one of the urgent tasks of logistics today. There are several approaches to its solution.
This approach is based on complex information interaction between participants in the supply chain, which allows for automated analysis of final demand. For example, if a manufacturer has access to data on sales of its products directly from the trading floors, then it will not be difficult for him to predict how much he should ship in distribution center supplying this retail chain. This technology is not implemented everywhere, but continues to gain momentum.
So, the whiplash effect is a problem that exists, it negatively affects the logistics of the enterprise (sales of products), and it needs to be addressed. The solution lies in the availability of information about the entire material flow chain. It, in turn, can be provided by a database system. Each of them contains information about each element of the supply chain. Then, based on the information collected, appropriate forecasts are made that protect the company from the negative impact of the Bullwhip effect.
REFERENCES Grishaeva O., Shumaev V. Logistical coordination of material flows as a competitive advantage / O. Grishaeva, V. Shumaev // RISK, No. 2, 2005. – P. 22 – 27. Johnson J., Wood D. F. , Wardlow D. L. Modern logistics / J. Johnson, D. F. Wood, D. L. Wardlow: Per. from English. - M., 2004. - 624 p. [Electronic resource]. – Access mode: http://www.loglink.ru/massmedia/analytics/record/?id=78
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 solution, which players take 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 higher level until the end of the game (usually only 52 rounds in 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 consequence of the whip effect, there are problems throughout the supply chain:
While the bullwhip effect is not new, it is still a relevant and pressing issue in modern supply chains. |
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 bigger, 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 highlighting 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 entire 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 the next shipment to go 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, the longer the replenishment time, the more explicitly the order volume will respond to an increase in forecast demand (especially in combination with the need to update the safety stock level, 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 place only 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.
