About the "bullwhip effect" in supply chain management

About the "bullwhip effect" in supply chain management

Lost a nail and broke a shoe;

Broken a shoe and folded a horse;

Folded a horse and injured a knight;

Injured a knight and lost a battle;

Lost a battle and died an empire.

- Western folk songs

Professor Sterman of the Massachusetts Institute of Technology has done a famous experiment - the beer test. In this experiment, four groups of students represent consumers, thus forming a simple supply chain. Test requirements: No upstream or downstream companies can exchange any business information, only downstream enterprises are allowed to deliver orders to upstream enterprises, and consumers can only place orders to retailers. The results show that due to the asymmetry of information between the nodes in the chain and the pursuit of maximization of their own interests, the demand information is distorted when it is transmitted inside the supply chain.

This is not an accidental phenomenon. According to the survey, even in well-known companies such as HP, IBM, and Procter & Gamble, this similar phenomenon exists.

So what is this all about? First, let's briefly introduce a term mentioned in the "Beer Trial" - the supply chain.

The concept of supply chain was put forward in the late 1980s. In recent years, with the emergence of global manufacturing, the supply chain has been widely applied in manufacturing management and has become a new management model.

There are many different expressions about the definition of supply chain management.

We can compare the supply chain to one-stop. The leader is the sales link of the goods, that is, the process of interaction between the enterprise and the customer after the product is produced; the dragon body is the manufacturing process, the process of production of the internal products of the enterprise; the dragon tail is the procurement of raw materials. The link is to procure the right goods to the right vendor at the right time. The role of supply chain management is to integrate the capital flow, information flow and logistics in this dragon, so that enterprises can obtain the optimal route of procurement, production and sales, and improve the competitiveness of enterprises.

The key to supply chain management lies in the connection and cooperation between the enterprises in the supply chain, as well as the good cooperation in design, production and competition strategies. If all the nodes in the supply chain take actions that drive overall profit growth, the coordination of the supply chain will improve. Supply chain coordination requires each node in the supply chain to consider the impact of its own actions on other nodes.

However, in the supply chain, there are often uncertainties such as inaccurate forecasts, unclear requirements, unstable supply, poor cooperation and coordination among enterprises, resulting in lack of supply, uneven production and transportation operations, high inventory, and cost. Higher phenomenon. There are many root causes of these problems, but one of the main reasons is the bullwhip effect. The bullwhip effect distorts demand information within the supply chain, and different stages have very different estimates of demand conditions, resulting in a supply chain imbalance.

So what is the bullwhip effect?

The bullwhip effect is a kind of demand variation amplification phenomenon in the supply chain. When the information flow is transmitted from the final client to the original supplier, the information cannot be effectively shared, and the information is distorted and amplified step by step, resulting in the emergence of demand information. Increasingly large fluctuations. This kind of distortion of the information distortion is very similar to a pick-up bullwhip in the graphic display, so it is called the bullwhip effect.

Usually 10% of the customer's market demand changes will result in a 200% change in component supplier orders.

For example: In 1995, when the management of P&G company inspected the order distribution of infant disposable diapers, it was found that the consumption of the products in certain areas was relatively stable, and the sales volume of retailers was not very volatile, but the manufacturers from dealers The order quantity obtained has fluctuated greatly. During the same period, the order quantity of the manufacturers to the raw material suppliers fluctuated more. This distortion of information, if combined with uncertainties in the manufacturing process of the enterprise, will result in huge economic losses.

The bullwhip effect is unfavorable for supply chain management. It causes the wholesale and retailer's orders and producers' output peaks to be much higher than the actual customer demand, which in turn leads to product backlogs and capital occupation, making the entire supply chain inefficient. As more companies operate in the supply chain, this effect becomes more apparent, and the management of the entire supply chain becomes very complicated and difficult. But this effect is unavoidable and is the property of the supply chain itself.

1. What harm will the bullwhip effect cause to the enterprise?

1. Increased production costs. Because of this effect, companies and their suppliers try to meet order flow that is more volatile than customer demand. In order to cope with this increased volatility, companies either expand production capacity or increase inventory. But both of these practices will increase the production cost per unit of product.

2. Increased inventory costs. In order to cope with the increased demand volatility, the public has to maintain a higher inventory level than when the bullwhip effect does not exist. Simultaneously. High levels of inventory also add to the necessary storage space, which leads to an increase in inventory costs.

3. Extend the supply period of the supply chain. As the bullwhip effect increases the volatility of demand, the production plan of the company and its suppliers is more difficult to arrange than the general demand. It is often the case that the current production capacity and inventory cannot meet the demand of the order, resulting in the supply chain. The supply period of the company and its suppliers has been extended.

4. Increase the transportation cost of the supply chain. The transportation needs of the company and its suppliers at different times are closely related to the completion of the order. Due to the existence of the bullwhip effect, transportation demand will fluctuate drastically with time. Therefore, the need to maintain the remaining power to meet peak demand will increase the total labor cost.

5. Increased labor costs associated with supply chain and delivery and incoming goods. The labor demand of the company and its suppliers will fluctuate with the fluctuation of orders, and the labor demand of distributors and retailers will also have similar fluctuations. In order to cope with the fluctuation of such orders, different stages of the supply chain have different stages. Choose, or retain surplus labor, or change labor, but no matter which option, it will increase the total labor cost.

6. Reduced the supply level of products in the supply chain, resulting in more shortage of goods. The large fluctuations in orders made it impossible for the company to supply all distributors and retailers in a timely manner, which led to an increase in the frequency of shortages of retailers and a decrease in supply chain sales.

7. Negative impacts on the operations of each node in the supply chain, thereby damaging the relationship between different nodes in the supply chain. Each node in the supply chain believes that it is doing its best, and will This responsibility is blamed on other affiliates. As a result, the bullwhip effect leads to distrust between the different nodes in the supply chain, making potential coordination efforts more difficult.

In summary, it can be concluded that the bullwhip effect and the resulting imbalance have a greater negative impact on the operational performance of the supply chain. The bullwhip effect increases costs and reduces responsiveness, leading to a decline in supply chain profits.

Second, how is the bullwhip effect produced?

This has the following eight main aspects:

1. Demand forecast correction. As shown in the “Beer Experiment”, in the traditional supply chain, each node company always uses its direct downstream demand information as the basis for its own demand forecast, and has a strong grasp of the future, so it is often added to the forecast value. The last modified increment as the order quantity produced an inflated demand. The bullwhip effect is followed.

2. Price fluctuations. Faced with price volatility, promotions and discounts, short supply, inflation, natural disasters, etc., retailers and distributors often adopt measures to increase the amount of inventory, so that the order quantity is far greater than the actual demand. Upstream companies in the supply chain often use promotional strategies such as price discounts and volume discounts. For downstream companies, if the inventory cost is less than the benefit from the discount, during the promotion period, in order to obtain a large number of goods with discounts, they will falsely report the sales volume of the goods, and then take the false goods to other markets for sale or Postponed until the end of the promotion and then sell, and some resell this part of the goods to other operators, which caused great uncertainty in demand. For consumers, during the price fluctuations, they will change the purchase, but this does not reflect the actual needs of consumers, because they will delay or advance some of the demand. For example, three times a year, due to the promotion of the merchants, the consumer will delay some of the demand before the holiday, and will also concentrate some of the future demand to the holiday consumption, so the demand changes are relatively large. Therefore, price fluctuations will produce a "bullwhip effect."

3. Order quantity. In the supply chain, each company orders from its upstream. In general, the seller does not order an order from the superior supplier, but considers the inventory and transportation costs, in a cycle or After summing up to a certain quantity, ordering is made to the supplier; in order to reduce the order frequency, reduce the cost and avoid the risk of out-of-stock, the seller will often order according to the best economic scale. At the same time, frequent orders will increase the workload and cost of suppliers. Suppliers often require sellers to order in a certain number or period of time. At this time, the sellers need to obtain the goods as soon as possible or get the goods in full, or in case of emergency. It is often artificially increased in order quantity, so that the "bullwhip effect" is caused by the ordering strategy.

4. Environmental variability. This is due to the uncertainty caused by changes in the environment such as policy and society, which has led to an increase in demand for orders. The most important means of dealing with it is to hold high inventories, and the greater the uncertainty, the higher the inventory, but this high inventory represents not the real demand.

5. A shortage game. When the demand is greater than the supply, the rational decision is to allocate the existing supply according to the order quantity. For example, the total supply is only 40% of the order quantity, and the reasonable allocation method is to supply 40% of the order. At this point, in order to obtain a larger share of the ration, the seller deliberately exaggerated the ordering demand is inevitable. When the demand cools down, the order suddenly disappears. This distortion of demand information caused by the shortage game eventually leads to "bull". Whip effect."

6, the inventory is out of balance. Traditional marketing is generally carried out by the supplier to the seller, and the inventory responsibility is still attributed to the supplier. After the sale is completed, the settlement is completed, but the goods are controlled and dispatched by the distributor. This has led to the general tendency of sellers to increase the order quantity to master inventory control, thus increasing the demand for orders and leading to the bullwhip effect.

7. Lack of collaboration. Due to the lack of information exchange and sharing, enterprises can not grasp the real needs of the downstream and the upstream supply capacity, so they have to store more goods by themselves. At the same time, there is no way to achieve inventory exchange and transfer transfer in the supply chain, and only hold high stocks each, which will also lead to the bullwhip effect.

8. Lead time. The change in demand increases with the increase of the lead time, and the longer the lead time, the larger the order quantity caused by the change in demand. Due to the inaccurate timing of the delivery, the company often hopes to leave some room for the delivery date. Therefore, it has a long lead time, so the step-by-step extension of the lead time also causes the bullwhip effect.

Through the above analysis, we can find that the root cause of the "bullwhip effect" is the lack of communication and trust mechanism between the upstream and downstream enterprises in the supply chain, and each enterprise is a rational person with its own interests, resulting in Demand information is constantly being distorted during the delivery process.

Third, how to solve the bullwhip phenomenon in supply chain management?

Because the bullwhip effect is the result of the risk of passing the risk from the downstream client to the upstream, it will endanger the operation of the entire supply chain, resulting in increased total inventory, disordered production and imbalance, business process blockage, waste of resources, market confusion and The risk increases.

The fundamental solution to the "bullwhip effect" is to integrate the relationships among enterprises in the chain, establish a mechanism of integrity between enterprises, and achieve information sharing. Information sharing means that each company in the supply chain has some knowledge or actions, such as production, sales, demand and other information, and information sharing can reduce the risk caused by information asymmetry or incompleteness. We hope to achieve information sharing management by establishing an Internet-based information sharing system, coordinate the actions of enterprises, ensure the real and rapid transmission of demand information, and thus reduce the "bullwhip effect" in the supply chain.

1. Improve the accuracy of the forecast. This requires consideration of historical data, pricing, seasons, promotions, and sales. Some of the data is in the hands of retailers and distributors. They must maintain good communication with them, obtain these data in a timely manner, and share forecast data between upstream and downstream. Collaborative prediction using similar prediction methods to improve the accuracy of predictions. For example, in the US computer industry, manufacturers need sales data from distributor center warehouse inventory, although these data are not exactly equal to POS point-of-sale data, but manufacturers use this data as an important measure to keep in touch with distributors. Measures can reduce the difference in demand forecasting between upstream and downstream in the supply chain.

2. Realize information sharing. This is one of the most effective measures to reduce the bullwhip effect. Supply chain members use Internet/EDI to communicate and share information in real time, establish a direct sales system, reduce the level in the supply chain, simplify the structure of the supply chain, and prevent the information from being artificially distorted in the process of transmission. For example, Dell has formed an efficient information network through the Internet, telephone, fax, etc., customers can directly place orders for the company to assemble and supply, so that ordering, manufacturing, and supply "one line