How to Reduce the Bullwhip Effect
Supply-chain management used to be simple. A customer ordered a product from you, and you kept track of the items sold and ordered enough raw materials to keep up with the demand. But customers now expect faster delivery times, which complicates the restocking of raw materials. This is usually due to a lack of coordination between different departments within the organization. For instance, if a car company can't sell its cars, it might put a promotion in place to sell more cars. If sales and marketing (distribution) isn't communicating with manufacturing, increased sales might be misinterpreted as an increase in demand instead of a response to a promotion. The result of this lack of coordination is what Stanford's Hau Lee calls the "bullwhip effect." Specifically, these are decisions made by groups in the supply chain which worsen the issues caused by an overstock or shortage in inventory.
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Instructions
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Improve information flow. The most obvious way to reduce the bullwhip effect is to improve communication and forecasting along the supply chain. While end-user demand is more predictable, it should not be the only source of information for forecasting. Supply chain managers should be a part of the forecast. Ignoring supply chain supply-and-demand signals when forecasting ignores day-to-day fluctuations.
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Reduce delays along the supply chain. The best way to achieve this is by cutting order-to-delivery time. This also reduces inventory carry and operating costs as less capacity is needed to respond to fluctuations.
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Focus on point of sale data collection. By focusing on the end user via electronic data interchange, supply chain mangers can reduce misleading signals sent from sales and marketing (distribution).
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Create smaller purchase orders. By reducing the order increments and order "batching," supply chain managers can focus on ordering according to need rather than vendor promotions to cut costs. The bullwhip effect has a greater cost to the overall organization than any discount achieved from making a bulk order.
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Maintain consistent pricing. Pricing fluctuations change forecasts by spurring purchases when prices are low and reducing purchases when prices are high. This invariably leads to increased fluctuations for the supply chain to manage, which increases the bullwhip effect.
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