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Is Better Forecasting a Solution to the Bullwhip Effect?
The term "bullwhip effect" refers to the magnification of demand fluctuations as orders move up the supply chain. Improved forecasting techniques at any one level in the supply chain cannot eliminate the bullwhip effect and may worsen it if used improperly. Information flow and coordination of orders across the supply chain offer the only hope of taming the bullwhip effect.
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Many manufacturers face product demand that changes significantly on a weekly basis, forcing them to hold excessive inventory in order to maintain acceptable customer service levels. In addition, large demand fluctuations make it difficult to manage equipment, transportation, and human resources. Manufacturers often respond to variable demand by implementing progressively more sophisticated forecasting tools. Unfortunately, no forecasting tool is capable of predicting demand fluctuations like the typical scenario graphed at right.
Amazingly, when examining retail demand figures, manufacturers commonly discover that retail demand exhibits relatively low variability. The term bullwhip effect refers to the magnification of demand variability as orders move up the supply chain. Procter and Gamble executives coined the term after studying demand for Pampers disposable diapers. As might be expected, babies consume diapers at a steady and predictable rate, and retail sales are quite uniform. Procter and Gamble observed however, that distributor orders to the factory fluctuated far more than underlying retail demand. P & G orders to materials suppliers fluctuated even more.
Recent research conducted at MIT and Stanford Universities identifies several causes for the bullwhip effect, including long lead times, the use of various forecasting tools, price fluctuation, and volume and transportation discounts. These research findings have led to the development of new techniques allowing manufacturers and suppliers to reduce upstream variability in the supply chain, thereby improving operational efficiency, lowering costs, and increasing service levels. Over the past several months, LogicTools has worked to help improve supply chain operations for a $500 million Japanese electronics manufacturer. Initial investigations indicated that the bullwhip effect was the culprit behind low customer service levels and high inventory costs. To address the problem, a LogicTools team is now working to help the manufacturer implement strategic partnering arrangements with their distributors and customers and to reduce order lead-times. Preliminary calculations predict significant inventory reductions, improved customer service levels, and increased sales.
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