Is it possible to totally eliminate bullwhip effect

However, the good news is that it can be significantly reduced, although this requires a serious focus on the true cause of the effect. So what is that cause? Just as the crack of a whip is affected by the force of the arm and hand movement and the length of the whip, the bullwhip effect in a supply chain is caused by demand uncertainty and lead time.

Many companies hold safety stock to help them cope with demand uncertainty; longer lead times mean more safety stock. Moreover, the further upstream companies are, the greater their demand uncertainty and hence their need for safety stock is. This can be illustrated by a simple example. If your historical average demand is units per week and your lead time is five weeks, your pipeline is full at around units: units to meet the average demand working stock and 50 units for exceptions safety stock.

Suddenly, your sales level increases to units. After asking around in the market, you discover that this could be a structural rise. To avoid similar surprises in the future, you also decide to increase your safety stock from 50 units to As a result, you place an order with your supplier for units — but your supplier was expecting an order for units. Hence, a potentially structural sales increase of 50 units leads to a hopefully one-off volume increase of units.

Just imagine what would happen if your supplier were to assume your increase to be a structural one, and the supplier of your supplier, and so on. Like this, the bullwhip effect in a supply chain is caused by demand uncertainty and transition time. Many companies hold safety stock to help them cope with demand uncertainty.

Longer transition times mean more safety stock. Moreover, the further upstream companies are, the greater their demand uncertainty and hence their need for safety stock is. This can be illustrated by a simple example. If your historical average demand is units per week and your transition time is five weeks, your pipeline is full at around units.

There are units to meet the average demand working stock and 50 units for exceptions safety stock. Suddenly, your sales level increases to units. After asking around in the market, you discover that this could be a structural rise. To avoid similar surprises in the future, you also decide to increase your safety stock from 50 units to As a result, you place an order with your supplier for units — but your supplier was expecting an order for units.

Hence, a potentially structural sales increase of 50 units leads to a hopefully one-off volume increase of units. Just imagine what would happen if your supplier were to assume your increase to be a structural one, and the supplier of your supplier, and so on. The above example demonstrates that the bullwhip effect is not caused by irrational behavior.

Instead, it is the consequence of demand uncertainty, transition time and stocking policies. Three phenomena that are present in pretty much every supply chain. It is therefore not possible to completely eliminate the bullwhip effect, but luckily it can be considerably reduced.

After all, the effect is caused by demand uncertainty and transition time. It can also be mitigated by reducing that demand uncertainty and shortening the transition time. This rather dynamic concept is best understood by experience. In the game a multi-tier supply chain is confronted with a sudden change in the end demand. The more upstream parts of this supply chain experience a huge increase and decrease of demand in time.

This is causing problems in costs, capacity and service levels. In the game you learn the background of the system dynamics, and what to do about it on the level of a complete supply chain.

Volatility has always played a crucial role in supply chains, hence in supply chain management. Maybe there is a sudden surge in demand for bottled water because a hurricane is approaching — or perhaps there is a sudden drop in demand for LCD screens because of newer technologies.

Inchainge believes it is important that companies make conscious choices about how to deal with volatility and make that a part of how they manage their business. A high-performing value chain needs the collaboration of team members from across the organization. Tearing down silos and creating the right cross-functional mindset, however, can be a serious challenge. So, what do you need in order to achieve success? Supply variability, including machine reliability and quality problems, is another potential cause of the bullwhip effect.

Outputs from unreliable machines fluctuate, and that fluctuation can trigger the variability of demands for the members of the supply chain that are on the upstream of that machine. Finally, when demand exceeds supply, a rationing of products can occur. When retailers are afraid that their supply will not be able to meet the desired demand, they start to overestimate their real needs. For example, sometimes customers are allowed to cancel orders when their real demand is fulfilled, which leads retailers to rely on a small amount of information and get confused about the buying pattern of consumers.

While these methods are a powerful antidote to the bullwhip effect, supply chain is rapidly changing; sometimes, these strategies are not enough. Technology-driven solutions can make a big difference to real-time visibility. Cyber physical system CPS technology processes and collects information in real time by connecting devices within a network, which magnifies the information base, increases information availability and enables visibility of material flows in the supply chain.

With these advantages, the bullwhip effect can be reduced easily because CPS provides quality feedback loops, which eventually reduces the time delay and overall processing time in manufacturing. Furthermore, operational information created under this system should be shared and available, which improves demand forecasting.

Cloud computing enables flexibility and scalability of infrastructure and software for the entire supply chain, aiding in the implementation of available information and sharing information in real time across and within the supply chain. All this digitalization leads to time reduction and information consistency, reducing the bullwhip effect. Artificial intelligence is one of the most effective and promising technologies to reduce bullwhip effect.

It is renowned for improving demand signals processing and reducing time delay in supply chain by inferring and noticing patterns in data, which ultimately cracks the bullwhip effect. Blockchain facilitates traceability and transparency of data among all trading partners in a network. By providing access to demand data in the supply chain, it is easier for parties to reduce the bullwhip effect and improve their planning accordingly.

This technology removes the need of an intermediary and allows distributed information to be shared directly with interested parties, reducing information asymmetry and increasing trust, thereby permitting high data integrity and robustness. Digital transformation has shifted the structure of organizations in terms of effective and visible management of the supply chain.

And, by creating meaningful information systems across each element of supply chain, it increases the smooth flow of material, leading to the satisfaction of real customer demand and maximized profit. That is great news as we continue on the path toward recovery.

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