Define and describe the bullwhip effect

The bullwhip effect is also known as the “demand variation acceleration amplification principle,” is the famous American supply chain management Helbing & Lämmer, on the demand information distorted in the supply chain to convey an image description. (Helbing & Lämmer, 2005).  The basic idea is that when the nodes of the supply chain only make production or supply decisions based on the demand information from their neighboring subordinate enterprises, the unrealistic information of the demand information will flow up and down along the supply chain The demand for information and the actual demand in the consumer market, the demand for information in the consumer market has been greatly deviated, and the demand variation coefficient is much larger than the demand variation coefficient of the distributor and the retailer. As a result of this demand amplification effect, upstream suppliers tend to maintain a higher level of inventory than downstream suppliers. This phenomenon reflects the phenomenon of demand in the supply chain is not synchronized, it shows the supply chain inventory management in a common phenomenon.

Determine potential risks and effects on a corporation

Bullwhip effect is a common phenomenon in marketing activities, because when the supply chain suppliers at all levels only from the neighboring subordinate vendors based on the demand for information supply decision-making, the demand information will not be true With the supply chain upstream, the phenomenon of gradual amplification, to reach the most source of the supplier (such as the total seller, or the manufacturer of the product), the access to the demand information and the actual consumer market demand for customer information The coefficient of variation is much greater than the coefficient of variation of demand for distributors and retailers. As a result of this demand amplification effect, upstream suppliers tend to maintain a higher level of inventory than their downstream demand to cope with the uncertainty of the seller’s orders, thereby artificially increasing the production of upstream suppliers in the supply chain , Supply, inventory management and marketing risks , and even lead to production, supply, marketing confusion.

There are six main reasons for the “bullwhip effect,” namely demand forecasting correction, order batch decision, price fluctuation, shortage game, inventory liability imbalance and cope with environmental variation. “Demand forecast correction refers to when the supply chain members use their direct downstream order data as the market demand information and basis; it will produce demand amplification. For example, in the market sales activities, if the retailer’s highest monthly sales of 1,000, but next month coincides with major festivals, in order to ensure that sales continue to sell, he will be the highest monthly sales on the basis of additional A%, so he (1 + A%) 1000 orders for wholesalers. The wholesaler aggregates the region’s sales forecast (assuming) 12,000, and he adds B% to the retailer’s needs, so he orders 12,000 (1 + B %) to the producer. In order to ensure that wholesalers demand goods, although he knows that there are exaggerated ingredients, but he did not know the particular circumstances, so he had at least (1 + B%) 12000 production, and for the sake of security, in considering the damage, Missing and so on, he added volume production, so that a layer to increase the amount of booking, resulting in “bullwhip effect.” (Lee,  Padmanabhan  & Whang, 2007).

Price volatility due to some promotional tools, or the economic environment caused by mutations, such as price discounts, quantity discounts, free tickets, with competitors vicious competition and demand, inflation, natural disasters, social unrest. This factor allows many retailers and salespeople to pre-order orders greater than actual demand because if the inventory costs are less than the benefits due to price discounts, sellers are of course willing to buy in advance, so that the order does not reflect the change in demand, Resulting in “bullwhip effect.”

The bullwhip effect leads to an overreaction to market changes. When the market demand increases, the capacity of the entire supply chain increased more than the increase in market demand, the excess part of the inventory in the backlog of a supply chain in different nodes. Once the demand slows or grows a lot of money and products will be the backlog in inventory, the entire supply chain may be poor cash flow, seriously affecting the good operation of the supply chain, and even lead to business failures, especially in the supply chain at the end of small businesses.

Describe potential solutions to minimize negative effects on a corporation supply chain management, inventory management or profitability

The response speed to the market, the bullwhip effect shows that the more in the back of the supply chain, the slower the response of enterprises. As a result, when the market demand increases, suppliers often cannot support the manufacturer; and when the market demand slows down, suppliers tend to continue to over-production, resulting in inventory backlog. Due to bullwhip effect, accompanied by over-production is the entire supply chain production capacity of excessive expansion. Once the economic downturn, the whole supply chain was forced to significantly reduce the staff, off, stop, and turn equipment. To the author of the company, for example, by 2003, the staff from the peak of 2000 to more than 5,000 people reduced to 2200 or so, the headquarters of the production plant, office space from 8 to 4. The company’s suppliers experienced a more severe suffering process, most of the suppliers of half of the staff turnover only one-third of the peak, equipment production capacity utilization rate of only about 30%.

For the entire macro economy, the bullwhip effect can explain why some industries are ahead of recession or lagging behind other industries. Take the semiconductor industry, the supply chain front-end chip manufacturing industry before the back-end equipment manufacturing industry recession; while the latter is lagging behind the former recovery. For a single enterprise, when the economic recovery, not only to mobilize their production capacity, more importantly, but also to mobilize all levels of suppliers. This is because, due to the bullwhip effect, back-end suppliers are often subject to greater economic impact, facing greater financial pressure, which is more difficult and more reluctant to expand production capacity. In the industry take off, the economic boom, often due to the back-end suppliers can not be the timely expansion of the entire supply chain sales.

Given the significant impact of the bullwhip effect, over the years the academic community and industry are actively studying. Bullwhip effect is an important factor leading to fluctuations in the industry cycle, almost cannot find any industry can get rid of the impact of bullwhip effect. When companies in different supply chain locations anticipate demand, they will include certain security stocks to deal with the vagaries of market demand and the supplier’s possible supply disruption. When the lead time is long, the number of such safe stock will be very significant. For example, a US computer manufacturer predicts that the market demand for a certain type of computer is 100,000, but it may place orders for 110,000 parts from Chinese suppliers. Similarly, Chinese computer parts suppliers may order 120,000 of their supplier’s Raw materials. And so on, the supply chain nodes will be gradually enlarged. Also, some forecasting methods will systematically distort requirements.

In particular, many companies are accustomed to years of rapid growth, the macroeconomic slowdown and the cyclical changes in the industry psychological preparation are insufficient, or simply not prepared, still heavy asset operations, excessive expansion, and finally doomed to pay a heavy the price. This is especially important for the equipment industry, which is far from the consumer and at the end of the supply chain. “How to manage fixed investment, expansion or contraction of production capacity, decide whether to do or outsourcing, to talk about the company’s survival, nor is it alarmist. Ignoring the supply chain management, over-reliance on heavy asset operations, companies are bound to pay a severe price, some of which have been bearing the consequences” (Metters, 2009).

The bullwhip effect results from the complex and dynamic dependencies in the supply chain. The “co-players” within the chain (locally) seem to make apparent rational ordering and production decisions due to false perceptions and distorted system information. In this environment, individual decision-makers usually fail to predict the impact of their actions on the other elements of the supply chain. Since every local decision-maker feels in the right, there is a tendency to push the dynamism to an external effect rather than to look at it as a result of one’s actions. Improvement measures can therefore only be applied to the supply chain infrastructure.