On the Importance of Supply Chain Visibility: The Impact of Bullwhip Effect

For years, traditional supply chains have focused on squeezing efficiencies across the supply chain by promoting just-in-time strategies. More recently, there has been a shift to just-in-case strategies as the new world has faced sudden unexpected events, such as Panama Canal slot restrictions by 50% due to drought or the recent attacks on commercial ships in the Suez Canal, disrupting the supply chains in a very significant manner. To effectively plan, one must have information available across the supply chain in an efficient and timely fashion. 

Figure 1 shows a simplified depiction of the material flow for a retailer, which is a part of the overall supply chain.

Figure 1. Traditional supply chain material flow

The complexity of managing the supply chain becomes apparent when we consider the flow of the information needed to ensure efficiencies in the supply chain. The inventory levels needed at the DC, warehouse and the retail store is fairly complex since there has to be the right product, in the optimal quantities and at the right time to keep the inventory carrying costs optimal and avoid an out of stock scenario. The visibility of the inventory across the supply chain is a critical factor in ensuring the information is accurate. When the information is less than perfect, it leads to serious inefficiencies resulting in bloated inventory, poor customer service, poor capacity planning and missed production schedules. The term bullwhip effect was first coined by Proctor and Gamble (P&G) in the 1990s when they noticed that the customer orders for Pampers diapers varied a little bit but when they looked at distributor orders, it was higher variation at the distributors than the customer orders and as they went upstream to the manufacturer, the variation of orders was compounded. While the babies that use the product Pampers were relatively constant, the demand variation increased as we considered the inventory levels upstream in the supply chain.The term bullwhip effect is also called whiplash effect or whipsaw effect in some industries. This bullwhip effect is a recurring theme in multiple companies and industries and is not an isolated case with P&G and the one common theme that evolves around incomplete or inadequate information is that the variabilities and demand attributes are more pronounced as we go upstream in the supply chain.

Figure 2 shows the bullwhip effect as an illustration of how the variation gets compounded as we go from consumer to a retail store to a wholesaler to a manufacturer.

Figure 2. Bullwhip effect

The factors that cause the bullwhip effect include:

1. Demand forecasting
2. Order batching
3. Price fluctuations
4. Rationing and shortage gaming

Demand forecasting is done by each member in the supply chain to address the demand from a member in the downstream. Customer demand is forecast by a retailer and based on this information, the upstream member adjusts the demand taking into account the time to procure and the capacity constraints of its upstream member and when it gets fully upstream, the demand levels upstream are distorted significantly. Perceptions and previous experiences of the downstream member also plays an important role in adjusting the numbers upward just to be sure no errors are made.

Order batching is done by an upstream member up or down to adjust for production planning and transportation constraints. A member could be increasing production because of the efficiencies they want to achieve in terms of the quantities produced in a single setup to avoid frequent setup of equipment or transport. An simple example of this could be an agreement between a supplier and the retailer to place an order once a month instead of when the materials are actually needed causing the need to store inventory in excess to avoid stockouts.

Price fluctuations could be due to temporary inflationary pressure or surge in demand due to temporary shortage like we witnessed the demand for toilet paper during COVID. Other factors related to this are quantity discounts, and sale prices such as the ones we encounter in E Commerce such as Prime Days or Diwali sale.

Rationing and shortage gaming occurs when the demand for a product exceeds the supply, a manufacturer can limit the quantities made available. Knowing that a fraction of the order will be fulfilled, a retailer would increase the order quantity to get more of the product in demand. When this information is not known clearly, manufacturers might produce more thinking the demand is higher than what it is in reality. 

To reduce the effects of bullwhip effect it is necessary to:

• Increase transparent communication among the supply chain members
• Reduce setup costs for production and decreased costs for placing each order and allowing more flexible orders instead of a fixed higher number of orders.
• Use forecasting tools to predict demand better and isolate temporary surges and seasonality. This will also reduce markdowns.
• Use EDI (Electronic Data Interchange) and other strategies such as vendor managed inventory to reduce the inventory that needs to be stocked by each supply chain member.
• Use everyday low price strategies to reduce and mitigate price fluctuations.
• Allocate based on past sales history when there is a product shortage
• Improve operational efficiency to mitigate the effect of longer lead times for a product to reach the customer

By improving the visibility of demand and inventory levels among the members of the supply chain, it is possible to predict demand and keep inventory levels at an optimal level. Software such as Vin OMS, Vin WMS and Vin Seller Panel provides visibility of the orders being placed in each sales channel, the inventory available in each storage location such as stores and in warehouses, the quantities that need to be replenished and the inventory available at each supplier, which helps with better coordination and inventory planning.