1 1 The Bullwhip Effect John H. Vande Vate Spring, 2009

2 2 Diagnosis & Treatment What is it? Symptoms? Causes? Cures Follow-up

3 3 What it is… The Bullwhip Effect describes the phenomenon in which order variability is amplified as it moves up the supply chain from end-consumers through distribution and manufacturing to raw material suppliers.

4 4 The Point Managing variability costs money The Bullwhip effect is self-inflicted variability. What can we do to mitigate it?

5 5 Example Procter & Gamble: Pampers Smooth consumer demand Fluctuating sales at retail stores Highly variable demand on distributors Wild swings in demand on manufacturing Greatest swings in demand on suppliers

6 6 Illustration Consumer Sales at Retailer Consumer demand Retailer's Orders to Distributor Retailer Order

7 7 Illustration Retailer's Orders to Distributor Retailer Order Distributor's Orders to P&G Distributor Order

8 8 Illustration Distributor’s Orders to P&G Distributor Order P&G's Orders with 3M P&G Order

9 9 Illustration Consumer Sales at Retailer Consumer demand P&G's Orders with 3M P&G Order

10 What Are the Effects? What problems, costs, challenges does this create for the players in the supply chain? What problems does this create for the product in the market place?

11 The Effects Manufacturing Inventories Lead Time Transportation Retail

12 And we’ve made it worse Example: –Kimberly sells nearly 300 different SKUs of diapers Kimbies Huggies Active Huggies Supreme –Natural Fit –Gentle Jumbo –Gentle Care »Size »Packaging… Huggies Baby Shaped

13 Pricing Strategies Uncertain Supply Forecasting Ordering strategies Order batching The Causes

14 Causes Pricing Strategies –Promotions Reduce margin Advance demand Diversions –Sales Targets & Revenue Targets Reduce price at end of quarter to meet plans “Hockey Stick” phenomenon

15 Uncertain Supply Product on Allocation Customers place extra large orders to ensure they get “their share” Gaming supply

16 Forecasting More variability Poorer forecasts Less reliable supply

17 Causes Ordering Strategies –Reduce processing costs –Exploit economies of scale in transport –Ordering cycles and planning cycles –Either the order quantity or the order frequency is “rounded”

18 Cures Information Sharing –Wal-Mart provides POS info to P&G Channel Alignment –Coordination of promotions, transport, etc. Operational Efficiency –Reducing leadtime and improving forecasts

19 Information Sharing Chrysler makes the cars Leer makes the seats Third party cuts & sews fabric Milliken makes the fabric Dupont makes raw material … Shared schedule information

20 Information Sharing Chrysler makes the cars Leer makes the seats Third party cuts & sews fabric Milliken makes the fabric Dupont makes raw material … Shared schedule information

21 BMW & Daimler Fiber Optic controls Bosch: integration Infineon: switches Several other suppliers Shared visibility of components and alerts of shortages

22 VMI/CRP Vendor managed inventory/Continuous Replenishment Dell requires its suppliers to hold consignment inventory at a warehouse near the factory --- Vendor responsible for maintaining 2 weeks supply

23 Consumer Contact Maintain contact with end consumer (source of demand) to reduce reliability on information from channels –Loyalty programs –Coupons –BMW model of ordering Disintermediate distribution –Dell build-to-order –GM build-to-order in Brazil

24 Information Information sharing from industrial customers VMI and CRP Contact with end consumers Disintermediate distributors Faster replenishment

25 Reducing Batch Sizes Reduce the cost of ordering: automated ordering, VMI, etc. Facilitate consolidation: –multi-stop deliveries, pick-ups, milk-runs –Shared inventory and transport (Dell) –3PL’s help

26 Stabilize Prices Eliminate promotions (Everyday low prices) Stabilize Demand –Auto manufacturers produce at a constant rate and drive demand with 0% financing, rebates, etc. –Dell adjusts its offerings and pricing to reflect product availability

27 Eliminate Gaming Allocate based on historical sales rather than orders Shorten manufacturing lead time Limit cancellations

28 Follow-up How well have these cures worked? Enormous investment of energy and money into these treatments The Bullwhip is alive and well Two “cases”

29 Dell Hard drives Relies on several sources –Competition: who gets what share –Contingency: if one has a problem –Cultivation: don’t want just 1 disk drive maker Contracts for share –X% of volume to A, Y% to B, etc. Implementation

30 Implementation Assume a 5 day production schedule 20% to A: one day a week 40% to B: two days a week 40% to C: two days a week Mondays to A Tuesdays & Wednesdays to B Thursdays & Fridays to C Comments?

31 The Auto Industry Increasingly BTO –Consumer contact –Short replenishment cycles –Small batch sizes Increasingly Lean –As little as 2 hours inventory on site –Sequencing: Send supplier locked production schedule. Supplier sends parts in that order –Frequent small deliveries (sometimes every 4 hrs) –Coordinated supply with Milk runs, etc.

32 Auto Industry Keep production level –Target daily production, e.g., 1,000/day –Promotions, rebates, low financing to drive

33 Consequences BTO and shortened order-to-delivery means smaller bucket of orders in hand to sequence with: Before After Best Schedule: 3R, 3B, 3G, 3Y

34 More Variable Usage Sequence under old method Sequence under BTO

35 Lean Prevents Pooling With releases every day or even several times per day, variability is transmitted to suppliers Study of one OEM’s in-bound supply showed up to 270% variation in day-to-day volumes ordered X today, 3X tomorrow, 1/3X next day…

36 Consequences Supplier Capacity Supplier Inventory Transportation

37 Next Inventory model designed to temper the Bull Whip Effect in lean/BTO environments