Impact of IT

Main factors that contribute to the "bullwhip effect"

"In modern supply chains, information replaces inventory"

- While customer demand for specific products does not vary much, inventory levels fluctuate considerably across the supply chain.

- This fluctuation increases as we travel up in the supply chain. Distributors' orders placed to the factory fluctuated much more than retail sales.

- This increase in variability as we travel up the supply chain is referred to as the "bullwhip effect"

- If the whole seller does not have access to the customer's demand data, he must use orders placed by the retailer to perform his forecasting. So the wholesaler is forced to carry MORE safety stock than the retailer in order to meet the same service level as the retailer. The same thing applies to the distributor and the manufacturer.

Main factors that contribute to the bullwhip effect:

Demand Forecasting: traditional inventory management techniques practiced at each level in the supply chain lead to the bullwhip effect. The method used is called the "Min-Max inventory level" which means that whenever the inventory position is less than a given number called the "re- order point", the facility raises its inventory level up to a given level called the safety stock.

Lead time: Lead time is the time it takes to process orders across the supply chain. The longer the lead time the larger the safety stock and reorder level. Larger inventories mean higher costs.

Batch ordering: If the retailer uses batch ordering, as happens when using a min-max inventory policy, then the wholesaler will observe a larger order, followed by periods of no orders. So the wholesaler sees a distorted and variable demand pattern. Absence of information leads to batch ordering

Price fluctuations: If prices fluctuate, retailers will attempt to stock up when prices are lower. Offering promotions and discounts will lead to price fluctuations

Inflated orders: Inflated orders placed by retailers during shortage periods tend to magnify the bullwhip effect. This happens when retailers and distributors suspect that a product will be in short supply. Lack of information lead to inflated orders.

How to deal with the "bullwhip effect"?

1- Reducing uncertainty:

The main factor for reducing uncertainty is to centralize demand information within a supply chain. That is to provide each stage of the supply chain with complete information on the actual customer demand.

2- Reducing variability:

If the variability of demand seen by the retailer is reduced, then the variability seen by the wholesaler will also be reduced.

Variability or shifts in demand can also be reduced by eliminating price promotions. The adoption of everyday low pricing (which is Wal-Mart's) strategy is an example of this.

3- Lead time reduction:

Lead time has two components: order lead time, which is the time it takes to produce and ship the item. The other part is information lead time or processing lead time, which is the time it takes to process the order. Information lead time can be reduced through the use of Electronic Data Interchange (EDI)

4- Strategic partnership:

The bullwhip effect can be eliminated by engaging in strategic partnerships. One example of this is the implementation of Vendor Management Inventory (VMI). VMI takes place when the manufacturer manages the inventory of the product at the retail outlet and as a result determines for itself how much inventory to keep. Other important strategic partnerships are discussed under key issues (3PLs and supplier retailer alliances)