Bullwhip Effect and Complete Fulfillment

Complete Fulfillment-

The Bullwhip Phenomenon can Effect complete fulfillment:

The bullwhip effect is phenomenon observed in supply chains whereby unpredictable elements introduced by human behavior in the lower part of the chain become more pronounced the higher up the chain they move which effects complete fulfillment. The effect is important because it is frequently the cause of serious inefficiencies that result from ordering too much or too little of a given product as links in the chain overreact to changes further downstream.  It occurs when consumer behavior varies, even slightly, from predictions. The result of these variances is that variances occur throughout the supply chain, becoming larger and larger as one moves up the supply chain. It is called the bullwhip effect because it resembles the way in which a small flick of a bullwhip causes a larger and larger motion toward the end of the whip. The bullwhip effect is widely regarded as a negative occurrence and the sign of a poorly structured supply chain. Familiarizing yourself with the effects of the bullwhip effect can help you to understand what happened and why.

PROBLEMS IT CAUSES FOR COMPLETE FULFILLMENT

The bullwhip effect is created by several factors. One is the fact that managers perceive demand differently at different points in the chain and order based on those perceptions. Other difficulties that play a role include ordering processes, price instability due to promotions and other factors, and problems related to intentional exaggeration of demand by customers due to shortages and the resulting cancellations when supply normalizes and complete fulfillment can become “complete” again.

An example of Bullwhip effecting complete fulfillment for Beer Distribution

One example of the bullwhip effect is the beer distribution game, a hypothetical model set up for four human players that tests the manner in which participants in a supply chain behave. The 2002 Supply Chain World Europe Conference and Exposition found that when the computer substituted for all the roles, it achieved a result of 228 Euro of costs. However, the average for human players in the simulation ran 500 to 600 Euro. In one case, the costs exceeded 1,500 Euro.

the bullwhip effect in real life

The bullwhip effect is seen in real life as well. It originally takes its name from executives at Proctor & Gamble who began to see disturbing and often inexplicable variations in supply and ordering figures on diapers, despite a relatively stable demand from consumers. Oddly, the company even saw that variability increased further when examining its own orders to its suppliers.

Hewlett Packard

Hewlett Packard observed a similar effect to the one Proctor & Gamble found. Upon investigating sales of a given HP printer by a retailer, the company found that orders from the merchant exhibited far bigger movements that what was seen by changes in actual sales of the item. Further, the same could be said of orders from HP’s printer unit to another division of the company supplying it with materials.

Solutions

Better cooperation and communication are seen as key elements in preventing—or at least mitigating–the consequences of the bullwhip effect. Reductions in lead time also help, as do a variety of new shipping, ordering and pricing methodologies that can introduce a greater degree of stability and prevent small fluctuations in demand from breeding excessive changes on the suppliers end of the chain.

Excessive Inventory

As forecast inaccuracies become amplified up the supply chain, it can result in a highly inaccurate demand forecast being made by the producer. As a result, the producer may end up producing more of the product than the market is actually willing to accept. This means that the producer will have produced too many units. This can be disastrous in some cases, as it may not be possible to offload the products for a profit. The products will likely be sold at a deep discount to secondary markets (for example, companies that purchase wholesale overstocks). In a worst-case scenario, it could result in having an excess of products that must simply be destroyed.

Inefficient Production

The bullwhip effect can lead to inefficient production. This happens when the producer does not have accurate demand data and cannot accurately produce the required amount of product ahead of time and cannot schedule production in an efficient way. This can lead to a reactive production, where the producer does not produce enough and then must rush to produce more. This is extremely inefficient because it means that rather than operating at a constant rate, the producer is alternating between times where it is producing nothing and times where it is at maximum capacity.

Increases of Cost

The most important effect that the bullwhip effect has is that it increases costs (sometimes dramatically). This happens for a variety of reasons. When there is an inefficient production, it means that stock-outs will occur (that is to say, that customers will not be able to get their products)  This will dramatically effect complete fulfillment. Stock-outs result in lost revenues from sales that are missed. They can cause costly losses to a company’s reputation and they can result in the competition gaining your customers. Also, inefficient production can be much more costly because it requires hiring and training extra staff, paying overtime wages and may require sourcing materials from the quickest (rather than cheapest) supplier.

complete fulfillment