During this lecture, it is introduced that "sharing of information among members of the supply chain also helps to reduce the bullwhip effect". What is bullwhip effect? What are the problems it can cause? It is a phenomenon in forecast-driven distribution channels. Customer demand is always changing, therefore businesses must forecast demand in order to properly position inventory and other resources. Forecasts are based on statistics and they are rarely perfectly accurate. As forecasts are not accurate, companies often carry an inventory buffer called "safety stock". Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and greater need for safety stock.
One example is shown in the figure above (Figure 1: Bullwhip effect). In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified the farther you get from the end-consumer.
This unplanned for demand results in a disturbance in supply, which may be a minor blip for any one customer, oscillates back through the supply chain often resulting in huge and costly disturbances at the supplier end of the chain. Often, these demand fluctuation will launch a mad scramble in manufacturing with the need to acquire more raw materials and reschedule production. Other problems of the bullwhip effect includes excess inventories, quality problems, higher raw material costs, overtime expenses and shipping costs.
Some casues of the bullwhip effect are forecast errors, price fluctuations, product promotions, delay times for information and materials and no communication and coordination up and down the supply chain.
Some solutions to overcome the bullwhip effect are to move from a forecast-dependent system that lacks actual demand visibility to Just In Time (JIT) replenishment or Vendor Managed Inventory (VMI) which can provide data about customer demand. Price fluctuations and product promotions can be prevented by using special purchase contracts to specify ordering at regular intervals to better plan delivery and purchase.
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