The Bullwhip Effect

1. The Bullwhip Effect John H. Vande Vate Fall, 2002 1

2. Diagnosis & Treatment • What is it? • Symptoms? • Causes? • Treatments • Follow-up 2

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. 3

4. 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 4

5. Illustration Consumer Sales at Retailer 1000 900 800 700 600 Consumer demand 500 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Retailer's Orders to Distributor 1000 900 800 700 600 Retailer Order 500 400 300 200 100 0 5 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

6. Illustration Retailer's Orders to Distributor 1000 900 800 700 600 Retailer Order 500 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Distributor's Orders to P&G 1000 900 800 700 600 Distributor Order 500 400 300 200 100 0 6 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

7. Illustration Distributor’s Orders to P&G 1000 900 800 700 600 Distributor Order 500 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 P&G's Orders with 3M 1000 900 800 700 600 500 P&G Order 400 300 200 100 7 0 1 4 7 10 19 40 13 16 22 25 28 31 34 37

8. Illustration Consumer Sales at Retailer 1000 900 800 700 600 Consumer demand 500 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 P&G's Orders with 3M 1000 900 800 700 600 500 P&G Order 400 300 200 100 8 0 1 4 7 10 19 40 13 16 22 25 28 31 34 37

9. 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? 9

10. The Effects • Manufacturing Cost • Capital Investment • Operating costs • Inventories • Anticipatory • Cycle • Pipeline • Safety stock • Infrastructure • Lead Time • New product releases • Order response time • Shipping & Receiving Cost • Order processing 10

11. The Effects • Customer Service Level • Product availability • Transport Cost • Economies of scale • Variability 11

12. The Causes • Order batching • Pricing Strategies • Uncertain Supply • Forecasting 12

13. Causes • Order Batching • Reduce processing costs • Exploit economies of scale in transport • Ordering cycles and planning cycles 13

14. Causes • Pricing Strategies • Promotions • Reduce margin • Advance demand • Diversions • Sales Targets & Revenue Targets • Reduce price at end of quarter to meet plans 14

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

16. Forecasting More variability Poorer forecasts Less reliable supply 16

17. Treatments • Information Sharing • Wal-Mart provides POS info to P&G • Channel Alignment • Coordination of promotions, transport, etc. • Operational Efficiency • Reducing cost and leadtime 17

18. 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 18

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 19

20. BMW & Daimler • Fiber Optic controls • Bosch: integration • Infineon: switches • Several other suppliers • Shared visibility of components and alerts of shortages 20

21. 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 21

22. 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 22

23. Information • Information sharing from industrial customers • VMI and CRP • Contact with end consumers • Disintermediate distributors • Faster replenishment 23

24. 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 24

25. 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 25

26. Eliminate Gaming • Allocate based on historical sales rather than orders • Intel case • Promote orders far in advance • Limit cancellations 26

27. 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” 27

28. 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 28

29. 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? 29

30. 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. 30

31. Auto Industry • Keep production level • Target daily production, e.g., 1,000/day • Promotions, rebates, low financing to drive 31

32. Consequences • BTO and shorted order-to-delivery means smaller bucket of orders in hand to sequence with: Before After Best Schedule: 3R, 3B, 3G, 3Y 32

33. More Variable Usage • Sequence under old method • Sequence under BTO 33

34. 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… 34

35. Consequences • Supplier Capacity • Supplier Inventory • Transportation 35

36. Confounding Factor • Product Diversification • GM plans to launch a new vehicle every 23 days. • BMW makes 1017 versions of the 7 series sedan • … 36

37. Next • Inventory model to temper the Bull Whip Effect in lean/BTO environments • November 19th Visitor from • Peach State Integrated Technologies • What they are doing with location models • Yuri and his team are working on using those models to build low variance milk runs for Ford based on location models 37