The Bullwhip Effect John H Vande Vate Spring

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

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

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 3

The Point Managing variability costs money The Bullwhip effect is self-inflicted variability. What can we do to mitigate it? 4 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 5 5

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

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

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

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

The Effects • • • Manufacturing Inventories Lead Time Transportation Retail 11 11

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 12 12

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

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 14 14

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

Forecasting More variability Poorer forecasts Less reliable supply 16 16

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” 17 17

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 18 18

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

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

BMW & Daimler • • • Fiber Optic controls Bosch: integration Infineon: switches Several other suppliers Shared visibility of components and alerts of shortages 21 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 22 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 23 23

Information • • • Information sharing from industrial customers VMI and CRP Contact with end consumers Disintermediate distributors Faster replenishment 24 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) – 3 PL’s help 25 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 26 26

Eliminate Gaming • Allocate based on historical sales rather than orders • Shorten manufacturing lead time • Limit cancellations 27 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” 28 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 29 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? 30 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. 31 31

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

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

More Variable Usage • Sequence under old method • Sequence under BTO 34 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, 3 X tomorrow, 1/3 X next day… 35 35

Consequences • Supplier Capacity • Supplier Inventory • Transportation 36 36

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