The Bullwhip Effect in Supply Chain
The supply chain is a complex group of companies that move goods from raw materials suppliers to finished goods retailers. These companies work together when meeting consumer demand for a product; supply chains allow companies to focus on their specific processes to maintain maximum probability. Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.
The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier. This effect can be observed through most supply chains across several industries; it occurs because the demand for goods is based on demand forecasts from companies, rather than actual consumer demand.
The bullwhip effect is phenomenon observed in supply chains whereby unpredictable elements introduced by human behaviour in the lower part of the chain become more pronounced the higher up the chain they move. 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. 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.
Forecasting Errors
When companies enter new products into the marketplace, they estimate the demand of the good based on current market conditions. Most companies in the supply order more than they can sell, attempting to prevent shortages and lost sales of goods. This "extra" inventory begins to increase or decrease during the normal market fluctuations of supply and demand. When demand increases, the companies closest to the consumer will increase inventory to meet the consumer demand. When the demand falls, the front-end of the supply chain will decrease inventory, amplifying the extra inventory on each company up the supply chain.
Behavioral Causes
One cause of the bullwhip effect is normally driven by management behavior at the front-end companies of the supply chain. Retail management never wants to have a stock-out on a popular good, leading to higher orders from the wholesalers. This eventually squeezes each company in the supply chain and creates decreases in inventory.
Another major behavioral effect is the ordering of too much inventory when consumer demand has fallen for an item. Retailers may have raised their inventory levels to avoid a stock-out but are now met with goods that cannot be sold quickly. This creates overstock of inventory for each supply chain company.
Operational Causes
The main operational cause of the bullwhip effect comes from individual demand forecasts from each company in the supply chain. This causes an increase in demand from companies in the supply chain, but not the actual consumers who will purchase the goods. A lack of communication is also prevalent during operational causes; companies may not supply information up the supply chain regarding current market conditions, causing improper levels of inventory.
Corrective Measures
To properly manage the fluctuations in consumer demand, implementing a point-of sale (POS) system with a just-in-time (JIT) inventory system. This allows each company in the supply chain to process information electronically regarding individual goods. Understanding consumer demand can then be evaluated based on the order information from the POS system and allow managers to order more goods if needed.
Example of Companies : 7-Eleven
Toyota just doing assembly work in factories only 20% of total employment, as well as Boeing's only 35% of the total job. The remaining work to create a subsystem, subassemblies and component done by suppliers and sub-contractors. Even the IT functions of both systems and maintenance is done by companies that are experts in the field of IT hardware and software. Toyota (especially in Japanese) earnestly implement supply chain management such as just in time and to encourage all vendors to meet demand from consumers. Thus today we can say that a car and plane is a result of inter-company collaboration.
They should make the process just in-time delivery
The word collaboration among several parties that reflect relationships deeper and more tightly than coordination. Coordination can be done in determining the schedule of arrival, planning and production decisions, targets and delivery schedules, and reduces the occurrence of lack of products (out of stock). In the supply chain management purpose of coordination is the attempt to stretch out the supply chain. Collaboration among several companies aiming to establish product design, product innovation, the creation of new products and inform each other to determine the forecasting (forecasting) and replenishment. The term CPFR (Collaborative, Planning, Forecasting and replenishment) was developed since 1997 by the organization that put the request in the field of logistics. Implementation of CPFR by the two companies resulted in savings in inventory levels and less out of stock at the Point of Sales (POS).
Examples of CPFR are applied by the giant retailer Wal-Mart with 100 suppliers in 2005 by using RFID technology (Radio Frequency Identification). This is assured by Wal-Mart that suppliers need information on demand at the retailer, price, number of stocks in the stores Wal-Mart in the condition as accurately as possible and in real time position. Wal-Mart also need information capacities suppliers, reserve stock suppliers, and order status.
7-Eleven, Inc. is the world’s largest operator, franchisor and licensor of convenience stores. Its company’s name was changed from The Southland Corporation to 7-Eleven, Inc. after approval by shareholders on April 28, 1999. 7-Eleven is also one of the nation's largest independent gasoline retailers.
Founded in 1927 in Dallas, Texas, 7-Eleven pioneered the convenience store concept during its first years of operation as an ice company when its retail outlets began selling milk, bread and eggs as a convenience to customers.
The name 7-Eleven originated in 1946 when the stores were open from 7 a.m. to 11 p.m. Today, offering customers 24-hour convenience, seven days a week is the cornerstone of 7-Eleven's business.
7-Eleven focuses on meeting the needs of convenience oriented customers by providing a broad selection of fresh, high quality products and services at everyday fair prices, speedy transactions and a clean, safe and friendly shopping environment. Each store's selection of about 2,500 different products and services is tailored to meet the needs and preferences of local customers. Stores typically vary in size from 2,400 to 3,000 square feet and are most often located on corners for great visibility and easy access.
Well known for the Big Gulp® fountain soft drink, Big Bite® grill items, the Slurpee® beverage and its fresh-brewed coffee, 7-Eleven’s food service offerings bring consumers a proprietary line of prepared-fresh-daily and daily delivered deli sandwiches, wraps, breakfast sandwiches and a wide assortment fruits, salads and baked goods.
7-Eleven offers consumers a number of convenient services designed to meet the specific needs of individual neighborhoods, including automated money orders, automatic teller machines, phone cards and, where available, lottery tickets.
7-Eleven, Inc. is the world’s largest convenience retail chain. Based in Dallas, Texas, the company operates, franchises and licenses close to 7,100 stores in the U.S. and Canada. Of the 6,000 stores the company operates and franchises in the United States, more than 4,700 are franchised. 7-Eleven master franchisees, licensees and affiliates operate more than 32,000 7-Eleven and other convenience stores in countries including Japan, Taiwan, Thailand, South Korea, China, Hong Kong, Malaysia, Mexico, Singapore, Australia, Philippines, Indonesia, Norway, Sweden and Denmark.
7-eleven in Japan has been doing collaborations with suppliers of bread, so the 10 000 existing stores. Around Japan connected as a result of the server computer to connect with PPIC (Production, Planning and Inventory Control) suppliers. Bread can be made in accordance with market demand so that forecasting become more accurate.
Finally, whoever manages the company's organization in particular need to encourage the creation of a collaboration (derived from the Latin word "co" and "labor", which means to work together or to work together) among the companies that really need each other because they have one purpose, namely to meet the needs and consumer satisfaction . Collaboration with the support of the sharing of information, systems planning and development of new products together, as well as understanding the strengths and weaknesses of each company, will be able to cope with the bullwhip effect is the increased variability and uncertainty of the downstream (retailers) to upstream (supplier of raw materials) . All of the flow of raw materials, from downstream to upstream so it can be controlled (oversee) so be predicted well, except for natural disasters.
