Bullwhip Effect

Introduction

  A SUPPLY CHAIN refers to a network of suppliers, manufacturing, assembly, distribution, and logistics facilities that perform the functions of procuring of materials, transformation of these materials into intermediate and finished products, and the distribution of these products to customers. Supply chains arise in both manufacturing and service organizations. It is a systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the customers.

Bullwhip Effect, also referred as the Whiplash Effect, is a phenomenon noticed in the forecast driven distribution channel. We find the reference of the said effect in the J Forrester’s Industrial Dynamics (1961). The effect refers to the fact that the variation in demand increases as we move further upward in the chain from customer to the manufacturer. This effect leads to inefficiencies in supply chains, since it increases the cost for logistics and lowers its competitive ability. A variation in demand causes variation in the usage of capacities. The varying demand leads to variation in inventory levels at each level of the supply chain. As a result the safety stock that is required to maintain apt service level increases with the variation of demand.

There is always an unstable demand from the customers, which blurs the estimation of the businesses. If we segregate two aspects as demand forecast and demand fulfillment then demand forecast deals with customer contracts/sales forecast, MRP/Production, purchase request, purchase order, receiving, supplier's invoice and payments while demand fulfillment deals with the sales order, order confirmation, picking and packing, shipping, delivery management, customer invoice and receipts.

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The above picture clearly depicts the role of information in the supply chain management.

Suppose if there is an original equipment...