Bullwhip Effect Supply Chain Management

ot long ago, logistics executives at Procter & NCamble (P&C) examined the order pat- terns for one of their best-selling products. Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' orders, the execu- tives were surprised by the degree of variability. When they looked at P&C's orders of materials to their sup- pliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the de- mand order variabilities in the supply chain were am- plified as they moved up the supply chain. P&G called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the

"whipsaw" effect.)

When Hewlett-Packard (HP) executives examined

the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations

over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders fTom the printer division to the company's integrated circuit division had even greater flucttiations.

What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distri- bution channel stage, HP had to rely on the sales or- ders from the resellers to make product forecasts, plan capacity, control inventory, and schedtile produaion. Big variations in demand were a major problem for HP's man^ement. The common symptoms of such variations could be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor cus- tomer service due to unavailable products or long back- logs, uncertain producdon planning (i.e., excessive revi- sions), and high...