Philips Electronics Synchronizes Its Supply Chainto End the Bullwhip Effect

What’s covered?

• Bullwhip effect definition• Results of the bullwhip effect• Causes of the bullwhip effect• Preventive Actions• Case Study• Toyota’s logistic principles & Other

applications• Conclusion

Bullwhip Effect Definition

• The bullwhip effect is the uncertainty caused from distorted information flowing up and down the supply chain.

• It can be detected when orders sent to the manufacturer and supplier create a large variance than the sales to end customer.

Example

• Actual Demand from a Customer = 8 Units• To avoid the run out of floor stock, the retailer

will keep 2 units extra.The order given to Supplier = 10 Units

• To have a cost advantage and to have enough stocks for timely shipment of goods, the supplier will purchase in bulk.The order given to Manufacturer = 20 Units

• After getting the bulk orders, the manufacturer will ensure Economy of Scale in production to meet demand.No. of units manufactured = 40 Units

Example

Now 40 units have been produced for a demand of only 8 units

Actions to be taken:• The retailer will have to

increase demand by dropping prices or finding more customers by marketing and advertising.

Feast or Famine Diagram

At one point of time we have excessive inventories and at another point of time we have a stock out and thereby we are unable to meet the demand.

Demand ~ Supply Curve of a Product

Who is affected?

• Nearly all industries are affected!

• Firms that experience large variations in demand are at risk.

• Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.

Evolution

• The phenomenon was first found at Proctor & Gamble (P&G).

• This effect was named as the BULLWHIP EFFECT by the P&G executives as it resembled a Bull-Whip.

• The Bull Whip effect is also know as “Whip-Lash” or the “Whip-Saw” Effect.

Results of the bullwhip effect

• Excess inventories• Problems with quality• Increased raw material costs• Overtime expenses• Increased shipping costs

Results of the bullwhip effect - continued.

• Lost customer service• Lengthened lead time• Lost sales• Unnecessary adjusted capacity

Causes of the bullwhip effect

• Un-forecasted sales promotions• Sales incentives• Lack of customer confidence• Customers turning back sales

orders• Freight incentives

Solving the Bullwhip dilemma

• Improve communication along the supply chain. Retailers notifying firms upstream of

sales promotions will help clarify demand signals from consumers

Improved information will improve demand forecasts upstream in the supply chain.

Solving the Bullwhip dilemma - continued

• Improve sources of forecast dataFirms can use data from Point of Sale

computer systems to derive data from forecasting

Firms along the supply chain can use EDI systems to retrieve data on items that are legitimately being purchased by customers

Solving the Bullwhip dilemma - continued

• Work with firms upstream and downstream in the supply chain Create smaller order increments to

decrease time between orders. Order processing will become closer to real-time.

Work to develop consistent pricing of products to avoid demand fluctuations from the sale of inexpensive products.

The Project

• Project team (Philips Semiconductors (PS) and Philips Optical Storage)

• CQM consultants, • TUe operations research experts.

DVD drive Manufacturing process

Multi echelon optimization model

The Collaborative-Planning-Support Tool

The CP process comprises four stages:

• Stage 1. Gather data. • Stage 2. Decide. • Stage 3. Escalate.• Stage 4. Deploy.

Business Impact

Logistics principles proposed by Toyota to mitigate Bullwhip effect

1. Synchronisation : No overproduction or waiting time Quick response to changing

requirements

2. Takt : Each operation performs equally

Logistics principles proposed by Toyota to mitigate Bullwhip effect

3. Flow:Reduced lead timesCuts inventory lot sizeHigh variety flexibility

4. Pull:Decentralized material controlNo information distortion

Logistics principles proposed by Toyota to mitigate Bullwhip effect

5. Standardisation: Improved process qualityConsistency in cycle time

6. Integration:Reduced uncertainty of material flowQuick response due to undelayed and

undistorted data

Other Ways

Mitigating Bullwhip effect• Aligning of Goals and Incentives.• Improving Information visibility and accuracy.• Improving Operational performance.• Designing pricing strategies to stabilize orders.• Building strategic partnerships and trust.

2 Methods to reduce Bullwhip effect• Continuous replenishment and Vendor Managed

inventories• Collaborative Planning, Forecasting and Replenishment

Other Ways

Examples:Vendor Managed Inventory to reduce Bull

whip effect

• Kmart implemented Vendor managed inventory with 50 of its suppliers

Benefits: Inventory Turns on seasonal items increase from 3 to 10 and on non seasonal items from 12 to 20.

• Fred Meyers reduced inventories by 40%, and increase the fill rate by 98%

Other Ways

Other ways of mitigating Bullwhip effect

Collaborative Planning , Forecasting and Replenishment (CPFR) : has been implemented by more than 300 companies.

Specific Example:Henkel, German detergent

manufacturer, and Eroski, a Spanish food retailer

Benefit: Forecasting error reduced from 70% to less than 20%

Examples

Example : Hyper city Mall in India adopted CFPR practice.

Benefits: Decrease of 2% in stock levelsIncreased RevenueElimination of Expired stockReduction in write offs

Summary

Causes of the bullwhip effect may include:

• poor forecasting of sales• incorrect information • Sales incentives, sales promotions • lack of customer confidence.

Summary- Continued..

Results of the bullwhip effect can include:

• excess inventories• problems with quality• increased costs, overtime expenditures,

lost customer service, lost sales and more.

Summary - Continued

Solutions to the bullwhip effect include:

• improved information flow• stable pricing, small order • increments, focused demand on

EDI or POS systems and removal of sales incentives.

References• Cachon, G. P., Randall, T. and Schmidt, G. M., 2006. In Search of the

Bullwhip Effect. Working Paper, Wharton School of Business, University of Pennsylvania.

• Chatfield, D. C., Kim, J. G., Harrison, T. P. and Hayya, J. C., 2004. The Bullwhip Effect-Impact of Stochastic Lead Time, Information Quality, and Information Sharing: A Simulation Study, Production and Operations Management, 13(4), 340-353.

• Chen, F., Drezner, Z., Ryan, J. K. and Simchi-Levi, D., 2000. Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times, and Information, Management Science, 46(3), 436-443.

• Croson, R. and Donohue, K., 2003. Impact of Pos Data on Supply Chain Management: An Experimental Study, Production and Operations Management, 12(1), 1-11.

• Croson, R. and Donohue, K., 2006. Behavioral Causes of the Bullwhip Effect and the Observed Value of Inventory Information, Management Science, 52(3), 323-336.