The bullwhip effect is not only one of the best-known supply chain phenomena, but also one of the most damaging. By increasing the upstream variation and uncertainty, it pushes chain partners ever-deeper into the so-called planning mismatch, resulting in unreliability, inflexibility and inefficiency. The long-held belief has been that organizations just have to learn to live with the bullwhip effect and its consequences – but it now seems the bullwhip can be tamed after all. Demand Driven Supply Chain Management points the way.
Just as the crack of a whip is affected by the motion of the hand and the length of the whip, the bullwhip effect in a supply chain is caused by demand uncertainty and lead time. This can be illustrated by a simple example: if your historical average demand is 100 units per week and your lead time is five weeks, your pipeline is soon full at around 600 units – 500 units to meet the average demand (lead time stock) and around 100 units in case demand turns out to be a little higher (safety stock). Now imagine that your sales level suddenly increases to 150 units a week. After asking around in the market, you discover that this could be a sustained rise.
So you now have a shortage of 250 units (5×150 – 5×100) in your lead time stock. To avoid similar surprises in the future, you decide to also increase your safety stock from 100 units to 200. As a result, you place an order with your supplier for 500 units – yet your supplier was expecting an order for 100 units. Hence, a potentially sustained sales increase of 50 units leads to a (hopefully one-off) volume increase of 400 units. But just imagine what happens if your supplier assumes your increase to be a sustained one, and so does your supplier’s supplier, and so on.
The above example demonstrates that the bullwhip effect is not caused by irrational behaviour, as many people wrongly believe, but is actually the logical consequence of demand uncertainty and lead time. In other words, demand uncertainty and lead time are the two basic ingredients in the recipe for the bullwhip effect.
But now that we know what causes the bullwhip effect, we also know how to tackle it: by reducing demand uncertainty and lead time. Although this might sound easy in theory, however, it is much more problematic in practice. Attempts to reduce uncertainty through forecasting rarely – if ever – achieve the desired result; despite considerable expense, effort and frustration, the bullwhip effect often stubbornly persists. The truth is that it is difficult to forecast with accuracy, especially when the future is involved.
Generally speaking, predictability declines as you look further into the future – think of the weather forecast, for example. Conversely, if we can reduce the lead time it becomes a lot easier to make accurate forecasts – and we might not even need forecasts at all if we can become fast enough. So the key to taming the bullwhip effect is not better forecasting accuracy, but shorter lead times. Funnily enough, people have been talking about the importance of speed for several years, but I’m aware of very few initiatives aimed at substantially reducing lead time. I’ve seen hardly any companies or organizations working to significantly improve their speed in order to lessen their dependence on chronically unreliable forecasts and hence tame the bullwhip effect – or at least I hadn’t, until recently.
I’ve noticed that a growing number of companies and organizations are no longer willing to accept long lead times and chronically unreliable forecasts. Thanks to eliminating unnecessary variation and uncertainty, and by advancing riskless decisions, they are improving their agility with faster response and shorter lead times. Whether implicitly or explicitly, these companies and organizations have opted for Demand Driven Supply Chain Management (DDSCM). In addition to helping them to tame the bullwhip effect, DDSCM principles also and above all enable them to escape the planning mismatch. As a result, they can provide much better service to their end customers with much less waste.
If your supply chain is also struggling to cope with long lead times and unreliable forecasts, I would advise you to take a closer look at the principles of DDSCM. I promise you that you won’t regret it.
You can try taming the bullwhip effect for yourself; please click here to play our beer game. Take part for a chance to win a free DDSCM masterclass.
Keen to know more? Contact Alex Tjalsma via a.tjalsma@involvation.com