The bullwhip effect has long been known and repeated over and over again irrespective of the latest software and tenure in supply chain management. It may be a generational learning thing. As demand picks up, even not by a lot, customer satisfaction as measured by on time in full (OTIF) can fall to zero with total stockouts! Then with an inability to supply customers and reduced revenue the business sees an increasing backlog and considers borrowing to replenish inventories. If there are competitors and/or substitutions for your product the backlog is likely illusionary and financial trouble ensues. Don’t think this can happen? Bankruptcy courts are full of rhyming cases.
Let’s examine a graphical representation of performance from a recent SBTI supply chain training simulation. It’s a simple simulation but very effective in demonstrating the bullwhip. The entities are:
The participants are instructed to make decisions that would maximize the profits for their entity. The first thing we typically notice is that it takes a few periods for the change in demand to trickle through the supply chain. Each entity is selling off inventory to theoretically maximize profits until they feel the change in demand is sustainable. As this happens we see that both the change in demand and a drop in inventory levels takes the longest time to be realized at the primary level in the supply chain. This is totally logical and we suspect that the primary level in the supply chain may not even be aware of a change in demand at the ultimate consumer level.
Then, something really strange happens. The first place to stock out is the primary supplier! The stock out situation then proceeds sequentially through the supply chain over time until the ultimate customer can’t be serviced at all.
Now with minimal invenotories and increasing backlog coupled with passed down perceptions of ultimate demand the stage is set for the bullwhip. Inventories along the supply chain swell as it is bought and manufactured which could decimate a balance sheet.
Notice the change in demand trickle through the entities in the first column. The second column shows the depletions of inventories over time. The third column shows the stock out with the raw material supplier being the first to fail its customer, and the final column, the perceived backlogs. The bullwhip occurs within each measurement for each entity. Note that the end customer true demand only changed once!
Performance graphs of a typical initial round of the supply chain simulation.
The overall supply chain inventory bullwhip.
Naturally our facilitation process of basic supply chain tools and techniquies for the participants rectifies the situation, even when we introduce more volatile demand.
The lessons learned from the simulation are transferable to internal and external supply chains and are important for people who are not intimately involved in day to day supply chain management such as operational and financial decision makers.
If you would like to request a listening session for your business, you can contact me, Bob Jeske, by email at bjeske@sbtimail.com.