5Bullwhip Effect and Risk Pooling2009

5Bullwhip Effect and Risk Pooling2009 - Bullwip Effect In...

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Bullwip Effect In recent years many suppliers and retailers have observed that while customer demand for specific products does not vary much, inventory and backorder levels fluctuate considerably across the supply chain Ex:Procter and Gambles (Pampers disposal diapers) Retail sales of the product were fairly uniform No particular day or month in which demand is significantly higher or lower than any other However, executives noticed that distributors’ orders placed to the factory fluctuated much more than retail sales This increase in variability as we travel up in the supply chain is referred as bullwhip effect Prof. Dr. Fusun Ulengin, 2009 2
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Bullwhip Effect Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers Distorts demand information within the supply chain, where different stages have very different estimates of what demand looks like Results in a loss of supply chain coordination Examples: Proctor & Gamble (Pampers); HP (printers); Barilla (pasta) Prof. Dr. Fusun Ulengin, 2009 3
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Bullwhip Effect The bullwhip effect is present in a supply chain if the variability od demand at one level of the supply chain is greater than the variability of demand at the next lower level in the supply chain, where the variability is measured with the coefficient of variation Coefficient of variation = cv = m/s = mean/(std dev) = size of uncertainty relative to demand For example, if the coefficient of variation in the supplier’s demand (which is the sum of the retailer’s orders) is greater than the coefficient of variation of the retailers’ total demand then the bullwhip effect is present in our supply chain Prof. Dr. Fusun Ulengin, 2009 4
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Impact of Order up to level on the Bullwhip Effect A key characteristic of an order-up-to policy is that the amount ordered in any period equals the amount demanded in the previous period. As a result, if all of the retailers use order-up-to policies with daily review, then their daily order will match their daily demands. In other words, there will be no bullwhip effect If all retailers use an order-up-to policy (with a constant order up to level S), then the standard deviation of the retailer’s orders in one period equals the standard deviation of consumer demand in one period; that is , there is no bullwhip effect Prof. Dr. Fusun Ulengin, 2009 5
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Impact of Order up to level on the Bullwhip Effect The bullwhip effect does not occur when every member at the same level of the supply chain implements a “demand - pull” inventory policy each period, that is, their orders each period exactly match their demand Unfortunately, firms do not always adopt such “distortion free” inventory management In fact, there may have good reasons to deviate from such behavior Prof. Dr. Fusun Ulengin, 2009 6
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This note was uploaded on 11/10/2009 for the course LOGISTICS 20091 taught by Professor Fusunulengin during the Spring '09 term at Istanbul Technical University.

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5Bullwhip Effect and Risk Pooling2009 - Bullwip Effect In...

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