Question

What is bull whip effect? Discuss effective ways for reducting the lead times within a supply chain.

Answer 1

Bullwhip effect is the occurrence of variance of the orders sent to the manufacturer and supplier to that sent to the customers. This large variance is identified in supply chain.

There are many factors that contribute to this effect. They are:-

• Supply chain not organized properly
• Lack of communication
• Customer returning the products often due to free return policy.
• Discounts and promotions may increase the demand for short period of time.
• Relying more on past demand information.

Bullwhip effect impacts the financial performance of an organization. It may result in inefficient production or excess production in order to fulfill the demand. It result in lengthening the lead time and results in inefficient production because demand of the customers’ needs to fulfilled by each producer. The situation of stock-out leads to poor customer service and lost sales. There is also a low utilization of distribution channel. It also damage the reputation of the organization. The cost incurred by the organization due to bullwhip effect include contractual penalties for coping up with the consequences of failed fulfillment. In order to meet the demand variability, the organization is required to hire or dismiss employees that adds training cost, hiring cost and lay-offs cost.

These are the following measures to overcome bullwhip effect.

• Focusing more on customer and designing the network accordingly.
• Based on the demand the inventory should be optimized.
• Focusing on sharing information and extracting information from partners.
• Product complexity should be managed appropriately.
• Maintaining the price of product stable.