Bullwhip Effect
The Bullwhip Effect in Supply Chains
Hau L. Lee • V. Padmanabhan • Seungjin Whang
Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, mis^ided capacity plans, ineffective transportation, and missed production schedides. How do exaggerated order swings occur? What can companies do to mitigate them? ot long ago, logistics executives at Procter & Camble (P&C) examined the order patterns for one of their best-selling products. Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' orders, the executives were surprised by the degree of variability. When they looked at P&C's orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the "whipsaw" effect.) When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations
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over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders fTom the printer division to the company's integrated circuit division had even greater flucttiations. What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distribution channel stage, HP had to rely on the sales orders from the resellers to make
Hau L. Lee • V. Padmanabhan • Seungjin Whang
Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, mis^ided capacity plans, ineffective transportation, and missed production schedides. How do exaggerated order swings occur? What can companies do to mitigate them? ot long ago, logistics executives at Procter & Camble (P&C) examined the order patterns for one of their best-selling products. Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' orders, the executives were surprised by the degree of variability. When they looked at P&C's orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the "whipsaw" effect.) When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations
N
over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders fTom the printer division to the company's integrated circuit division had even greater flucttiations. What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distribution channel stage, HP had to rely on the sales orders from the resellers to make