The Bullwhip Effect In Supply Chain

Bullwhip effect happens due to the failure of information sharing, lead-time, batch ordering and predictive information which is inconsistent with actual need, thus, upstream enterprises cannot receive correct signals of demand, leading to increasing inventory cost and the cost of marketing. Because of this, firms can either lead to stockouts or excessive inventory. According to Lee, Padmanabhan, and Whang (2004), this whiplash effect affecting vertical and horizontal integration as well as strategic outsourcing can be mitigated by the following activities: allowing the manufacturer to determine the demand data at the retailer outlet with the use of electronic data interchange systems between retailers and manufacturers that can facilitate quick and easy transmission of demand data so that the manufacturer can predict or forecast how much they should produce; shortening the lead time; consenting a more frequent replenishment of variety of goods in small batches, which in turn leads to a less distortion of demand information and more efficient delivery or production schedules; a well-coordinated delivery schedules; permitting third-party logistics providers to leverage lower delivery cost; restricting buyer’s flexibility through free cancellations and returns; in addition to, limiting price variations brought about by discounts, sales, and promotions.

Likewise, to protect the company from this Forrester effect, an appropriate type of capacity planning should be in place to meet the demands of its customers and avoid the bottleneck on its operations. In this case, the capacity that matches the demand would be suitable, having an ample amount of supplies according to the needs. This type of capacity planning is usually accomplished by flexibility in either from labor or facilities to be able to meet the demand upon the requirement which relies heavily on forecasting and accurate information as investment decisions are made in line with the forecast. Because of this planning, it eliminates an increased number of stocks and inventories as well as other expenses. In the case of Philips Electronics in 2005, the company faced several issues pertaining to its supply chain being an international company. Issues on independent processes caused long information latency that encouraged all parties to safeguard against uncertainty by creating stocks that lead to running obsolescence risks, making their deliveries to and from Philips very unreliable. Upon assessment, four key requirements to allay this issue were found: first, is to intensify collaboration with partners across their supply chain; second, is to share key supply chain information; third, is to synchronize decisions on capacities and material flows under high volatility; and fourth, is to decide on supply chain questions very quickly.

A collaborative process (CP) and an innovative planning-support software that greatly helped Philips to improve customer service, increase sales and margins, and reduce obsolescence and inventories. This CP process and software enable to them to quickly synthesize its information and find solutions across its network allowing them to fulfill the needs of its segment without the need to create unnecessary stocks helping them save a huge amount of money. This also helped them to forecast the appropriate capacity they need to meet the expectations of their consumers. Moreover, it also helped them resolve issues in guaranteeing their customers in delivering its goods in quantity and delivery times.