The Bullwhip Effect in Supply Chains

1 The Bullwhip Effect in Supply Chains SPRING 1997 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, misguided capacity plans, ineffective transportation, and missed production schedules. How do exaggerated order swings occur? What can companies do to mitigate them? Hau L. Lee V. Padmanabhan Seungjin Whang Vol. 38, No. 3 Reprint #3837 The Bullwhip Effect in Supply Chains Hau L. Lee V. Padmanabhan Seungjin Whang Distorted information from one end over time.

2 However, when they examined the orders from the reseller, they observed much bigger swings. of a Supply chain to the other can Also, to their surprise, they discovered that the orders from the printer division to the company's integrated lead to tremendous inefficiencies: circuit division had even greater fluctuations. excessive inventory investment, poor What happens when a Supply chain is plagued with a Bullwhip Effect that distorts its demand information customer service, lost revenues, as it is transmitted up the chain?

3 In the past, without being able to see the sales of its products at the distri- misguided capacity plans, ineffective bution channel stage, HP had to rely on the sales or- transportation, and missed ders from the resellers to make product forecasts, plan capacity, control inventory, and schedule production. production schedules. How do Big variations in demand were a major problem for exaggerated order swings occur? What HP's management. The common symptoms of such variations could be excessive inventory, poor product can companies do to mitigate them?

4 Forecasts, insufficient or excessive capacities, poor cus- tomer service due to unavailable products or long back- N. ot long ago, logistics executives at Procter & logs, uncertain production planning ( , excessive revi- Gamble (P&G) examined the order pat- sions), and high costs for corrections, such as for expe- terns for one of their best-selling products, dited shipments and overtime. HP's product division Pampers. Its sales at retail stores were fluctuating, but was a victim of order swings that were exaggerated by the variabilities were certainly not excessive.

5 However, the resellers relative to their sales; it, in turn, created as they examined the distributors' orders, the execu- additional exaggerations of order swings to suppliers. tives were surprised by the degree of variability. When In the past few years, the Efficient Consumer Re- they looked at P&G's orders of materials to their sup- sponse (ECR) initiative has tried to redefine how the pliers, such as 3M, they discovered that the swings grocery Supply chain should One motivation were even greater. At first glance, the variabilities did for the initiative was the excessive amount of invento- not make sense.

6 While the consumers, in this case, ry in the Supply chain. Various industry studies found the babies, consumed diapers at a steady rate, the de- that the total Supply chain, from when products leave mand order variabilities in the Supply chain were am- the manufacturers' production lines to when they ar- plified as they moved up the Supply chain. P&G rive on the retailers' shelves, has more than 100 days of called this phenomenon the Bullwhip Effect . (In some industries, it is known as the whiplash or the Hau L. Lee is the Kleiner Perkins, Mayfield, Sequoia Capital Professor whipsaw Effect .)

7 In Industrial Engineering and Engineering Management, and professor of operations management at the Graduate School of Business, Stanford When Hewlett-Packard (HP) executives examined University. V. Padmanabhan is an associate professor of marketing, and the sales of one of its printers at a major reseller, they Seungjin Whang is an associate professor of operations information and found that there were, as expected, some fluctuations technology, also at Stanford. SLOAN MANAGEMENT REVIEW/SPRING 1997 LEE ET AL. 93. Figure 1 Increasing Variability of Orders up the Supply Chain Consumer Sales Retailer's Orders to Manufacturer 20 20.

8 15 15. Order Quantity Order Quantity 10 10. 5 5. 0 0. Time Time Wholesaler's Orders to Manufacturer Manufacturer's Orders to Supplier 20 20. 15 15. Order Quantity Order Quantity 10 10. 5 5. 0 0. Time Time inventory Supply . Distorted information has led every distributors' warehouses, and store warehouses along entity in the Supply chain the plant warehouse, a the distribution channel have inventory stockpiles. manufacturer's shuttle warehouse, a manufacturer's And in the pharmaceutical industry, there are duplicat- market warehouse, a distributor's central warehouse, ed inventories in a Supply chain of manufacturers such the distributor's regional warehouses, and the retail as Eli Lilly or Bristol-Myers Squibb, distributors such store's storage space to stockpile because of the as McKesson, and retailers such as Longs Drug Stores.

9 High degree of demand uncertainties and variabili- Again, information distortion can cause the total in- ventory in this Supply chain to exceed 100 days of sup- ply. With inventories of raw materials, such as integrat- T. he ordering patterns share a ed circuits and printed circuit boards in the computer common, recurring theme: the industry and antibodies and vial manufacturing in the pharmaceutical industry, the total chain may contain variabilities of an upstream more than one year's Supply . site are always greater than those In a Supply chain for a typical consumer product, of the downstream site.

10 Even when consumer sales do not seem to vary much, there is pronounced variability in the retailers' orders to the wholesalers (see Figure 1). Orders to the manu- ties. It's no wonder that the ECR reports estimated a facturer and to the manufacturers' supplier spike even potential $30 billion opportunity from streamlining more. To solve the problem of distorted information, the inefficiencies of the grocery Supply companies need to first understand what creates the Other industries are in a similar position. Computer Bullwhip Effect so they can counteract it.