Influences of the Forrester Effect and the Bullwhip Effect
A supply chain management is the broad concept which includes the management of the entire supply chain from the supplier of raw materials through the manufacturer, wholesaler, and retailer to the end consumer. However, certain dynamics exist among firms in the supply chain thereby causing inaccuracies and volatility of orders from the retailer to the primary suppliers and that these cause for operations, say, readjustments further upstream in the supply chain. The Forrester effect and the bullwhip effect influence the supply chain directly or indirectly through the components in the supply chain like manufacturers, suppliers, wholesalers, distributors, retailers, and customers in many ways.
Bullwhip effect, also known as Forrester effect occurs when the demand order changes in the supply chain are amplified as they moved up the supply chain. It is termed as bullwhip effect because of the large magnitude of disturbances in the chain caused by a small disturbance at one end of the chain.Thus, in a typical supply chain for a consumer product, with less sales variation, there seem to be a pronounced variability in the retailers’ orders to the wholesalers.
Considerably, four major causes of the bullwhip effect have been identified. These are:
1. Demand forecast updating: this is the readjustment of demand forecasts by upstream managers as a result of future product demand signal. Forecasting is usually based on the order history from a company’s immediate customers.Traditionally,every company in a supply chain usually prepares product forecasting for its production scheduling, capacity planning, inventory control and material requirement planning. It is contended that the signal from demand forecasting is a major contributor to the bullwhip effect. For example, if a manager uses, say, exponential smoothing (future forecast is always updated as demand increases) the order sent to the supplier reflects the amount needed to replenish the stocks to meet the requirements for future demands and safety stocks which might be considered necessary.
2. Order batching: Companies place orders with upstream organisations in a supply chain, using some inventory monitoring or control. As demand comes in, inventory is depleted but the company may not immediately place an order with the supplier. It often batches or accumulates demands before issuing an order. Sometimes the supplier cannot handle frequent order processing because of the substantial time and cost involved so instead of ordering frequently, companies may order weekly or fortnightly.
This leads to two forms of order batching; periodic and pushing ordering. Many manufacturers place purchase orders with suppliers when they run their materials requirement planning (MRP) systems monthly; resulting in monthly ordering with suppliers. This is a periodic ordering. As an illustration, for a company that places orders once a month from its suppliers, the supplier faces a highly erratic stream of orders. Demands go up at one time during the month, followed by no demands for the rest of the month. This periodic ordering amplifies distortions and disruptions and contributes to the bullwhip effect. A similar effect becomes prevalent in push ordering phenomenon.Here, a company experiences regular surge in demand. As a result, customers ‘push’ orders on the company periodically. Although the periodic surges in demand by some customers would be insignificant suppose all ordering are not made at the same time, however, it does not happen that way. The orders are more likely to overlap and cause the bullwhip effect to be felt most.
3. Price Fluctuations: Because of attractive offers like ‘buy one get one free'(BOGOF),price and quantity discounts, rebates and so on usually provided by manufacturers to distributors in the grocery industry, items are bought in advance of what is actually needed. This is referred to as ‘forward-buying’ which is known to account for about $75bn to $100bn of inventory in the grocery industry in the United States. The result is that customers buy in bigger quantities that do not reflect their immediate needs with the view to stock for future use.Thus,these special price schemes, lead to speculative buying which is considered as costly to the supply chain.
For example, Kotler reports that trade deals and consumer promotion constitute 47% and 28% of distributors and manufacturers respectively of their total promotion budgets. Considering a situation when a product’s price is pegged low through the price schemes, more would be bought by the customer than actually needed. As the price returns to normal, the customer stops buying in order to use up its inventory. This triggers an irregular buying pattern of the customer which does not reflect its consumption pattern, and the variation of the buying quantities is much bigger than the variation of the consumption rate leading to the bullwhip effect or Forrester effect. Such a practice was called “the dumbest marketing ploy ever”.
4. Rationing and short gaming: rationing usually becomes the norm when demands exceed supply. Manufacturers allocate the amount in proportion to the amount ordered. During rationing customers exaggerate their real needs when they order for fear that the orders might be in short supply.Customers’ overreaction in anticipation of shortages results when organisations and individuals make sound, rational economic decisions and ‘game’ the potential rationing. The effect of this gaming is that little information is given to the supplier on the product’s real demand by the customers’ orders. The gaming practice is very common. Increases in orders are made not because of an increase in consumption but due to anticipation.
Actually, the bullwhip or the Forrester effect is not just an economic error. Its influence on a company’s supply chain management could be felt as well in a positive way. Thus, these four major causes of bullwhip effect somewhat influence or affect the supply chain management in number of ways:
– Conflict between supply chain players. This is brought about as a result of no coordination amongst individual demand forecasts based on each supply chain player’s sales history or strategy.
– Large demand and supply fluctuations result in the need for high inventories to prevent stock outs. Because of the fluctuations in the supply chain, companies try to keep more stock than needed in order to avoid stock out and its attendant problems like loss of profit, customers and market share in some situations.
– There is poor customer service as all demand might not be met. Customers are upset when their demands are not met especially from the suppliers they seem to rely on .This is as a result of the bullwhip effect.
– Production scheduling and capacity planning becomes difficult due to large order swings. Because of the large distortions in demand due to bullwhip effect, capacity planning-the task of setting effective capacity of the operation in order that it can stand any demands placed on it-and production scheduling which is a detailed timetable in planning showing at what time or date jobs should start and when they should end to ensure that customers demand is met, are largely affected. This is known to usually affect several other performance indicators like costs, say due to under-utilization of capacity; revenues, working capital due to building up finished goods inventory prior to demand; quality by hiring temporary staff; speed could also be enhanced by surplus provision; dependability of supply will also be affected due to any unexpected disruptions; and flexibility will also be enhanced due to surplus capacity.
– Extra plant expansion to meet peak demand. Another influence on the supply chain brought about by the Forrester effect or the bullwhip effect is to look for an additional plant capacity or expansion to cater for demand either as a result of low stock or increased demand which were distorted as the bullwhip effect struck. The implication is it can lead to large distortions and high costs.
– High costs for corrections-large unexpected orders or supply problems necessitate expedited shipments and overtime. This might also affect the planning of the company’s transport and logistics in terms of additional handling and administrative costs though there will be some benefits, the supply chain is affected.
– Other influences are the following: collaboration, direct sales, smaller order batches or more frequent re-supply, unexpected shortages in inventory, price fluctuation, demand behaviour, stock market trading, information-sharing and profit variation.
Notwithstanding these,there are some possible ways and means to minimise or reduce the bullwhip effect. The various initiatives for possible solution to the bullwhip effect are based on the underlying coordination mechanism. These mechanisms are namely, information sharing,;by this demand information at a downstream site is relayed upstream in time for processing; channel alignment, this is the coordination of pricing, transportation, inventory planning, and ownership between the upstream and downstream sites in a supply chain; and operational efficiency, are the activities that are pursued to improve performance like reduced costs and lead-time.
In the light of these three mechanisms, some of the critical areas that can be looked at to reduce the impact of variability on the supply chain include aligning incentives to overall supply chain performance objectives; developing trust and contractual agreements between supply chain partners; approach such as delayed differentiation, designing for commonality; direct sales, vendor managed inventory, continuous replenishment; multi-echelon inventory control policies; lead time reduction through operational efficiency and design; lot size reduction using efficient transportation and distribution systems; price stabilization and uniform pricing.
First and foremost understanding the causes of the bullwhip effect can help managers to find strategies to combat or curb it. Companies must make concerted efforts through various means available in their supply chain management in order to deal with these inconsistencies.