The Dynamics of the Supply Network
In this lesson, you’re expected to learn about:
– the Bullwhip Effect
– some of the challenges faced in supply chain management
What Causes the Bullwhip Effect?
• Its main cause is an understandable desire by the different links in the supply chain to manage their production rates and inventory levels sensibly.
• As we are going to see, it is one of the reasons that calls for the need for supply chain coordination.
As in the “Chinese Whispers” game, in a typical supply chain, small fluctuations in the market can cause increasing volatility further back in the chain
• Buyer-supplier relationships are potential sources of misunderstanding and miscommunication.
• This may be caused by information asymmetry regarding customer expectations and supplier capabilities.
Analogy to “Chinese Whispers”
The effect is analogous to the children’s game of Chinese Whispers
– the first child whispers a message to the next child who, regardless of whether he/she has heard it clearly or not, whispers an interpretation to the next child and so on. The more children the message passes through, the more distorted it tends to become. The last child says out loud what the message is and the distortion of the original message is clearly evident.
In the figure below, we can see that variation in the number of orders (how ”irregular” the wave is) gets bigger as we move upstream, from customer to supplier.
[Optional] What is the Bullwhip Effect in Supply Chain and how do we mitigate it?
Let’s use an example to demonstrate the bullwhip effect.
Take your time to examine the production rate
and stock levels
for the supply chain shown in the table below:
• The OEM is served by three tiers of suppliers. The demand from the OEM’s market has been running at a rate of 100 items per period, but in period 2, demand reduces to 95 items. In all stages, the supply chain works on the principle that each party will keep in stock one period’s demand (a simplification, but not a gross one).
Source: adapted from Slack et al. (2010)
Enlarged version: http://bit.ly/2oY37dX
The ‘stock’ column shows the starting stock at the beginning and the finish stock at the end of the period. At the beginning of period 2, the OEM has 100 units in stock. Demand in period 2 is 95 and the OEM must produce enough to finish up at the end of the period with 95 in stock (this being the new demand rate).
To do this, it need only manufacture 90 items; these, together with five items taken out of the starting stock, will supply demand and leave a finished stock of 95 items and the OEM can operate at a steady rate of 95 items per period. Note, however, that a change in demand of only five items has produced a fluctuation of ten items in the OEM’s production rate.
Now carry this same logic through the suppliers. (Please, take your time to analyze it). As you can see, the further the supplier is upstream, the more drastic the effects of the demand fluctuations are.
* This exercise does not include other complications, such as time lag between demands, which would, in practice, exacerbate the fluctuations.
[Optional] Bullwhip Effect
Challenges in supply chain management
Some of the greatest challenges in supply chain management arise from the uncertain environment
in which it operates.
As companies try to achieve strategic fit, they face several obstacles, mostly related to the uncertainties that are inherent to the environments in which companies operate.
These uncertainties arise from several sources. For example:
– Increasing demand for product variety: from the product-strategy matrix, we know that this add a lot of complexity
– Decreasing product life cycle: this makes achieving fit much harder, as requirements are in constant change
– Information asymmetry and variability: as sources of amplified variation and misaligned incentives
– And many others
[Optional] The Power of Resilience