Bull Effect

8/2/2019 Bull Effect

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Supply Chain Management spans all movement andstorage of raw materials, work-in-process inventory,and finished goods from point of origin to point ofconsumption (supply chain).

In essence, Supply Chain Management integratessupply and demand management within and acrosscompanies.


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Demand

Information flow

Large number of touch-points

Lead time

Shelf-life

Oil prices

Real-estate Manpower

Competition

Working capital


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The objective of supply chain management is toprovide a high velocity flow of high quality,relevant information that will enable suppliers

to provide an uninterrupted and preciselytimed flow of materials to customers.

Stock outs can cause havoc up and down thesupply chain.


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luctuations in orders increase as they move upthe supply chain from retailers to wholesalersto manufacturers to suppliers.

It distorts demand information within thesupply chain, with each stage having adifferent estimate of what demands looks like.

These supply chain distortions is called

THE BULL EFFECT.


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Order batching

Shortage gaming

Free return policies

Demand forecast inaccuracies


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Larger orders result in more variance.

Order batching occurs in an effort to reduce ordering costs,to take advantage of transportation economics such as fulltruck load economies, and to benefit from sales incentives.

Periodic Ordering Weekly, Fortnightly, Monthly etc. Creates spikes in order sizes, disrupting suppliers demand

forecasts Benefits from transportation & distribution side

Push Ordering Orders are pushed by sales personnel Done usually at monthly/quarterly sales review and demand

estimates from sales team This results in uneven spread of customer orders resulting in the

bullwhip effect


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When demand exceeds supply, manufacture ration suppliesto distributors.

customers order more than they need during a period ofshort supply, hoping that the partial shipments they receivewill be sufficient.

This results in distributors ordering more than they need, tofulfill the demand.

When the market cools down, orders start getting cancelled,

excess inventory piles up, leading to the bullwhip effect.

Real demand is never known in such market conditions.

Most commonly effected is the IT hardware & telecom

industry


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Forward buys; discount sales; offer merchandise;coupons; rebates; end of season sales.

Customers buy in bulk.

But the buying pattern never matches theconsumption pattern.

This results in overstocking at the far ends of thesupply chain and also results in idle capacity


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Everybody in the chain adds a certain percentage to thedemand estimates. The result is no visibility of truecustomer demand.

F

orecasting is based on order history from companysimmediate customer

Often, forecasts are made at whims & fancies of managers

Upstream manager updates his/her demand forecasts basedon customer demand variations, longer lead times, pricefluctuations etc.

Techniques like exponential smoothing creates biggerswings at the suppliers end


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Overreaction to backlogs.

Neglecting to order in an attempt to reduce

inventory.

No communication up and down the supply chain.

No coordination up and down the supply chain.

Delay times for information and material flow


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Worse quality. Quirky, unplanned

changes in productionand delivery schedulesdisrupt and subvertcontrol processes,begetting diverse qualityproblems that provecostly to rectify.

Poorer service. Irregular, unpredictable

production and deliveryschedules also lengthenlead time, causing delayand customerdissatisfaction


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Minimize the cycle time in receiving projected andactual demand information.

Establish the monitoring of actual demand for product

to as near a real time basis as possible. Understand product demand patterns at each stage of

the supply chain.

Increase the frequency and quality of collaborationthrough shared demand information.


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Minimize or eliminate information queues that createinformation flow delays.

Eliminate inventory replenishment methods that

launch demand lumps into the supply chain. Eliminate incentives for customers that directly cause

demand accumulation and order staging prior to areplenishment request, such as volume transportationdiscounts.


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Minimize incentivized promotions that will causecustomers to delay orders and thereby interruptsmoother ordering patterns.

Offer your products at consistently good prices tominimize buying surges brought on by temporarypromotional discounts.

Identify, and preferably, eliminate the cause ofcustomer order reductions or cancellations.


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Popularized in the late 1980s by Wal-Mart andProcter & Gamble, VMI became one of the keyprograms in the grocery industrys pursuit of

efficient consumer response

and the garmentindustrys quick response.

Successful VMI initiatives have beentrumpeted by other companies in the United

States, including Campbell Soup and Johnson& Johnson, and by European firms like Barilla(the pasta manufacturer).


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The supplierusually the manufacturer butsometimes a reseller or distributormakes the maininventory replenishment decisions for theconsuming organization. The supplier monitors the buyers inventory levels

(physically or via electronic messaging) and makes periodicresupply decisions regarding order quantities, shipping, andtiming.

Transactions customarily initiated by the buyer (like

purchase orders) are initiated by the supplier instead. The purchase order acknowledgment from the supplier may

be the first indication that a transaction is taking place; anadvance shipping notice informs the buyer of materials intransit.


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Thank you

Bull Effect

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