CONTENTS

No.ContentsPages

1Executive Summary2

2Company Background

7

3Causes of the Bullwhip Effects8

4Consequences of the Bullwhip Effects11

5Countermeasures to overcome the Bullwhip Effects13

6Refferences14

1. Executive Summary

Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.This definition leads to several observations. First, supply chain management takes into consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements: from supplier and manufacturing facilities through warehouses and distribution centres to retailers and stores. Indeed, in some supply chain analysis, it is necessary to account for the suppliers suppliers and the customers customers because they have an impact on supply chain performance.Second, the objective of supply chain management is to be efficient and cost-effectiveacross the entire system; total system wide costs, from transportation and distributionto inventories of raw materials, work in process, and finished goods, are to be minimized. Thus, the emphasis is not on simply minimizing transportation cost orreducing inventories but, rather, on taking a systems approach to supply chain management.Finally, because supply chain management revolves around efficient integrationof suppliers, manufacturers, warehouses, and stores, it encompasses the firmsactivities at many levels, from the strategic level through the tactical to the operationallevel.

The Key concepts of SCMThe concept of Supply Chain Management is based on two core ideas. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain.The second idea is that while supply chains have existed for a long time, most organizations have only paid attention to what was happening within their four walls. Few businesses understood, much less managed, the entire chain of activities that ultimately delivered products to the final customer. The result was disjointed and often ineffective supply chains.Supply chain management, then, is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities.The organizations that make up the supply chain are linked together through physical flows and information flows. Physical flows involve the transformation, movement, and storage of goods and materials. They are the most visible piece of the supply chain. But just as important are information flows. Information flows allow the various supply chain partners to coordinate their long-term plans, and to control the day-to-day flow of goods and material up and down the supply chain.

BULLWHIP EFFECTS OF SCMThrough the numerous stages of a supply chain; key factors such as time and supply of order decisions, demand for the supply, lack of communication and disorganization can result in one of the most common problems in supply chain management. This common problem is known as the bullwhip effect; also sometimes the whiplash effect. What is the Bullwhip Effects?

The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain. This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.

The bullwhip effect occurs when the demand order variabilitys in the supply chain are amplified as they moved up the supply chain. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies. Companies can effectively counteract the bullwhip effect by thoroughly understanding its underlying causes. Industry leaders are implementing innovative strategies that pose new challenges: 1. integrating new information systems, 2. defining new organizational relationships, and3. implementing new incentive and measurement systems.Not long ago, logistics executives at Procter & Gamble (P&G) examined the order patterns for one of their best-selling products, Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' orders, the executives were surprised by the degree of variability. When they looked at P&G's orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the "whipsaw" effect.)When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders from the printer division to the company's integrated circuit division had even greater fluctuations.What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distribution channel stage, HP had to rely on the sales orders from the resellers to make product forecasts, plan capacity, control inventory, and schedule production. Big variations in demand were a major problem for HP's management. The common symptoms of such variations could be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain production planning (i.e., excessive revisions), and high costs for corrections, such as for expedited shipments and overtime. HP's product division was a victim of order swings that were exaggerated by the resellers relative to their sales; it, in turn, created additional exaggerations of order swings to suppliers.In the past few years, the Efficient Consumer Response (ECR) initiative has tried to redefine how the grocery supply chain should work.[1] One motivation for the initiative was the excessive amount of inventory in the supply chain. Various industry studies found that the total supply chain, from when products leave the manufacturers' production lines to when they arrive on the retailers' shelves, has more than 100 days of inventory supply. Distorted information has led every entity in the supply chain the plant warehouse, a manufacturer's shuttle warehouse, a manufacturer's market warehouse, a distributor's central warehouse, the distributor's regional warehouses, and the retail store's storage space to stockpile because of the high degree of demand uncertainties and variabilities. It's no wonder that theECR reports estimated a potential $30 billion opportunity from streamlining the inefficiencies of the grocery supply chain.[2]

Other industries are in a similar position. Computer factories and manufacturers' distribution centers, the distributors' warehouses, and store warehouses along the distribution channel have inventory stockpiles. And in the pharmaceutical industry, there are duplicated inventories in a supply chain of manufacturers such as Eli Lilly or Bristol-Myers Squibb, distributors such as McKesson, and retailers such as Longs Drug Stores. Again, information distortion can cause the total inventory in this supply chain to exceed 100 days of supply. With inventories of raw materials, such as integrated circuits and printed circuit boards inthe computer industry and antibodies and vial manufacturing in the pharmaceutical industry, the total chain may contain more than one year's supply.In a supply chain for a typical consumer product, 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 manufacturer and to the manufacturers' supplier spike even more. To solve the problem of distorted information, companies need to first understand what creates the bullwhip effect so they can counteract it. Innovative companies in different industries have found that they can control the bullwhip effect and improve their supply chain performance by coordinating information and planning along the supply chain.

(1 Copyright Sloan Management Review Association, Alfred P. Sloan School of Management Spring 1997)

2. COMPANY BACKGROUND

Quality Hotel City Centre Kuala Lumpuris situated in Kuala Lumpur's business and shopping district. The hotel's excellent location make it easy to explore the city. Major transportation stations such buses and theLight Rail Transit (LRT)are accesible from the hotel, and a short walk will brings you toJalan Masjid India (Little India), Maju Junction Mall, row of restaurants and corporate offices.Quality Hotel City Centre Kuala Lumpurelegant guest rooms and suiteswill keep you feeling relax. Other facilities features at this 4-star hotel includesrestaurant, spa,andpoolwill always pleasure the guest who stays indoor.Procurement practices are used in the logistics and supply chain industry to supportoperational needs of the company by focusing on how purchasing is done, how the product is received from suppliers, building relationships with vendors and managing the procurement process by identifying opportunities and managing internal operations (Fantazy, Kumar, & Kumar, 2010). In todays procurement environment, importance has been placed on reducing costs during purchasing which leads to the best costs and value to its customers. Companies like Quality Hotel who go straight to the manufacturer, are very strong when they negotiate their price with vendors and make sure no other company is getting their products at the same low price.For example TJX companies the off-price retail store, makes their procurement strategy transparent by spending a lot of time with vendors to better understand their price structure and their strategy to best reduce costs.

3. Causes of the Bullwhip Effects

Perhaps the best illustration of the bullwhip effect is the well-known "beer game. In the game, participants (students, managers, analysts, and so on) play the roles of customers, retailers, wholesalers, and suppliers of a popular brand of beer. The participants cannot communicate with each other and must make order decisions based only on orders from the next downstream player. The ordering patterns share a common, recurring theme: the variabilities of an upstream site are always greater than those of the downstream site, a simple, yet powerful illustration of the bullwhip effect. This amplified order variability may be attributed to the players' irrational decision making. Indeed, Sterman's experiments showed that human behavior, such as misconceptions about inventory and demand information, may cause the bullwhip effect.In contrast, we show that the bullwhip effect is a consequence of the players' rational behavior within the supply chain's infrastructure. This important distinction implies that companies wanting to control the bullwhip effect have to focus on modifying the chain's infrastructure and related processes rather than the decision makers' behavior.A bullwhip effect is a very common phenomenon and unavoidable part of the order-to-delivery cycle that may have negative impacts on supply chain performances if arises. It emerges from an amplification of demand order deviations in the supply chain as it ascends. Basically, it happens when different supply chain stages have different calculations of demand amount, therefore the longer the chain between the manufacturer and wholesaler the greater the demand deviation. (Dragana M., Biljana P. & Mirko V., 2009)

4. Causes of the Bullwhip EffectsWe have identified four major causes of the bullwhip effect:1. Demand forecast updating2. Order batching3. Price fluctuation4. Rationing and shortage gaming

Each of the four forces in concert with the chain's infrastructure and the order managers' rational decision making create the bullwhip effect. Understanding the causes helps managers design and develop strategies to counter it.

Lack of communication between participants of the chain and disorganization in terms of ordering larger or smaller quantities of product than is necessary are the common influential factors that contribute to the bullwhip effect in supply chains.

Demand forecast updating Forecasts of demand are inaccurate by nature and it always creates unrealistic expectations and the greater the loophole between actual and forecasted demands, the higher the risk of surplus inventory or product shortages.

Order batching In order to reduce costs of order processing and transportation, companies usually make orders in lots. This spreads up the demand cycles to suppliers and results in poor forecasting every time a batch is run.

Price fluctuations During special promotions and price discounts customers buy in greater quantities and stock up for the future, however, it doesnt reflect their direct needs. Thus, it infers unpredictable future purchase estimates.

Rationing and shortage game Manufacturers often ration their products when demand for product exceeds supply. This creates perception in customers that there is a product shortage and they usually double their orders. However, production of wrong information on real demand affects forecasts and results in further demand related issues as suppliers receive little information on real demand for the product.The causes can further be divided into behavioral and operational causes:Behavioral causes1. misuse of base-stock policies1. misapplication of trinomial theorem1. misperceptions of feedback and time delays1. panic ordering reactions after unmet demand1. perceived risk of other players bounded rationality

Operational causes1. Dependent demand processing1. Forecast Errors1. Adjustment of inventory control parameters with each demand observation1. Lead-time Variability (forecast error during replenishment lead time)1. Lot-sizing/order synchronization1. Consolidation of demands1. Transaction motive1. Quantity discount1. Trade promotion and forward buying1. Anticipation of shortages1. Allocation rule of suppliers1. Shortage gaming

5. Consequences of the Bullwhip EffectsIn addition to greater safety stocks, the described effect can lead to either inefficient production or excessive inventory as the producer needs to fulfill the demand of its predecessor in the supply chain. This also leads to a low utilization of the distribution channel.

In spite of having safety stocks there is still the hazard of stock-outs which result in poor customer service. Furthermore, the Bullwhip effect leads to a row of financial costs.

Next to the (financially) hard measurable consequences of poor customer services and the damage of public image and loyalty an organization has to cope with the ramifications of failed fulfillment which can lead to contract penalties. Moreover the hiring and dismissals of employees to manage the demand variability induce further costs due to training and possible pay-offs.

6. Countermeasures to overcome the Bullwhip EffectsIn quality hotel groups Theoretically the Bullwhip effect does not occur if all orders exactly meet the demand of each period. This is consistent with findings of supply chain experts who have recognized that the Bullwhip Effect is a problem in forecast-driven supply chains, and careful management of the effect is an important goal for Supply Chain Managers. Therefore it is necessary to extend the visibility of customer demand as far as possible. One way to achieve this is to establish a demand-driven supply chain which reacts to actual customer orders. In manufacturing, this concept is called Kanab. This model has been most successfully implemented in Wal-Marts distribution system. Individual Wal-Mart stores transmit point-of-sale (POS) data from the cash register back to corporate headquarters several times a day. This demand information is used to queue shipments from the Wal-Mart distribution centre to the store and from the supplier to the Wal-Mart distribution centre. The result is near-perfect visibility of customer demand and inventory movement throughout the supply chain. Better information leads to better inventory positioning and lower costs throughout the supply chain. Barriers to the implementation of a demand-driven supply chain include the necessary investment in information technology and the creation of a corporate culture of flexibility and focus on customer demand. Another prerequisite is that all members of a supply chain recognize that they can gain more if they act as a whole which requires trustful collaboration and information sharing.Methods intended to reduce uncertainty, variability, and lead time:1. Vendor Managed Inventory (VMI)2. Just In Time replenishment (JIT)3. Strategic partnership4. Information sharing5. smooth the flow of products6. coordinate with retailers to spread deliveries evenly7. reduce minimum batch sizes8. smaller and more frequent replenishments9. eliminate pathological incentives10. every day low price policy11. restrict returns and order cancellationsREFFERENCES1. Aprile D., Garavelli C., (2008) Bullwhip effect reduction 19th Product Research Conference, Bari, Italy 2. Dragana M., Biljana P. & Mirko V., (2009) Bullwhip Effect and Supply Chain Forming 3. Dr. Seung Hyun Lee (2008) Warehousing Lecture notes in Distribution and Customer Support at the Boise State University, the U.S.A. 4. FW Warehousing (2011) Cross-docking services Accessed on 12/03/13, Available at: http://www.fwwarehousing.com/services/1/50/cross-docking-services-%7C-st-louis-mo-il;-indianapolis-in.html 5. Gartner, (2012) Gartner Supply Chain top 25 Accessed on: 10/03/13, Available at: http://www.gartner.com/technology/supply-chain/top25.jsp 6. Hau L., V P., & Seungjin W. (2007) The bullwhip effect in Supply Chains Sloan Management Review, Volume 38, Issue 3, pp. 93-102 7. Joseph H. W. (2010) Managing the Bullwhip1