Have you ever seen the movement of a whip? When it is cracked it starts with small ripples at base and
magnifies as the waves move towards the end. Now someone may be puzzled how in the earth that can be
linked towards supply chain. The analogy is quite simple, although the consequences can be quite
complex and adverse. Let’s start with an example, suppose just at the beginning of the winter season
customers buy 2 moisturizer creams for the season. If there is an offer on the table, customer may buy
even more. So at POS (point of sale) let’s assume overall demand is 50. Now the retailer may forecast a
spike in the demand and can place and order of 60. Similarly distributor may further magnify order to 80
to prevent stock-out loss, …show more content…
A classical example of bullwhip effect is the case of diaper demand fluctuation in P&G. The company
observed wide variation in demand of baby diapers although the demand of diapers should be fairly
stable.
Courtesy of Wikimedia and James Pitts
Now let’s analyze the causes in more detail and how they influence order quantity.
One of the major reasons of bullwhip effect is that sales estimation at each level takes place with minimal
cooperation between different entities in supply chain. As in the example illustrated above every party is
concerned with stock out hence they inflate order at each level.
Another reason can be quantity discount offered by manufacturers. Distributors stockpile inventory to
avail discounts often ignoring higher inventory cost. Before placing an order each party should analyze
what should be ideal EOQ (Economic Order Quantity) that minimize inventory carrying cost, inventory
ordering cost as well as total product cost.
A third reason can be placing bulk orders to minimize transportation cost or traditionally what is known
as “batching”. As bulk orders help to achieve economic of transportation, an FTL (Full truck load) …show more content…
So, how can we prevent bullwhip effect in supply chain? One major way is to improve the information
flow and transparency of orders through supply chain. This can be achieved through CPFR (collaborative
planning, forecasting and replenishment CPFR aims to minimize forecast error by cooperative
management of suppliers, manufacturers, distributors and retailers. Wal-Mart pioneered the idea of CPFR
in1995. In this model the goal is to share the forecast among different stakeholders, identify exceptions
and resolve the conflict. Sharing of information can be achieved easily through EDI (electronic data
interchange) among different parties. Even though there is collaboration for forecasting in CPFR
sometimes still lot of fluctuation can happen due to different forecasting methods used. In this case VMI
(vendor managed inventory) is used to forecast only at one level. Here vendors themselves manage and
maintain inventories at the retailer site and replenish as and when required. FMCGs like P&G, Nestle use
this technique quiet often.
Steps of CPFR
The actual demand data should be captured from POS. Wal-mart tracks the on shelf stock by
magnifies as the waves move towards the end. Now someone may be puzzled how in the earth that can be
linked towards supply chain. The analogy is quite simple, although the consequences can be quite
complex and adverse. Let’s start with an example, suppose just at the beginning of the winter season
customers buy 2 moisturizer creams for the season. If there is an offer on the table, customer may buy
even more. So at POS (point of sale) let’s assume overall demand is 50. Now the retailer may forecast a
spike in the demand and can place and order of 60. Similarly distributor may further magnify order to 80
to prevent stock-out loss, …show more content…
A classical example of bullwhip effect is the case of diaper demand fluctuation in P&G. The company
observed wide variation in demand of baby diapers although the demand of diapers should be fairly
stable.
Courtesy of Wikimedia and James Pitts
Now let’s analyze the causes in more detail and how they influence order quantity.
One of the major reasons of bullwhip effect is that sales estimation at each level takes place with minimal
cooperation between different entities in supply chain. As in the example illustrated above every party is
concerned with stock out hence they inflate order at each level.
Another reason can be quantity discount offered by manufacturers. Distributors stockpile inventory to
avail discounts often ignoring higher inventory cost. Before placing an order each party should analyze
what should be ideal EOQ (Economic Order Quantity) that minimize inventory carrying cost, inventory
ordering cost as well as total product cost.
A third reason can be placing bulk orders to minimize transportation cost or traditionally what is known
as “batching”. As bulk orders help to achieve economic of transportation, an FTL (Full truck load) …show more content…
So, how can we prevent bullwhip effect in supply chain? One major way is to improve the information
flow and transparency of orders through supply chain. This can be achieved through CPFR (collaborative
planning, forecasting and replenishment CPFR aims to minimize forecast error by cooperative
management of suppliers, manufacturers, distributors and retailers. Wal-Mart pioneered the idea of CPFR
in1995. In this model the goal is to share the forecast among different stakeholders, identify exceptions
and resolve the conflict. Sharing of information can be achieved easily through EDI (electronic data
interchange) among different parties. Even though there is collaboration for forecasting in CPFR
sometimes still lot of fluctuation can happen due to different forecasting methods used. In this case VMI
(vendor managed inventory) is used to forecast only at one level. Here vendors themselves manage and
maintain inventories at the retailer site and replenish as and when required. FMCGs like P&G, Nestle use
this technique quiet often.
Steps of CPFR
The actual demand data should be captured from POS. Wal-mart tracks the on shelf stock by