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Dealing with Supply Chain Issues
One of the most common issues with supply chain management is regarding wrong forecasting. This article deals with one such issue commonly known as “Bullwhip Effect”.
Simply put, the bullwhip effect is the fluctuations in order-placement by those at the end point of the supply chain especially retailers which becomes larger at every step up the supply chain. (See figure-1)
This phenomenon is observed in all the MNCs and top companies of the world. Though initially it goes undetected, later the same can even challenge a company’s existence in the market.
For example, A group of 4 retailer dealing with a common product forecasts 100 units of the product where the actual demand may be 75, then the immediate 2 dealer takes orders from them and passes it on to company. The difference of 25 units is enhanced to a difference of 100 units with the company. (See Figure-2)
The primary cause of this effect is bad forecasting or poor market information.
This usually results in: -
1. Huge Inventory Figures: It may lead to excessive inventory or sometimes shortage of inventory and with the next order placement it gets enhanced.
2. Poor Production Schedule: - The production schedule for the company is based on the demands from the market and the required inventory level. If the primary feed goes wrong, the entire production supply will be hampered.
3. Increase in Cost: - Since there is a miss-match between demand and supply, the prices of the product tend to go up. Every member involved in the supply chain will try to clear their stocks and it can lead to a price war as well.
4. Stained Relationship: - All the above mentioned factors will lead to bad relationship amongst the members in the supply chain as well as with the end customers.
Though the problems can be huge, but the solution or preventive actions are very simple. Some of the main actions that can be taken as:-
1. Collaborative market study and research: - Company persons and other members of the supply chain can do a joint market study and arrive at the correct forecasting figures.
2. Enhanced use of IT: - Vendor management software and other IT tools can be used to find the exact demand of the market.
3. Incentive Schemes for Forecasting: - Incentive schemes for the accurate forecasting can be implemented rather than an order wise incentive scheme.
4. Continuous Communications: - Dealer meets and other formal functions need to be organized at regular intervals in order to improve communication and relationship between the company and the supply chain members.
The Bullwhip effect is present in every sector today that depend on supply chain management. And you need not know the “Rocket Science” to get out of it. Simple effective measures can be developed by each and every company to monitor the forecasting methods. A review of accurate forecasting is essential with all the distributors and retailers at regular intervals. The benefit of eliminating the Bullwhip Effect can be tremendous. It can lead to decrease in cost of the product, decrease the inventory cost, decrease the lead time, improve productivity and most importantly increases the relationship which is the base to any business.