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Influences of the Forrester Effect and the Bullwhip Effect on Supply Chain Management

A supply chain management is the broad concept that includes the management of the entire supply chain from the supplier of raw materials through the manufacturer, wholesaler and retailer to the final consumer. However, there are certain dynamics between companies in the supply chain that cause inaccuracies and volatility of orders from the retailer to the main suppliers and this causes operations, shall we say, realignments further up the supply chain. The Forrester effect and bullwhip effect influence the supply chain directly or indirectly through supply chain components such as manufacturers, suppliers, wholesalers, distributors, retailers, and customers in many ways.

The Bullwhip effect, also known as the Forrester effect, occurs when changes in the order of demand in the supply chain are amplified as they move further up the supply chain. It is called the bullwhip effect because of the large magnitude of disturbances in the chain caused by a small disturbance at one end of the chain. Thus, in a typical supply chain for a consumer product, with less sales variance, there appears to be pronounced variability in orders from retailers to wholesalers.

Significantly, four main causes of the bullwhip effect have been identified. These are:

1. Update of demand forecasts: it is the readjustment of demand forecasts by upstream managers as a result of the signal of future demand for the product. The forecast is typically based on the order history of a company’s immediate customers. Traditionally, each company in a supply chain typically prepares product forecasts for its production scheduling, capacity planning, inventory control, and supply requirements planning. materials. It is argued that the demand forecast signal is an important factor contributing to the bullwhip effect. For example, if a manager uses, say, exponential smoothing (the future forecast is always updated as demand increases), the order sent to the supplier reflects the quantity needed to replenish stock to meet future demand and stock requirements. security that might be considered. necessary.

2. Order batches: Companies place orders with organizations up a supply chain, using some form of inventory control or tracking. As demand increases, inventory is depleted, but the company may not immediately place an order with the supplier. Often bundles or accumulates demands before issuing an order. Sometimes the supplier cannot handle frequent order processing due to the considerable time and cost involved, so instead of placing orders frequently, companies may order weekly or bi-weekly.

This leads to two forms of order batching; periodic and urgent orders. Many manufacturers place purchase orders with suppliers when they run their material requirements planning (MRP) systems on a monthly basis; resulting in monthly orders with suppliers. This is a periodic sort. For example, for a company that places orders once a month with its suppliers, the supplier faces a very erratic order flow. Demands spike at one point during the month, followed by no demand for the rest of the month. This periodic ordering amplifies distortions and interruptions and contributes to the bullwhip effect. A similar effect prevails in the push order phenomenon, where a company experiences a regular increase in demand. As a result, customers regularly submit orders to the company. Although periodic surges in demand from some customers would be negligible, let’s assume that all orders are not placed at the same time, however, that is not the case. Orders are more likely to overlap and make the bullwhip effect more felt.

3. Price fluctuations: Due to attractive offers such as ‘buy one get one free’ (BOGOF), pricing and quantity discounts, rebates, etc., typically provided by manufacturers to distributors in the grocery industry, items they are bought before it actually is. necessary. This is known as ‘advance purchase’, which is known to account for around $75 billion to $100 billion of inventory in the grocery industry in the United States. The result is that customers buy in larger quantities that do not reflect their immediate needs with a view to storing for future use. Therefore, these special pricing schemes lead to speculative purchases that are considered costly for the supply chain. For example, Kotler reports that trade deals and consumer promotion make up 47% and 28% of distributors and manufacturers, respectively, of their total promotional budgets. Considering a situation where the price of a product is set low through pricing schemes, the customer would buy more than he really needs. As the price returns to normal, the customer stops shopping to deplete their inventory. This triggers an irregular customer buying pattern that does not reflect his consumption pattern, and the variation in purchase quantities is much greater than the variation in the rate of consumption leading to the bullwhip or Forrester effect. Such a practice was called “the dumbest marketing plot ever.”

4. Rationing and short game: Rationing often becomes the norm when demand exceeds supply. Manufacturers allocate the quantity in proportion to the quantity ordered. During rationing, customers exaggerate their actual needs when ordering for fear that orders may be short. Customer overreaction in anticipation of shortages occurs when organizations and individuals make rational and sensible economic decisions and “play” with potential rationing. The effect of this game is that little information is given to the supplier about the actual demand for the product from customer orders. The practice of the game is very common. The increases in orders are not due to an increase in consumption but to anticipation.

Actually, the bullwhip or Forrester effect is not just an economic mistake. Your influence on a company’s supply chain management could also be felt in a positive way. Therefore, these four main causes of bullwhip influence or somehow affect supply chain management in various ways:

– Conflict between the actors of the supply chain. This comes as a result of a lack of coordination between individual demand forecasts based on each supply chain player’s track record or sales strategy.

– Large fluctuations in supply and demand result in the need for high inventories to avoid stock-outs. Due to fluctuations in the supply chain, companies try to keep more stock than necessary to avoid stock-outs and its attendant problems, such as lost profits, customers, and market share in some situations.

– Customer service is poor as all demand may not be met. Customers get upset when their demands are not met, especially by providers they seem to trust. This is due to the bullwhip effect.

– Production scheduling and capacity planning become difficult due to large swings in orders. Due to the large distortions in demand due to the bullwhip effect, capacity planning (the task of establishing the effective capacity of the operation so that it can support whatever demands are placed on it) and production scheduling, which is a Detailed schedule in the planning that shows when or the date that the works must start and when they must finish to ensure that customer demand is met, are greatly affected. This is known to often affect various other performance indicators such as costs, for example, due to underutilization of capacity; income, working capital due to inventory buildup of finished goods prior to demand; quality through the hiring of temporary staff; speed could also be improved by providing surpluses; supply dependency will also be affected by any unexpected interruptions; and flexibility will also be improved due to excess capacity.

– Expansion of additional plant to satisfy the maximum demand. Another influence on the supply chain caused by the Forrester effect or bullwhip effect is seeking additional plant capacity or expansion to meet demand, either as a result of low inventory or higher demand that was distorted when the crisis occurred. whip effect. The implication is that it can lead to large distortions and high costs.

– High cost of corrections: large unexpected orders or supply problems require fast shipments and extra time. This could also affect the company’s transportation and logistics planning in terms of additional handling and administrative costs, although there will be some benefits, the supply chain is affected.

– Other influences include: collaboration, direct sales, smaller order batches or more frequent replenishment, unexpected inventory shortages, price fluctuation, demand behavior, stock market trading, information sharing, and price variation. Profits.

Despite this, there are some possible ways and means to minimize or reduce bullwhip.

The various initiatives for a possible solution to the bullwhip effect are based on the underlying coordination mechanism. These mechanisms are, namely, the exchange of information; Through this demand, information at a downstream site is transmitted upstream in time for processing; channel alignment, this is the coordination of pricing, transportation, inventory planning, and ownership between upstream and downstream sites in a supply chain; and operational efficiency, are the activities pursued to improve performance, such as cost reduction and delivery time.

In light of these three mechanisms, some of the critical areas that can be considered to reduce the impact of supply chain variability include aligning incentives with overall supply chain performance objectives; develop contractual and trust agreements between supply chain partners; approach like delayed differentiation, commonality design; direct sales, supplier managed inventory, continuous replenishment; multi-level inventory control policies; reduced lead time through operational efficiency and design; lot size reduction using efficient transportation and distribution systems; Price stabilization and uniform prices.

First, understanding the causes of the bullwhip effect can help managers find strategies to combat or stop it. Companies must make concerted efforts through various means available in their supply chain management to address these inconsistencies.

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