Page 542 - Using MIS

510 tHe InternatIonal DIMenSIon International MIS

Order Quantity Order Quantity

Period Period
(A) Demand at Retailer (B) Demand at Distributor

Order Quantity Order Quantity

Figure ID-7 Period Period
The Bullwhip Effect (C) Demand at Manufacturer (D) Demand at Supplier

Because of the nature of this process, small changes in demand at the retailer are amplified
at each stage of the supply chain. As shown in Figure ID-7, those small changes become quite
large variations on the supplier end.
The bullwhip effect is a natural dynamic that occurs because of the multistage nature
of the supply chain. It is not related to erratic consumer demand, as the study of diapers
indicated. You may have seen a similar effect while driving on the freeway. One car slows
down, the car just behind it slows down a bit more abruptly, which causes the third car in
line to slow down even more abruptly, and so forth, until the thirtieth car or so is slamming
on its brakes.
The large fluctuations of the bullwhip effect force distributors, manufacturers, and sup-
pliers to carry larger inventories than should be necessary to meet the real consumer demand.
Thus, the bullwhip effect reduces the overall profitability of the supply chain. Eliminating or
at least reducing the bullwhip effect is particularly important for international supply chains
where logistics costs are high and shipping times are long.
One way to eliminate the bullwhip effect is to give all participants in the supply chain ac-
cess to consumer-demand information from the retailer. Each organization can thus plan its
inventory or manufacturing based on the true demand (the demand from the only party that
introduces money into the system) and not on the observed demand from the next organiza-
tion up the supply chain. Of course, an inter-enterprise information system is necessary to
share such data.
Consider the Walmart example in Figure ID-8. Along the bottom, each entity orders from
the entity up the supply chain (the entity to its left in Figure ID-8). Thus, for example, the
Walmart processing centers order finished goods from manufacturers. Without knowledge of
the true demand, this supply chain is vulnerable to bullwhip effects. However, if each entity can,
via an information system, obtain data about the true demand—that is, the demand from the re-
tail customers who are the source of funds for this chain—then each can anticipate orders. The
data about true demand will enable each entity to meet order requirements, while maintaining
a smaller inventory.