01
Bullwhip Effect Bullwhip Effect
What is the Bullwhip Effect Bullwhip Effect? What are the consequences of the bullwhip effect in the supply chain? What are some ways to avoid the bullwhip effect?
The bullwhip effect means that when the information flow in the supply chain is reversed and transmitted layer by layer from the end customer to the original supplier, because the sharing and transmission of demand information cannot be effectively realized, the information is distorted, distorted and gradually distorted in the process of transmission. Amplification causes demand information to fluctuate more and more, just like throwing a bullwhip. The fluctuation (demand) on the side at hand is small, while the fluctuation (demand) of the far-end whip is very large. In this way, in the supply chain chain, small changes in downstream demand will be amplified step by step in the upstream, and the inventory may quickly change from "lack" to "surplus", which will affect the high risk of the entire marketing, supply and production, resulting in Chaos throughout the supply chain.
For example, there is a company A that produces accessories for a certain product and is a supplier of a certain product brand company. This product sold very well in the first quarter, so the product company predicted that it would increase the purchase of 1 million pieces in the next quarter no matter what. As soon as A parts company heard the news, it produced more spare stocks. In case of additional purchases later, the temporary production was too late and the production cost was still high, so the order placed in the production plan changed from 100W pieces to 110W pieces. Company A’s raw material supplier, Company B, saw that this accessory was so good, they should prepare some safety stock, otherwise, if the subsequent orders become sporadic or urgent orders, the production capacity will be wasted, so they did the math. Just produce 120W sets of raw materials. As you can see, this market demand is transmitted from the market side to the first-tier supplier A of the brand product company in this way, and then supplier A amplifies the demand to A's supplier B, and B amplifies it based on the analysis of A. From the initial 100W to 120W, the demand for 20W has been increased. The market is the head of the bullwhip effect, and the wave of demand thrown out is getting bigger and bigger, and the further away from the market, the manufacturer's judgment error on actual demand is getting bigger and more inaccurate.
What kind of consequences will it cause? Sales of this product declined in the second quarter, and only 90W sets were actually sold. If the brand owner refuses to accept the goods, company A will have 20W more inventory, and if company A refuses to accept the goods, company B will actually have 30W more inventory.
In this chain, the more companies involved in manufacturing, the greater the demand will be. This may still be a product line. If there are multiple product lines, for more brand owners, the demand for transmission to upstream production will be greater, and the inventory will be enlarged layer by layer.
02
Cash Flow Cycle Impact
I have investigated some manufacturing companies, the smaller ones have inventories of hundreds of millions, and the larger ones have inventories of several billion. There are also some clothing manufacturers who want to digest the inventory of raw materials. Even if you work day and night, you may not be able to use them up for two years. These are great risks and squeeze cash flow. There are also some exceptions. One company had 400-500 million in inventory in the first year and was worried about how to reduce inventory through data analysis and forecasting. I said that this is really difficult because there are too many variables. I was still worrying about it the first day, but when I encountered the epidemic, many factories were shut down, and they couldn't produce anymore. As long as they had a lot of inventory, it was a blessing in disguise, and they made a lot of money. But this kind of situation is a minority after all, with a very special background. In most cases, it is not so easy to digest such a large amount of inventory. When the cycle of receivables and payables remains unchanged, the cycle of inventory turnover is lengthened, and the cycle of cash flow is lengthened, which is very risky.
03
Bullwhip effect that is difficult to eliminate
Let's analyze the reason for the bullwhip effect again, because suppliers at all levels in the supply chain will only conduct supply assessments based on the needs of their adjacent lower-level sellers, and the untruth of this demand information will follow along The supply chain goes upstream, resulting in a phenomenon of step-by-step amplification. When it reaches the ultimate source of suppliers, there is a big deviation between the demand information they obtain and the customer demand in the actual consumer market. Upstream suppliers often maintain higher inventory levels than downstream demand to deal with the uncertainty of downstream orders, artificially increasing the risks of production, supply, and inventory management in the supply chain.
Although companies do not like the bullwhip effect, from the actual situation, the occurrence of the bullwhip effect is also reasonable to a certain extent, and it is difficult to completely eliminate it. Why?
First of all, the complexity of demand forecasting determines that companies in the supply chain must hold a certain amount of inventory, which is very critical. In a complete supply chain, from the perspective of customer experience, demand is always changeable and difficult to predict. Especially in some fast-moving consumer industries, the life cycle of products is very short, and the historical data of customers' early demand and consumption are not available or have very limited effect. Homogeneous competition has also brought about the difficulty of demand forecasting. The overall market demand for a certain category of goods can be predicted with a high probability, but it is difficult to predict a single brand and a single SKU. At the same time, customers are uncertain about the quantity, quality, price, time, etc. of the products ordered, which also requires enterprises to hold a certain amount of inventory.
Second, from an economic point of view, it is more inclined to make large orders. It is impossible for a manufacturer to place an order upstream every time it receives a demand order. It is best to use large-scale production and large-scale procurement to reduce the procurement cost from upstream suppliers. The reduction of logistics costs through vehicle transportation will reduce the frequency of orders. From the perspective of economic order quantity, it will definitely tend to make large orders. .
Therefore, judging from the above two points, the emergence of the bullwhip effect is not completely without its rationality, and there must be a reason for its existence.
04
how to improve
Is there any way to control the bullwhip effect, improve inventory and reduce inventory pressure. Note, the terms used here are control and improvement. Because the upstream and downstream situations of each industry and each enterprise are too different, I think it is difficult or even impossible to completely eliminate them. I can only say that there is a direction of thinking and exploration, and find some ways to actively respond and minimize the impact. This is a framework for thinking.
First, if you have the ability, reduce the intermediate links of the supply chain as much as possible. The shorter the intermediate links in the entire supply chain, the smaller the fluctuation range of the bullwhip effect, and the fewer times to amplify demand. In this way, you can understand why many manufacturers are now engaged in e-commerce and direct sales, because they want to directly reach consumers, so that the forecast of demand will be more accurate.
Second, try to reduce personalization and make standard products as much as possible. The complexity of demand is reduced, and the more uniform the granularity of product categories, the better for forecasting. Moreover, the concentration of semi-finished products or raw materials purchased from upstream is getting higher and higher, and it has more large-scale bargaining power, which can not only reduce costs, but also have a high degree of reuse of raw materials, and the inventory improvement will be more obvious. A good friend of mine is the owner of a clothing e-commerce company. For some categories of clothes, he only makes bare boards and standard products, which has a very obvious effect on improving inventory.
Third, the shorter the product delivery cycle, the better. The shorter the time cycle, the faster the response and adjustment to the upstream and downstream, including the market, and the bullwhip effect will be weakened.
Fourth, I think a very important point is whether the informatization capability can connect upstream and downstream, coordinate upstream suppliers, and connect downstream consumers. If this level can be achieved, all the data will be put together, and the point-to-point efficiency of each node in the entire chain will be very high, and the first-line demand can be directly grasped, and the response of the supply chain will be very fast. Predictions will also be more accurate.
This is also the three streams of the supply chain that everyone often mentions: product flow, cash flow, and information flow. What we are talking about here is information flow, which is very important. For example, in the mobile phone retail market, brand manufacturers can directly grasp the daily distribution and storage data of each dealer. After the information flow is opened up, they can continuously improve and adjust demand forecasts through data analysis.
The above is the analysis and interpretation of the bullwhip effect in the supply chain.
Some friends will say, what is the relationship between this supply chain knowledge and BI and data analysis? Let's think deeply about whether it matters or not, it really matters. If we don't have a deep understanding of these business backgrounds, and can't deeply analyze the phenomena and reasons inside, how can we start with data analysis? How to quantify without data; how to make decisions without data?
Video and article navigation of "Lv Pinchat Data"
Discussion on methodology, ideological framework and project management
A picture to see the thinking framework of BI and several questions
How to understand the technical thinking and business thinking in BI, what is the difference?
Technology and Architecture
Sub-warehouse sub-warehouse, front warehouse, large-scale group BI data architecture planning ideas
IT informatization and digitization