Bullwhip Effect: What causes it and using ECR and VMI to counteract its effects

"The bullwhip effect occurs when the demand order variabilities in the supply chain are amplified as they moved up the supply chain" (Lee, Padmanabhan & Wang 1997). The bullwhip effect could be characterized as a kind of a gigantic game of 'telephone,' in which the first message becomes distorted in the retelling, and subsequent transmissions of the information result in greater and greater errors. "The common symptoms of such variations could be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain production planning (i.e., excessive revisions), and high costs for corrections, such as for expedited shipments and overtime" (Lee, Padmanabhan & Wang 1997).

Individuals on the supply chain can only make use of information from the person on the chain immediately before them. Information is often not fully accurate, because even though demand may be consistent within an industry, it can be distorted because of monthly variations of demand; the desire to make orders large enough to fill a shipment truckload; and buying in bulk to save money which interferes with the ability to engage in accurate forecasting. The first step in counteracting the bullwhip effect is the use of Efficient Consumer Response systems (ECR). These computerized systems alleviate some of the asymmetries of information that are the cause of the bullwhip effect. ECR "attempts to integrate all departments and functions across a company...

ECR ensures "when a customer service representative enters a customer order into an ECR system, he has all the information necessary to complete the order... People in these different departments all see the same information and can update it. When one department finishes with the order it is automatically routed via the ECR system to the next department. To find out where the order is at any point, you need only log in to the ECR system and track it down" (Wailgum 2008:1). ECRs allow for integrated customer and financial information and standardized information. "Ordinarily, every member of a supply chain conducts some sort of forecasting in connection with its planning (e.g., the manufacturer does the production planning, the wholesaler, the logistics planning, and so on). Bullwhip effects are created when supply chain members process the demand input from their immediate downstream member in producing their own forecasts" (Lee, Padmanabhan & Wang 1997). With ECRs, forecasting is simultaneous and everyone uses the same information.
However, ECRs are only the first step in lessening the effects of the bullwhip. With Vendor Managed Inventory "the vendor creates orders for their customers based on demand information that they receive from the customer. The vendor and customer are bound by an agreement which detECRines inventory levels, fill rates and costs. This arrangement can improve supply chain performance by reducing inventories and eliminating stock-out situations" (Murray 2012).…