Bwe in Business, One of the Most

BWE

In business, one of the most challenging issues is what is known as the Bullwhip Effect (BWE) in the supply chain. This effect means that any demand forecast attempt cannot be accurate, since it is based on potentially inaccurate data. According to Ravichandran (2008), BWE refers to a distortion in the demand forecast related to a noise factor. The demand is therefore inflated and leads to an increase in fixed cost and a disadvantage relative to the competition. This, in turn, could lead to a production rate that is higher than the rate of consumption, again creating an economic disadvantage for the company. More specifically, this might also mean that there might not be sufficient stock to serve a specific demand, even if overall supply is higher than demand. Excessive supply also means that discount drives need to be implemented to dispose of stock that is not in high demand. This also leads to lower revenue than would have been planned for. All these effects are collectively known as the Bullwhip Effect.

BWE is responsible for unstable production schedules that relate to high uncertainties in the supply chain. Demand is highly variable resulting in high potential costs, where returns are not optimized. The result is also extra capacity along the supply chain to meet variable demand, which in itself is not optimal. Once demand drops, the existing capacity is then under-utilized and not optimal in terms of costs and returns. Lead-times are also increased by variable demand, which in itself can lead to increased stocks that could prove excessive later. The effect of this could be that end suppliers are left with excessive stock that is not popular, whereas popular stock is unavailable.

Because the Bullwhip Effect is not desirable from a business perspective, business people have been attempting to find solutions to the phenomenon. One potential solution is Vendor-Managed Inventory (VMI). One important component of this phenomenon is information sharing and communication. Specifically, this means that a distribution channel operation system is created to monitor and managed the inventory at the distributor or retailer. This management process is the responsibility of the manufacturer or vendor.

Information sharing among supply chain members is an essential component of this. This means that a more accurate initial estimation can be formed in terms of supplier inventory level and customer service level. The supplier's decisions for replenishment are then taken for the buyer. Because this is a much more direct decision level, based upon data available to the supplier, the quantity of products manufactured and delivered is much closer to the actual demand level for such products. This increases the revenue level and decreases the possibility of excessive revenue loss by means of better projections for predetermined customer service level.

Vendors monitor the inventory levels of the buyer and then make periodic decisions regarding the resupply of products and services including quantities, shipping and timing. This increases the effectiveness of supply and streamlines the balance between the supply and demand processes. In other words, VMI provides a more direct link between supplier and customer, and increases the effectiveness of supply chain coordination.

The Bullwhip Effect is created by a basic lack of visibility of end customer demand because of various noise factors along the supply chain. The larger the business, the bigger the potential difficulties that this could cause.

VMI allows the supplier to control the buyer's inventory level and can therefore ensure a predetermined customer service level on a more consistent basis. The quantity of product supplied in this way could be fixed or variable. When the stock level at the buyer reaches a specified level, it is replenished according to various criteria. These include the average demand during the transportation lead-time and safety stock to ensure that demand variations are covered.

It is therefore highly important to create open lines of communication and information flow within the supply chain to ensure that VMI functions optimally. This is the main challenge of VMI. If sufficient information flow cannot be ensured, the Bullwhip Effect remains in place. Furthermore, a sufficient level of trust needs to be ensured among the parties to encourage free information flow (Portes and Vieira, 2006).

It could therefore be concluded that VMI is a potential alternative to create mitigation for the Bullwhip Effect. This will, however, require a highly effective process of constant monitoring by the supplier. The buyer will also need to be entirely open regarding stock levels and show a sufficient level of trust to ensure full and free information flow between the supplier and the buyer.

The longer the supply chain, the more complicated the VMI process and the more danger there is of the BWE. However, it is important to maintain a sense of optimal effectiveness in ensuring that revenues are as high as possible while expenses are as low as possible. Once such a balance is reached, the important effect is that the entire supply chain will benefit. Hence, the motivation to optimize this process should be high (Hohmann and Zelewski, 2005).