...The Bullwhip Effect is a major cause of higher costs and inefficiencies in supply chains. It describes how small fluctuations in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturers, and suppliers. As an example, consider disposable diapers. Babies generally consume diapers at a more or less consistent rate when aggregated over a large group of customers. Nevertheless, order fluctuations invariably become considerably larger as one moves upstream in this supply chain.
Consequences of the Bullwhip Effect include excess/fluctuating inventories, shortages/stockouts, longer lead times, higher transportation and manufacturing costs, and mistrust between supply chain partners...
...In most supply chains, the upstream activities respond to forecasts, while somewhere on the downstream side the chain waits for orders to be placed. Consider these two former fast food slogans:
"We do it all for you!SM" - McDonald's
"Have it your way!SM" - Burger King
Consider how McDonald's used to produce finished hamburgers "to forecast" - they didn't know when patrons would come in for lunch, but they produced burgers in anticipation. Burger King waited until patrons actually placed (customizable) orders before the burgers were produced - this is more commonly known as the "Build-to-Order" (BTO) model, while McDonalds' former strategy was called "Build to Stock" (BTS). Both models have benefits and drawbacks, and many companies do a combination of both.
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Notice that the BTO chain takes time to build the exact item ordered by the customer. As a result, it takes longer to fill each customer order. The BTS chain...
...Our total supply chain may be drastically inferior to that of a competing supply chain, but we may be unable to observe that if we only compared our local node in the chain (e.g. our factory) with that of our competitor. Let's re-visit our inventory/service tradeoff curve in the figure below; the left side of the figure shows us that our inventory/service tradeoff curve is very similar to our competitor's. The right side of the figure, measuring our entire supply chains, reveals that our competitor's overall chain achieves better response time with lower inventories. Given that we know that our company/node is performing well, what is then implied about the performance of our partners in our supply chain? What actions might that suggest?
Consider two motherboard manufacturers that each sell to a PC maker. Both board manufacturers might have excellent, even similar, inventory/service levels...
