Exam 22: Supply Chain Management

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The bullwhip effect is a phenomenon in which the variability in the size and timing of orders increases at each stage up the supply chain,from customer to supplier.In a famous study,the bullwhip effect was observed in Procter & Gamble's supply chain for diapers.The number of babies determines diaper demand,and that number is constant or possibly slowly changing.
Retailers do not order from the distributor with the sale of every diaper package.The retailer waits until the diaper inventory falls below a certain level,called the reorder quantity.Then the retailer orders a supply of diapers,perhaps ordering a few more than it expects to sell to ensure that it does not have an outage.The distributor receives the retailer's orders and follows the same process.It waits until its supply falls below the reorder quantity,and then it reorders from the manufacturer,with perhaps an increased amount to prevent outages.The manufacturer,in turn,uses a similar process with the raw-materials suppliers.
Because of the nature of this process,small changes in demand at the retailer are amplified at each stage of the supply chain.These small changes become quite large variations on the supplier end.The large fluctuations of the bullwhip effect force distributors,manufacturers,and suppliers 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.

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A supply chain is a network of organizations and facilities that transform raw materials into products delivered to customers.In a typical supply chain,customers order from retailers,who,in turn,order from distributors,who,in turn,order from manufacturers,who,in turn,order from suppliers.The supply chain also includes transportation companies,warehouses,and inventories,and some means for transmitting messages and information among the organizations involved.Four major factors,or drivers,affect supply chain performance: facilities,inventory,transportation,and information.