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The Bullwhip effect under the presence of competitive markets

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Bachelor Thesis


Business Administration>Supply Chain & Logistics




Bachelor Thesis: This chapter will discuss the following research questions: "What is the bullwhip effect and what are the main reasons?". First, Section 2.1 will give a clear definition of the bullwhip effect. In order to better understand this topic, the main reasons for the bullwhip effect will be discussed in Section 2.2. This chapter will be used to provide a good foundation for other research questions, so you can investigate whether and under what circumstances. 2.1 Definition of Bullwhip Effect The bullwhip effect is one of the most popular and researched concepts in the field of operations and supply chain management . The main motivation for minimizing the bullwhip effect is the associated costs associated with this phenomenon. Despite extensive research, the supply chain has not succeeded in effectively addressing the bullwhip effect. In the current business environment, supply chain management and strategic use have become more common. In other words, organizations pay more attention to the profit and welfare of the entire supply chain than ever before (Chang et al., 2013). In order to understand the bullwhip effect, the general description of the supply chain should be clear. The supply chain is a network of companies and facilities (suppliers, manufacturers, distributors, and retailers) that participate in the transformation or value-added processes and activities of the raw materials and services that are ultimately delivered to customers through upstream and downstream connections. Very well done (Souza, 2014). In the supply chain, there are financial, physical and information flows between different companies participating in the supply chain. Successful supply chain management requires planning, managing and controlling these processes by integrating key processes, from suppliers to manufacturers, retailers to end users, so as to create value for end customers (Paik, Seung-Kuk and Bagchi, 2007) . Coordinated and implemented supply chain management decisions can directly benefit the organization by reducing transportation, procurement, out-of-stock, storage, and disposal costs. To achieve this goal, supply chain members must recognize that they are part of a complex network. The supply chain is interconnected. If a single member changes its conditions, every member of the supply chain will be affected. In the supply chain, each member relies heavily on information from its immediate downstream members. This stems from the fact that each member immediately orders from its upstream supply chain member. Various inefficiencies in the supply chain can lead to the bullwhip effect (Wang & Disney, 2016). The bullwhip effect is considered to be a common problem in the supply chain. 2.2 The cause of the bullwhip effect The need to control the bullwhip effect has become more and more important (Chang et al., 2013). Organizations in the supply chain can only deal with the bullwhip effect if they understand the underlying factors that cause this phenomenon. Lee et al (1997) identified five main reasons for the bullwhip effect, namely, demand forecast updates, delivery time, price fluctuations, order quantities, and supply shortages. All of these reasons can stem from information distortion somewhere in the supply chain (Li et al., 1997). Each cause of the bullwhip effect in the supply chain will be discussed separately in the following subsections. 2.2.1 The two main reasons for demand information distortion caused by demand forecast updates are inaccurate information and demand forecasts (Lee et al., 1997). Information sharing is about fully sharing demand data and sensitive company data. Demand forecasts are based on available data retrieved from supply chain members. Wrong information sharing and wrong demand forecasting will cause manufacturers to ignore the accurate needs of the market. Enterprise demand forecast information is usually based on past demand information. This means that the forecast of future demand depends on past data. For example, if a retailer experiences a huge increase in sales during a certain period, then future demand forecasts will be affected by this. However, this does not always mean that future demand is still relatively high. The demand forecast of a single member of the supply chain is based on its direct downstream partners, which may lead to inaccurate future demand forecasts (Lee et al., 1997). Because every company has its own goals, demand forecasts are often manipulated. By creating incentives to adjust the goals of supply chain members, deviations in demand forecasts can be reduced. In order to avoid the risk of out-of-stocks, the company, for example, increases part of the inventory. This may lead to demand inflation and a bullwhip effect (Dai et al., 2017). "The update of demand forecasts shows that due to safety stocks and long lead times, demand is magnified. As orders are predicted and passed along the supply chain, safety stocks will increase, resulting in a bullwhip effect." (Paik et al., 2007) . This means that when the retailer processes the demand signal, the original sales information will be distorted. This difference will be further amplified when passed to the upstream of the supply chain, and it will become larger as the delivery time and the length of the supply chain increase. (Because each company will add additional safety stock as their forecast) (Dai et al., 2017). In the supply chain, there is information flow in the upstream and physical logistics in the downstream. These flows are directed in the opposite way, but if one of the flows is distorted, both flows will be affected. Read Less