Exploring the Bullwhip Effect by Means of Spreadsheet Simulation

Abstract

An important supply chain research problem is the bullwhip effect: demand fluctuations increase as one moves up the supply chain from retailer to manufacturer. It has been recognized that demand forecasting and ordering policies are two of the key causes of the bullwhip effect. In this paper we present a spreadsheet application, which explores a series of replenishment policies and forecasting techniques under different demand patterns. It illustrates how tuning the parameters of the replenishment policy induces or reduces the bullwhip effect. Moreover, we demonstrate how bullwhip reduction (order variability dampening) may have an adverse impact on inventory holdings. Indeed, order smoothing may increase inventory fluctuations resulting in poorer customer service. As such, the spreadsheets can be used as an educational tool to gain a clear insight into the use or abuse of inventory control policies and improper forecasting in relation to the bullwhip effect and customer service.

Keywords: Bullwhip, Bullwhip effect, Forecasting techniques, Inventory fluctuations, Replenishment rule, Simulation, Spreadsheet simulation