The Bullwhip Effect

Something  goes terribly wrong when forecasting demand based simply on guessing future trends. The customer demand is actually 9 units, but to be sure you’ll consider 10 as a starting point and if you are a retailer you order 15 units, just to have a safety stock. De distributor then orders 20 units to the manufacturer in order to have a discount and to maintain enough stock.

As a result, the manufacturer orders material for 40 units to save some money on quantity purchased and to ensure timely delivery. This is a real scenario and the Demand Amplification has been since professor Jay Forester coined the term 50 years ago a challenge for effective supply chain management. By now Enterprise Resources Planning systems are in place and Collaborative Planning, Forecasting and Replenishment methods somehow solve this issue.

But, sales and operations planning (S&OP) – integrating sales forecasts with operations plans, still makes the difference between promise making and promise keeping and customer-facing departments: sales and marketing, and supply-side operations departments: purchasing, production and logistics still find themselves at odds during this not so simple process.

It’s still important to get promise-makers and promise-keepers on the same page: when we fail to deliver, this impacts credibility and chases customer away, and undersupply – opens the door to competition, oversupply leaves excess inventory that must be marked down or written off. This is simply the way market react when something goes wrong when matching supply and demand. To avoid this people need to agree on objectives and methods to achieve them.

Sales and operations planning (S&OP) planing inputs come from Sales and marketing experts but also from the purchasing, production and logistics specialists. Sales forecasts and capacity plans need to be based on agreed principles and match demand. Which also means that finance and human resources people should have a say in what regards the use of resources. So,  it’s about having at least monthly meetings to establish a common vision of what’s expected and ensure commitment to fulfill the vision.

As a final word, without going into details, the ideal approach in avoiding The Bullwhip Effect is to generate a quantitative forecast as a baseline, then have experts weigh in the results and see what influences the results and what are the best estimates and tools to correct them based on the available data and on the actual demand.

By successdotinc

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