Speculation, Postponement
and Bullwhip Effect
Outbound Logistics Flows
• The lead times are shorter in outbound than inbound
logistics
• Companies having short lead times in outbound logistics
tend to have short lead times in inbound logistics and
vice-versa
• Companies that have a high level of outbound inventory
turnover tend to have a high level of inbound inventory
turnover and vice-versa
• There is a higher inventory turnover in outbound logistics
than in inbound logistics
• There is thus an association between the inventory
trends in outbound and outbound logistics flows overall
inventories are higher in inbound logistics than in
outbound logistics
Implications
• There is a potential Bull Whip Effect between
inbound and outbound logistics flows.
• This has a managerial implication that managers
have to consider upstream activities in the
supply chain when they are striving to improve
their performance in the interface towards their
present and potential customers and vice-versa.
• It is also reasoned that the Bullwhip Effect
between inbound and outbound logistics is
because principle of postponement in outbound
and principle speculation in inbound.
Principles of Postponement
• Postponement of companies’ business
operations reduces the risk by moving the
differentiation nearer to the time of
exchange.
• It provides a point of departure for a critical
examination to enhance the performance
of companies’ business operations.
Postponement and Value Chain
• Porter’s concept of value chain indicates that
there is an adding of value in a company’s
successive business activities.
• Therefore, the finished goods have generated
costs that represent a higher value.
• The financial costs of inventories is higher in
outbound logistics.
• It forces companies to be more restricted in
maintaining these inventories.
Principles of Speculation
• The principle of speculation facilitates a counter
view in relation to the principle of postponement.
• The Bullwhip effect therefore, exists because of
the gap between speculation and postponement
of business activities.
• In a managerial context, Bullwhip effect is
eliminated if there is no gap between the degree
of speculation and postponement of business
activities.
•
The See-Saw Model of Bullwhip
Effect
• In this model, the gap between the degree of
speculation and postponement of business
activities is assumed to influence the Bullwhip
Effect.
• If there is a high degree of speculation (i.e. a low
degree of postponement) in inbound logistics
and a high degree of postponement (i.e. a low
degree of speculation) in outbound logistics,
then the Bullwhip Effect is high (i.e. an upstream
unbalanced see-saw scenario)
• If there is low degree of speculation (i.e. a
high degree of postponement) in inbound
logistics and a low degree of
postponement (i.e. a high degree of
speculation) in outbound logistics, then the
Bullwhip Effect might be interpreted as
high (i.e. downstream unbalanced see-
saw scenario)
Multiple Facets of the Bullwhip
Effect Construct
1.Dynamics model of the bullwhip effect
construct
2.Rubber-band principle
3.A typology of stocking level variability
4.Different levels of analysis of the Bullwhip
Effect.
5.Size of the company
6.Redefinition of the Bullwhip Effect
Construct
Dynamics Model of the Bullwhip
Effect Construct
• Bullwhip Effect is caused by a sequence of
happenings in and between value change
and value systems.
• It may be estimated by measuring the
construct in one or several occasions.
• Therefore, Bullwhip Effect can be dynamic
(i.e. continuous - several occasions) or
static (i.e. discontinuous – one occasion)
Parameters that influence the
dynamics of Bullwhip Effect
1. Time
2. Context
• As time moves on, the context evolves and therefore,
stocking level variability increases.
• These two parameters in conjunction create a generic
conceptual model and contribute to describe the
dynamics of the Bullwhip Effect construct.
• When Bullwhip Effect between stocking levels is
explored on one occasion, the research reflects on the
spot account construct (static).
• When it is explored on several occasions, the research
reflects a periodic construct (dynamic).
Rubber-band Principle
• Stocking level variability is affected by up-downstream
or down-upstream business operation between value
change.
• This should be explored based upon the outcome of a
set of interactive and iterative processes.
• The dynamics of stock level variability can be
illustrated by rubber-band principle.
• Rubber has two components:-
1. Rubber: refers to elasticity, flexibility and changeability
of business operations.
2. Band: refers to that stocking level variability is derived
from the lack of synchronization in sequential and
continuous processes of business operations
Comparison with congested traffic
• There is desynchronized reaction pattern among drivers
in queues of vehicles (demand cycles in upstream or
downstream value systems affect the stock level.
• Lack of synchronization is reflected in spasmodic
movements (some inventories are kept in stock , others
are delivered to another stock level.
• Some vehicles move fast or slow than others (some
stock levels are more or less inventories in stock and are
kept longer or shorter periods of time).
• Lack of synchronization disappears when the drivers
leave the traffic (stocking level variability continues until
inventories reach point of consumption.
Rubber-band comparison
• Movement of vehicles and movement of
inventories resemble the characteristics of
the rubber-band as it is tensioned and
slackened.
• Repeated pulling of rubber-band at one
end and having a small weight at the other
end illustrates congestion Vs.
decongestion and also dilemma of
stocking level variability (Bullwhip Effect).
Pulling of Rubber-band
• As the rubber-band is pulled, it will be
tensioned, thinner in the middle, both ends
relatively thicker.
• When inventories are demanded
downstream, stocking level variability
occurs as real time transfer of demand
cycles between levels does not usually
take place in the system.
Slackening of the Rubber-band
• When the rubber-band is slackened, the middle becomes
thicker, the ends will become relatively thinner.
• It means that as the demand in the marketplace
changes, it effects the stocking level variability in value
systems.
• The width of the rubber band illustrates the stock level
variability; thinner band represents decreased variability
and a thicker band represents increased variability.
• By repeated repulling the rubber impact of the
seasonality of demand cycles may be used to illustrate
stock level variability.
Rubber-band and dynamics of
Bullwhip Effect
• Bullwhip Effect has neither a beginning nor an end in value system.
It is dependent upon the continuous dynamics in the marketplace
(i.e. seasonality of demand cycles)
• It also reflects consequences of continuous spasmodic stock level
variability.
• Therefore, the construct is both dynamic and continuous.
• Bullwhip Effect is usually seen as a unidirectional construct that is
down-upstream variability approach.
• If we push the rubber-band from an upstream location, it will
slacken, bend and jam (i.e. causing the build-up of inventories
further downstream)
• The rubber-band has to be pulled as well as inventories should be
pulled based upon market place demand cycle.
Typology of Stocking Level
Variability
• Bullwhip Effect is explored in terms of
increased upstream variability as well as
increased downstream variability.
• Equilibrium between the degree of speculation
and postponement in different stock levels
smoothens both Bullwhip Effect and Reversed
Bullwhip Effect.
• A typology of stock level variability consists of
two stock levels:-
1. Upstream unit of analysis
2. Downstream unit of analysis
Each unit of analysis (stock level) is divided
into principles of speculation and
postponement.
This creates four stock level variability
situation each with its own unique
characteristics that separate them from
each other.
4 Cells of Typology
Cell: Top right hand corner
Principle of speculation dominates in inbound
logistics, (inventories are higher) than in the
outbound logistics (inventories are lower). This is
the traditional approach of the Bullwhip Effect.
Bullwhip Effect occurs when degree of speculation
in inbound flows is stronger in relation to
postponement in outbound flows.
Cell: Bottom left hand corner
Principle of speculation dominates in outbound
logistics (inventories are higher) than in the
inbound logistics (inventories are lower).
This is Reversed Bullwhip Effect and occurs
when degree of speculation in inbound flows is
weaker than postponement in outbound flows.
Reversed Bullwhip Effect
It occurs when there are:-
• Uncertainties upstream in the supply (limited
production capacity, product quality
deficiencies, unreliable deliveries, unreliable
transport, inaccurate information sharing)
1. Reverse Bullwhip effect scenario occurs when
the degree of speculation in the inbound
logistics in relation to the degree of
postponement in the outbound flows is weaker.
Cells: Top left and bottom right corners
No Bullwhip Effect signifies that there is a balance
between inventory management of business
activities in inbound and outbound logistics.
That means the principle of speculation (or
postponement) dominates equally in a
company’s inventory management of business
activities in inbound and outbound logistics.
Network Model
• The network model consists of three
components.
1. Actors:- this can be a company, a group of
companies, an individual or a group of
individuals. Actors consume resources when
activities are performed.
2. Activities:- these are business functions
performed in the business environment.
3. Resources:- these are tangible and intangible
assets for actors to perform business activities.
Dependencies
There are three generic categories of dependencies
between buyers and sellers for the typology of Bullwhip
Effect
1. Time dependence
• Time compression, order response
• Agility and ability to change direction
2. Functional dependence:-businesses are specialized
and complement each other
3. Relationship dependence:-business activities are
dependent upon the interaction process between
companies in marketing channels.
These dependencies create a dynamic business
environment.
Bullwhip Effect Dynamic Model
• The network and the typology can be
incorporated in a dynamic business
environment to create a dynamic model.
• The model considers generic
dependencies between the business
activities, the type of logic flows and the
components of the network so that a
change in one of the components has an
impact on others and vice-versa.
Implications of Dependencies
• The model also suggests that impact of generic
dependencies on actors’ activities and resources is
stronger in inbound logistics than outbound logistics as
there is high level of dependencies between them.
• The impact of generic dependencies on actors, activities
and resources is weaker in the inbound logistics flows
than in the outbound logistics as there is low levels of
dependencies between them.
The impact of generic dependencies on actors, activities
and resources is equal in the inbound and outbound
logistics on account of levels of dependencies between
them.
Different levels of analysis of the
Bullwhip Effect
Bullwhip effect applies to four levels:-
1. Within a value chain
2. Between value chains
3. Within a value system
4. Between value systems
The pair perspectives of stocking level variability are
1.Inbound vs outbound
2.Internal vs. external
3.Direct vs indirect
4.Upstream vs downstream
5.Intra vs inter
• Level 1, 2 , 3 have a channel orientation of
stock level variability. This is intra-channel
perspective.
• Level 4 has a market orientation which is
an inter-channel perspective.
Size of the company, inbound and
outbound inventories
Larger companies in inbound logistics flows as compared
to small companies
• Higher inventory turnover,
• more upward lead time trends
• More upward inventory level trends
Larger companies in outbound logistics flows as
compared to small companies
• Higher inventory turnover
• Shorter lead time
• More upward lead time trends
• More upward inventory level trends
Bullwhip Effect redefined
1. The Bullwhip Effect construct can be now defined as:-
the relative variability between stocking levels in and
between value change and value systems.
2. Specifically it is defined as:-the relative variability
between stocking levels caused by the degrees of
postponement and speculation. The relativity between
stocking level variability refers to either internal or
external, inbound or outbound, direct or indirect,
upstream or downstream, and intra- or inter-channel.
The proposed redefinition does not state that variability has
to be upstream, it can also be downstream.
Mitigation of Bullwhip Effect
1. Reduction of lead time
2. Revision of reordering procedures
3. Limitation of price fluctuations
4. Integration of planning and performance measurement
5. Shared knowledge with suppliers and customers to
better gauge demand
6. Cooperation with supply chain partners to determine
what information is causing an overreaction
7. Use of internet –enabled technology and the
application of the web to speed communications and
improve response time
How to cope with Bullwhip Effect
1. Reduce uncertainty: Provide complete
information on actual demand. POS
2. Strategic partnership: VMI, alliances
3. Reduce variability: EDLP, elimination of
price promotions, stable prices.
How to reduce and control
variability?
1. Avoid multiple demand forecast updates
2. Break order batches
3. Stabilize prices
4. Eliminate gaming in shortage situations
5. Control Lead time
Avoid multiple demand forecast
updates
• Order on ultimate customer demand: and not
on the ordering behaviour of immediate
downstream partner, as ordering behaviour
shows amplification to account for order batches
and overreactions. Use POS, EDI, VMI, Supply
chain responsibility through strategic partnership
• Centralized procurement: plan central
purchase to avoid uncertainties of multiple
forecasts.
• Direct sales to customers, avoiding
intermediate channels
Break Order Batches
• Control on Batch ordering: Batches
carry no relationship with needs. A
distorted picture of patterns of orders
emerges to the factory.
• Reduced batch: brings down lead time
and hence safety stock
Advantages of full truck loads are
achieved through assorted loads
Stabilize Prices
1. Control on Price fluctuations: Promotional
discounts and price variations lead to
influencing demand but not the actual needs
2. Stabilize prices: EDLP,
3. Reduce variability: of volumes, of prices
4. Penalties on returns: Often the channels
return the products if these are not sold.
Introduce strictness, penalties
Eliminate gaming in shortage
conditions
Gaming means customers order additional, non-required
amounts, since they expect to receive only a portion of
outstanding orders from factory due to shortage
situation
• Control on Inflated orders: Shortages tend to
magnify the bull whip effect and results become
obvious when period of shortages is over
• Penalties on cancellations: Strict conditions on
cancellation of orders
• Control process time: Eliminate or reduce delays
which lead to shortages
• Centralized Information : One of the most important
factors to control bullwhip effect.
Lead time control
• Lead time includes:
Time to process
Time to ship or transport
Information lead time
To calculate safety stocks, we in fact multiply estimates of
average demand and standard deviation of demand by
lead time.
•Longer the lead time, more significant is the change in
safety stock and reorder level.
•Longer lead time increases variability.
•Use EDI for information systems
McCullen and Towill approach
Four material flow principles to reduce
bullwhip effect
1. Control system
2. Time compression
3. Information transparency
4. Echelon elimination
Kelle and Mine Approach
Bullwhip effect is reduced through controls of:
• Purchase order of individual retailers
• Aggregate orders of the retailers
• Suppliers ordering and producing policy
Demand correlation can reduce the variability of
aggregate orders
Autocorrelation in buyers orders can smooth the
suppliers ordering policy
Small frequent orders decreases both
variability and uncertainty
Yu et al Approach
• Partnership reduces inventory as well as
costs
• Reduces bullwhip associated wit
decentralized controls
• Collaboration can control forecast
fluctuations
