One of the most common issues supply chain managers face is known as the bullwhip effect in which small fluctuations in demand at the downstream end of the supply chain may cause out sized variations at upstream suppliers. The effect is a bloated and ineffective supply chain with too much inventory. An effective supply chain manager will want to use strategies to reduce the bullwhip effect to improve the overall efficiency of the supply chain. Some methods to overcome the bullwhip effect are:
1. Collaborate with customers and suppliers
Improving supply chain effectively is through better collaboration with customers and suppliers. When companies work with customers to understand their plans and forecasts, they can build promotions and seasonality into the forecast and then provide more insight to their suppliers to help prevent the build-up of unnecessary inventory due to the bullwhip effect.
Supply chain management software often has capabilities to aid in collaboration. Supplier portals, EDI transactions, event alerts and project portals are some of the most common ways to increase visibility and collaboration.
2. Improve forecast accuracy
Even if a company tries to become more demand driven, it still need a forecast to plan long lead time items or to cover demand from new customers, new products or in-house promotions. While it’s a given that a forecast will be inaccurate, there are steps that can improve accuracy. Ensuring that you use the right algorithm to project demand is one way to increase accuracy; taking input from sales and customers is another.
3. Enable fast decisions with visibility and insight
The most important benefit of supply chain management applications is the visibility and insight they provide. Without the right degree of insight, a supply chain manager must rely on guesswork or rules of thumb to make decisions. The result will nearly always be sub-optimization of the supply chain that results in higher costs, excess inventory, and slow deliveries.
4. Adopt a demand driven supply chain management approach
Demand driven supply chain management is one of the most effective ways to reduce the bullwhip effect. It is a known fact that most forecasts are inaccurate, so when actual demand materializes it is almost certain to differ from forecast quantities. This causes companies to place emergency orders on suppliers. Without effective communication, those suppliers’ supply chain management systems will overreact, setting off a chain reaction of excess inventory that increases cost and slows velocity. In contrast, a demand driven supply network will have less overall inventory and be more responsive.
Re-post from GPPCPA blog