Smooth is smart: Bullwhip, inventory, fill-rates and the golden ratio
Abstract
A major cause of supply chain deficiencies is the bullwhip effect. This effect refers to the tendency of the variance of the replenishment orders to increase as one moves up a supply chain. Supply chain managers experience this variance amplification in both inventory levels and replenishment orders. As a result, companies face shortages or bloated inventories, run-away transportation and warehousing costs and major production adjustment costs. In this article we analyze a major cause of the bullwhip effect and suggest a remedy. We focus on a unique replenishment rule that is able to reduce the bullwhip effect. In general, bullwhip reduction may have a negative impact on customer service due to inventory variance increases. Our analysis shows that bullwhip can be satisfactorily managed without unduly increasing stock levels to maintain target fill rates.