Ways to eliminate the whip effect - Supply chain management

Methods for eliminating the whip effect

To eliminate the whip effect, there are several proven ways:

• Application of integrated planning;

• reduction in the timing of information entry (back order, joint demand planning);

• Increase the speed of supply chain reaction (shorten the delivery time, use integrated logistics concepts/technologies, for example, technologies just-in-time, postponement).

• Smoothing price fluctuations in the market using stock instruments;

• use of the principles of cooperation with participants in the supply chain.

Let's consider some specific ways to reduce the negative impact of the whip effect on the supply chain, including stability indicators.

In order to neutralize the impact of fluctuating forecasts and reduce insurance stocks, it is necessary to make information about demand available to all participants in the supply chain. This can be done through the rapid provision of information from sales points (for example, using EDI technology). This can also be done by integrating the business processes of the supply chain contractors based on the UTI in the implementation of JIT, CPFR, VMI, S & OP (see Chapter 7).

In order to reduce the negative impact of the time delay due to the length of the order execution cycle, we must look for ways to optimize internal business processes. And eliminating communication barriers and improving coordination between supply chain contractors on the basis of a single information system will improve the speed of information transfer between companies in supply chains. This will ultimately affect the reduction in the duration of the order execution cycle.

Using EDI technology will reduce administrative costs for placing and forming orders in the supply chain. As a result, counterparties will be able to place smaller orders in volume.

Another way to reduce the size of the order and increase the frequency of deliveries is to consolidate lots of shipments, downloading products from several suppliers at once, which will reduce the cost of transportation by using the full cargo capacity of the vehicle. You can also consider the option of transferring the consolidation function to outsourcing to the logistics operator, if the preliminary analysis shows the economic effectiveness of this solution.

In order to neutralize price fluctuations in the supply chain, one should adhere to a stable pricing strategy and reduce the number of promotions to promote products, as well as unify pricing in the light of discounts. It is possible to use special trade contracts that will create incentives for customers to consistently purchase products.

Counterparties often do not even realize that the whip effect plays a significant role in their supply chain. SC managers should start by comparing the variability of orders that they receive from their customers, with the variability of orders that are placed with suppliers. This helps each company quantify their own "contribution" in the whip effect. When the effect of increasing inventories is discovered, it becomes easier to recognize the fact that all links in the supply chain contribute to the whip effect, which leads to a significant loss in the overall profit chain. In the absence of such specific information, one should try to better counteract variability, rather than eliminate variability as such. This forces companies to invest significant amounts in inventory management and scheduling systems, solely to see a slight improvement in performance or profit. Establishing the size of the whip effect is very effective in stimulating supply chain counterparts to focus on the efforts needed to achieve coordination, eliminate order variability and improve the sustainability of the supply chain.

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