27 Sep 2009

Bull-whipping or driving the Demand?

Bullwhip effect is a phenomenon of demand being overestimated or underestimated as it passes through various stages of supply chain resulting in exaggerated supply fluctuations. The increased variability in demand at successive stages of supply chain trigger increases in inventory carried in different stocking points in the supply chain.

Myth: The Forecast is the primary reason of the bull-whip

Reality: The absence of a demand plan that captures more down-stream customer intelligence is the real culprit.

So contrary to the oft-expressed cliche on the Forecast being the problem, in reality when demand shocks occur, players in the supply chain react to the shock in different ways causing the bull-whip.

What can be done to mitigate this?

We can create more demand visibility or demand clarity by improving the flow of information from one point in the supply chain to another – supplier to manufacturer, manufacturer to distributor, distributor to final customer is how the goods and services flow.  Demand information should flow the opposite way.  How can we facilitate this?

You can learn more about collaboration on our pages devoted to collaborative planning and Forecasting.

  1. A supply planner using just the demand history to create a simple average forecast will NOT do much to help reduce the bullwhip.
  2. A Forecaster just creating a Statistical forecast based on past history can do slightly better.
  3. A Brand Manager creating a Forecast based on YTD trends at the dollar level can actually do more damage to the SKU level supply chain plans, especially if married with the supply planner in (1) above.

Until you have a good demand planning process that incorporates Sales and Marketing (however odd it may seem) and your customer with constantly flowing information, you will continue to bull-ship the demand.  Demand visibility increases with more downstream customer info on the future.  Demand-driven is a good thing but you need to ensure that it is the customer’s demand info that actually drives you – not just random order flow.

You can join us in Chicago this October along with some premier Fortune 500 companies to learn more about the art and science of demand planning.

We will discuss many myths and realities including the buzz-kill on the word “Demand-driven” and what it really means.

Lately, I hear a lot of discussion on Demand-Driven without a clear explanation of what this means.

What does this mean to you? Are you using Customer, Sales, or Marketing information in any way shape, or form to drive your supply chain planning?  You may want to review our web page for the Account-Based Forecasting model which holistically integrates customer demand information into the product level demand plan.

Please share your experiences on our Demandplanning.Net Linked in the group.

Please visit http://demandplanning.net/consulting.htm to know about our services offerings at DPLLC.

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