The bullwhip effect is a phenomenon that occurs when significant addition or reduction in inventories cause a ‘snap’ down the supply chain ( Aeppel, 2010 ). Aeppel’s article analyzes this occurrence in the case of Caterpillar Inc. The company’s decision to bolster its supplies and parts affect its suppliers the most, who need to be well positioned or frustrate the chain.
One of the methods used to mitigate the bullwhip effect is the reduction of uncertainty. This involves the manufacturer centralizing the demand information with them as the customers so that the demand may seem less erratic and enable forecasting (Balasubramanian et al., 2001). One way this has been adopted by caterpillar is in the implementation of freeze points, where the company promises not to change its orders. Additionally, the company also held meetings with the suppliers and ensured that they can get financing so that supply can be anticipated and controlled while surprises reduced. Similarly, the reduction of lead time has been implemented to reduce variation ((Balasubramanian et al., 2001)). The reduction of latency between the initiation and execution of an order reduces the variation through forecasting, which covers the safety stock levels. This has been achieved by integration of the ‘lane strategy’, where on one end machines with most common features are kept in stock and on the other custom made ones necessitate waiting.
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However, the suppliers of the company’s materials may cause a bottleneck in the supply chain or increased prices when they fail to meet expectations. Here, Japanese auto OEMs are better positioned due to their supply relations owing to their long term relations and understanding based on frequent communication and presence ( Kojima, 1998 ). An alternative would be the use of vertical integration. In an auto OEM like Hyundai, the implementation of vertical integration could help abate the bullwhip effect by allowing flexibility in their business chain and control capital transfer accordingly.
References
Balasubramanian, S., Whitman, L., Ramachandran, K., & Sheelavant, R. (2001). Causes and remedies of bullwhip effect in supply chain. In 10th Annual Industrial Engineering Research Conference, Dallas, TX, May.
Aeppel, T. (2010). Bullwhip hits firms as growth snaps back. Wall Street Journal (January 27) .
Kojima, K. (1998). Japanese supplier relations: A comparative perspective. Research Institute for Economics and Business Administration, Kobe University. Discussion Paper Series , (98).
