RFID gives an electronic identity to something non-electronic, like a box of detergent.
The bullwhip effect is when a company (like a grocery store) receives far more or less inventory than it needs. For example, a Finnish grocery store found that customer demand for laundry detergent fluctuated by up to 10 percent every week, but the store received more than twice the stock it needed to replenish it. The causes include a lack of visibility into the supply chain--for example, not seeing that replenishment stock is en route and so placing an unnecessary order. The solution is visibility into the supply chain, something technologies like radio-frequency identification (RFID) enable.
Definition
Skjott-Larsen and Schary in "Managing the Global Supply Chain" described the bullwhip effect as being that "information about the final customer's actual demand is often distorted from one end of the supply chain to the other." The supply chain is that long stream of manufacturers, distributors, wholesalers, logistics companies, and so forth that handle a product on its way to the customer.
The consequences are excess inventory or not enough inventory. Excess inventory forces a company to sell that inventory at discounted prices. With too little inventory, a company risks losing customers or paying high prices to expedite a replenishment order, which drives profits down.
Causes
As Skjott-Larsen and Schary describe, each link in the supply chain has its own ordering routines, reorder points, and quantities. So a retailer may order 10 percent replenishment inventory, but the number becomes distorted as it passes up the supply chain.
Ordering to forecasts, rather than to actual need, distorts inventory as well. A company that orders what it thinks it will need rather than what it actually needs will likely end up with too much or too little inventory. (This is difficult to avoid in seasonal goods, such as Christmas decorations.)
A retailer may also inflate its orders during a shortage, only to find that a shortage was short-lived.
Supply Chain Visibility
Perhaps the strongest contributing cause to the bullwhip effect, wrote authors Simchi-Levi and Kaminsky in "Managing the Supply Chain," is a lack of centralized demand information. Each link in the supply chain uses its own method of calculation, when they all should be using actual customer demand as a measure. Centralized demand information thus becomes the solution. Such connectivity along a supply chain, though, is rare. How would a chemical manufacturer, which supplies a detergent manufacturer, know how much detergent a particular Wal-Mart in New Orleans requires?
RFID
Both Wal-Mart and the Department of Defense (DoD) have attempted to reduce the bullwhip effect by mandating the use of RFID by their suppliers.
RFID is like a radio-frequency-emitting barcode. Whereas barcodes used the United Product Code (UPC) system, RFID in the supply chain typically uses the Electronic Product Code (EPC) system; this is a universally-accepted code, standardized by consensus of members of EPC Global, an RFID industry organization. Members include Wal-Mart, the DoD, and Procter & Gamble, among hundreds of others.
Wal-Mart uses RFID to take precise inventories; it then holds its suppliers to delivering exactly that replenishment stock. The suppliers in turn are required to tag cases and pallets of the inventory they supply, so that Wal-mart can conduct a precise incoming inventory.
Boeing and the DoD are beginning to require RFID visibility into the shop floors of some key suppliers. RFID follows the work order, enabling Boeing to see the exact status of a given order.
Internet of Things
RFID, along with global positioning systems (GPS) and similar technologies, are contributing to "The Internet of Things." This term was coined by Kevin Ashton, who was once a brand manager at Procter & Gamble. Ashton would later co-found the RFID company ThingMagic. As Ashton described it, the Internet of Things gives items a unique identity (much like a URL) and uses the Internet to transmit information about it, such as its whereabouts and condition. With a well-run Internet of Things, using technologies like RFID to make items searchable, stock-outs, overstocks, and the bullwhip effect can (in theory) be vastly reduced.
Tags: bullwhip effect, Internet Things, supply chain, supply chain, visibility into
