Bullwhip Effect in Supply Chain Essay

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Supply Chain Class Module 2, Lesson 3 Question #1 Develop a small group consensus on the impact (increases, decreases, no effect) of the Bullwhip Effect on two of the following six supply chain performance measures: manufacturing cost, inventory cost, replenishment lead time, transportation cost, shipping and receiving cost, level of product availability profitability. One of the two measures that your team chooses must be inventory cost. For inventory costs, be certain to be specific about the kinds of inventory costs impacted (in-storage cycle stock carrying costs, ordering costs, stockout costs, or safety stock carrying costs). Clearly explain your group’s reasoning or rationale for the impact you have agreed to; …show more content…
This situation is clearly defined in an article about Cisco’s need to write-off $2.1 billion in inventory in 2001. However, one must dive deeper into specific inventory performance measures to better understand the effects of the bullwhip effect on inventory costs.
Safety Stock
Safety stock can be defined as inventory held as buffer against mismatch between forecasted and actual consumption or demand, between expected and actual delivery time, and unforeseen emergencies. From a positive standpoint, safety stock can help to potentially reduce stock out situations however is also contributes to the bullwhip effect. Specifically with demand forecast updating using exponential smoothing, ordering of safety stock will create larger swings for suppliers and even move for orders placed to the manufacturer (Lee, p 95). Furthermore, poorly ordered safety stock that becomes excess or obsolete can lead to increased expense or in a worst-case scenario, written-off or scrapped completely.

Stockout Cost
Stockout cost, also called shortage cost, is defined as the economic consequences of not being able to meet an internal or external demand from the current inventory. Such costs consist of internal costs (delays, labor time wastage, lost production, etc.) and external costs (loss of profit from lost sales, and loss of future profit due to loss of goodwill). One cause of stockout cost can be attributed to