Vendor Managed Inventory and bullwhip reduction in a two level supply chain

This paper compares the bullwhip properties of a Vendor Managed Inventory (VMI) supply chain with those of a traditional “serially-linked” supply chain. The emphasis of this investigation is the comparative impact the two structures have on the “Bullwhip Effect” generated. Particular attention is paid to the manufacturer’s production ordering activities as demonstrated using a simulation model based on difference equations. Each of the four important sources of the Bullwhip Effect is documented and considered in turn. The analysis shows that with VMI implementation two sources of the Bullwhip Effect may be completely eliminated, i.e. rationing and gaming or the Houlihan Effect, and the order batching effect or the Burbidge Effect. VMI is also significantly better at responding to rogue changes in demand due to the Promotion Effect or to price induced variations. However the effect of VMI on demand signal processing induced bullwhip or the Forrester Effect is less clear cut. The paper concludes that on balance VMI offers a significant opportunity to reduce the Bullwhip Effect in real-world supply chains.