Rationing and shortage gaming:
Rationing and shortage gaming is the fourth cause for Bullwhip effect. It is characterized by large swings in perceived demand at upstream components of supply chain. To counter this reason following measures are useful.
- Allocate product depend on past sales not on current orders
- Share information regarding capacity
- Long term contracting to permit vendors to adjust capacity
- Eliminate generous return and order cancellation policies
Generally, Bullwhip effect is a main cause of worry in a supply chain as these results in inventory pile-up while there is no demand and huge shortages while there is demand. Both result in loss of profitability. Moreover, this phenomenon is more serious whenever one go away from the customer end of a supply chain. The possible approaches to counter this influence have been mentioned above. It is more effectively countered with information sharing among channel alignment, supply chain partners, and better operational efficiencies.
Internally also, this behaviour is present seriously throughout the chain. The typical case is the "marketing-manufacturing conflict". The demand forecast is inflated by marketing so as to achieve longer allocation from the manufacturing units. It saves them from being caught in short-supply situation under an upward market swing. Manufacturing and distribution people make a second guess apparently to nullify it that creates further distortion in demand. Likewise way, other elements of the chain contribute to the inventory building measures. Decisions about required-capacity of the enterprise lag behind the modification in demand. This causes further building-up of a safety net for inventories or lost sales because of under-production.
Figure: Amplification of Demand as Transmitted Along a Supply Chain