Answer to Question 1
The bullwhip effect is a phenomenon in which the variability in the size and timing of
orders increases at each stage up the supply chain, from customer to supplier. In a famous study,
the bullwhip effect was observed in Procter & Gamble's supply chain for diapers. The number of
babies determines diaper demand, and that number is constant or possibly slowly changing.
Retailers do not order from the distributor with the sale of every diaper package. The retailer
waits until the diaper inventory falls below a certain level, called the reorder quantity. Then the
retailer orders a supply of diapers, perhaps ordering a few more than it expects to sell to ensure
that it does not have an outage. The distributor receives the retailer's orders and follows the same
process. It waits until its supply falls below the reorder quantity, and then it reorders from the
manufacturer, with perhaps an increased amount to prevent outages. The manufacturer, in turn,
uses a similar process with the raw-materials suppliers.
Because of the nature of this process, small changes in demand at the retailer are amplified at
each stage of the supply chain. These small changes become quite large variations on the
supplier end. The large fluctuations of the bullwhip effect force distributors, manufacturers, and
suppliers to carry larger inventories than should be necessary to meet the real consumer demand.
Thus, the bullwhip effect reduces the overall profitability of the supply chain.
Answer to Question 2
D
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