Philips Electronics Synchronizes Its Supply Chain to End the Bullwhip Effect

Demand variability increases as one moves up a supply chain. The demand for finished products is less variable than for subassemblies, which is less variable than for individual components. This phenomenon is known as the bullwhip or Forrester effect. It increases inventory unnecessarily and makes managing the capacity of equipment and personnel difficult.

In 1999, Philips Semiconductors confirmed substantial bullwhip effects in some of its supply chains and began developing a collaborative-planning process and tool to reduce them. It sought to reduce inventory and increase customer-service levels by integrating its supply chain planning and control with those of its customers.

By applying stochastic multiechelon inventory theory, it developed an advanced planning and scheduling system that supports weekly collaborative planning of operations by Philips Semiconductors and one of its customers, Philips Optical Storage. The project has brought substantial savings. A conservative estimate shows minimum yearly savings of around US$5 million from $300 million yearly turnover.

More important, Philips Optical Storage now has a more flexible and reliable supplier that can virtually guarantee quantities and delivery times. Philips Semiconductor is rolling out its new approach to other customers.