Using contracts to mitigate the bullwhip effect in project implementation

The Chartered Institute of Procurement and Supply defines bullwhip effect as follows: “The bullwhip effect (also known as the Forrester effect) is defined as the demand distortion that travels upstream in the supply chain from the retailer through to the wholesaler and manufacturer due to the variance of orders which may be larger than that of sales.”

Bullwhip effects are related to supply chains. Given the impact of supply chains, which form the basis for project implementation, and contracts, which act as a link, it is more than obvious that disruptions due to the bullwhip effect in supply chains inevitably lead to problems in project implementation.

At the end of any project, whether single or cyclical, there is usually the end user, i.e. the beneficiary stakeholder. The end user holds the handle of an imaginary whip. Every time the end user swings his arm, ripples are created along the supply chain to meet demand, which can have serious consequences for the entire project life cycle.

The bullwhip effect is usually caused by one of the following four problems: demand forecasting, incorrect information regarding order batches, price fluctuation and ration gaming.
 
Demand forecasting:

This approach is mainly used in supply chain management, where an analyst or forecaster makes predictions about the likely demand patterns of end consumers. This is done by analysing historical data, market trends, changes in the product choices of the population and competing products, and the ability to respond to market factors in a timely manner. The larger the group of end-users, the less accurate the forecast reflecting end-user demand patterns.
 
 
Incorrect information regarding order batches:

This is somewhat similar to picking with an On-Time-In-Full (OTIF) approach along a supply chain. This is most critical when each member of the supply chain rounds up quantities received from downstream demand and adjusts them to meet order requirements. The many rounded up order quantities mean that the adjusted figures do not reflect actual demand.
 
 
Price fluctuations:

Price fluctuations are caused by a variety of factors. Economic factors such as inflation, retail management strategies like volume discounts, or panic buying, such as that caused by Covid-19, can quickly lead to an upswing in demand, causing customers to buy larger quantities than they need.  Supply can no longer meet demand. As a result, order quantities will fluctuate and forecasts will become more uncertain.

 
Ration game: 

This is when a supplier tries to limit order quantities by only delivering a certain percentage of the order placed by the buyer. The buyer, knowing that the seller will only deliver a fraction of the quantity ordered, tries to "game" the system by adjusting the order quantity upwards.Rationing and these shenanigans lead to distortions in the order information that enters the supply chain.

I believe that the best contract to avoid, manage or transfer the risk of the bullwhip effect in project implementation is a hybrid of Framework Agreements, Vendor Managed Inventory and Consigned Inventory Contracts.
 
A framework agreement is 'an agreement between one or more contracting authorities and one or more economic operators, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged.’
According to the GSP, there are four types of framework agreements: “Drawdown, Regular Order, Occasional Order and License to Hunt”.
 
The Chartered Institute of Procurement and Supply describes Vendor Managed Inventory as follows: "Vendor Managed Inventory (VMI) is a supply chain agreement where the manufacturer or supplier takes control of the inventory management decisions for the seller or retailer." However, it is important to note that VMI is not just a retail solution. VMI can be used for any contractual requirement that serves as the basis for an agreement where resources need to be allocated to a project, whether it is a single or multi-phase project.
 
The potential of a Vendor Managed Inventory contract is therefore so great that its benefits are significant for both the supplier and the project stakeholders. A well-designed VMI contract must have the following features: a rigid Six Sigma process with accurate forecasts, a defined replenishment process and a real-time performance monitoring system.
 
The third hybrid contract option is the Consigned Inventory Contract. This is used when consignment refers to the transfer of resources (inventory). You can have a VMI that is not a consignment inventory, you can have a consignment that is not a VMI, and you can have an inventory that is both a VMI and a consignment.
 
For any or all of the hybrid contract options to work perfectly, stakeholders must be willing to implement or adapt the Kanban inventory control system. This ensures that resources are always available Just-in-Time (JIT) regardless of bullwhip fluctuations. To implement Kanban in projects, I summarise the six rules as follows:
 

• No defective resource may go beyond a single project activity.
• Request only the resources needed.
• Generate the exact requirement for the project phase needed.
• Always work to resolve or minimise difficulties that arise in the project life cycle.
• Focus on optimising project activities.
• Visualise the project workflow.

 
By applying the six Kanban rules to the implementation of hybrid contracts, the impact of the bullwhip effect on project implementation can be largely avoided, controlled or transferred.

The causes of bullwhips during project implementation can largely be categorised as external environmental factors (EEF). Therefore, it is not only important to use the right contracting options and expertise, but also to go a step further and implement some strategies to avoid bullwhips. The following two options are very important and effective:
 
1. Optimising stock:

This can be achieved by ensuring that information is shared in real time throughout the supply chain. This means that at every stage of the project lifecycle (PLC), active demand is available to meet demand and there is no overstock.
 

2. Create active stakeholder relationships:
An important strategy to avoid bullwhips during project implementation is for the project implementation team to maintain a very open relationship with all project stakeholders. It is always much easier and more convenient to avoid or mitigate the bullwhip effect if the information is open, truthful and accurate.
 
There is no doubt that complete avoidance of the bullwhip effect in project implementation is possible. With innovative contract design and risk management techniques (avoid, accept, mitigate or transfer), there is a greater chance that bullwhip effects will not occur in projects.

Author: Dr. Nana Sackey PhD is a Contract Portfolio Specialist with several years of experience in innovative contracting across shipping, telecoms, managing donor funded projects and academia. He is a Certified Agile Project Manager (IAPM), holds an M.Sc. in Procurement and a PhD in Contract Management. He has facilitated several corporate trainings in the past, focused on contract administration, cost estimation, spend analysis and risk management within contract portfolios. He remains committed to shaping the future of contract design, structure, analysis and management.
He is happily married to Debbie with whom he shares three kids – Iden, Ibby & Ilse – with.