Eliminating the Bullwhip Effect at Philips Electronics

Philips Electronics is one of the world’s largest electronics companies with over 165,000
employees in more than 150 countries, and with sales in 2005 of over 30.4 billion Euros.

Philips Semiconductors (PS), headquartered in Eindhoven, The Netherlands, with over 33,000
employees, and Philips Optical Storage (POS), with over 9,000 employees around the world
are subsidiaries of Philips Electronics.

PS is one of the world’s largest semiconductor suppliers with twenty manufacturing and assembly
sites around the world, while POS manufactures optical storage products including drives,
subassemblies and components for audio, video, data and gaming playback, and rewritable CD
and DVD consumer products. Within the Philips supply chain, Philips Semiconductor is the
furthest upstream supplier of its downstream customer, Philips Optical Storage.

In 2000 Philips Semiconductor recognized that it was suffering from a substantial bullwhip effect
and collaborated with Philips Optical Storage on a project to reduce or eliminate it.

In order for Philips Optical Storage to assemble a DVD drive, it requires a number of components
and subassemblies, including printed circuit boards, which require integrated circuits (IC’s) to
produce that can have long manufacturing lead times. There are two steps in the process of
manufacturing integrated circuits (IC’s) ; wafer fabrication, which is a complex process that also
has long lead times, and assembly. Overall, the total lead time for the supply chain was between
17 and 22 weeks. The planning process was decentralized with each stage in the supply chain
planning and operating independently.

In addition, information about changes in demand and orders often lagged and was distorted, and
deliveries downstream to Philips Optical Storage were unreliable. Individual stages safeguarded
against the resulting uncertainty by creating safety stocks.

Figure 1: In the value network, the first two blocks cover the IC manufacturing process, the third block represents the
DVD drive component manufacturing (printed circuit boards, flex units, and optical pickup units), and the fourth block
represents DVD drive assembly.

Fuente: T. de Kok, F. Janssen, J. van Doremalen, E. van Wachem, M. Clerkx, and W. Peeters, “Philips Electronics
Synchronizes Its Supply Chain to End the Bullwhip Effect,” Interfaces 35 (1; January–February 2005), pp. 37–48.
Philips developed a collaborative planning process and supporting software that included a new
advanced scheduling system that supported weekly collaborative planning sessions. One of the
most important aspects of the new supply chain management system is the speed with which it
is able to solve problems that arise. The new system synchronized Philips supply chain, reduced
safety stocks, guaranteed order quantities and deliveries, and effectively eliminated the bullwhip
effect, resulting in savings of approximately $5 million per year.

*Additional Information from the Case:

The Collaborative-Planning (CP) Process.

The CP process is a weekly process linking monthly supply-chain-capacity agreements, weekly

The critical outcomes of the process are decisions on (1) the number of wafers to fabricate, (2)
the number of ICs to assemble and test, and (3) the number of ICs to ship to the various
destinations. The decisions are backed up by sound liability agreements between the involved
parties. These agreements guarantee that decisions based on the CP process will be in line with
the strategic intent of PS and POS senior management.

The CP process comprises four stages executed in a tightly managed weekly cycle:

Stage 1. Gather data. First, all partners update their parts of the master data in a central database.
Then, they collect live data on actual stocks, scheduled receipts, and material in transit and
transfer them to the database. They check the data for correctness and consistency.

Stage 2. Decide. Planners make decisions in a virtual meeting with a strict agenda and a
knowledge able moderator. Meetings typically last less than an hour. The partners share their
thoughts in a teleconference and interactively view and plan their material flows with the CP
planning tool that they share via a net-meeting environment. Typically, the session starts with a
review of the previous week's action points and of supply chain parameters, followed by the actual
status of the material flows and the new sales forecasts. Using the interactive planning
environment, the planners calculate and evaluate alternate scenarios. The planning tool allows
for interactive problem solving through its fast algorithm, its transparent planner-friendly solutions,
its ability to link downstream supply issues with upstream material-availability problems and vice
versa, and its strong user interface.

Stage 3. Escalate. If the planners cannot come to an agreement or decisions fall outside their
responsibility area, they refer the issues to the appropriate managers. Remarkable in over 100
weeks of live action, according to the records, planners have not had to call on upper
management, whereas before the introduction of this collaboration, upper management
involvement was the rule rather than the exception.

Stage 4. Deploy. All decisions are deployed in the organizations involved, that is, PS, POS, and
the contract manufacturers.

Fuente: T. de Kok, F. Janssen, J. van Doremalen, E. van Wachem, M. Clerkx, and W. Peeters, “Philips Electronics
Synchronizes Its Supply Chain to End the Bullwhip Effect,” Interfaces 35 (1; January–February 2005), pp. 37–48.