CPIM Practice Exam

If customers only provide orders and refuse to share demand information, what can help reduce the bullwhip effect?

1. Vendor managed inventory

2. Consignment

3. Sole-source supplier agreements

4. Single-source supplier agreements

The correct answer is: Vendor managed inventory

Vendor managed inventory (VMI) is indeed an effective strategy for reducing the bullwhip effect, especially in scenarios where customers are unwilling to share their demand information. In a VMI setup, the supplier takes responsibility for managing the inventory levels of the products they supply, based on their analysis of sales data rather than relying solely on the customer to provide forecasts. This allows the supplier to have a clearer view of demand patterns and adjust their production and restocking processes accordingly, which minimizes excess inventory levels and reduces variability in order quantities. By taking this responsibility, the supplier can smooth out the flow of goods through the supply chain, thereby mitigating the amplifying effects of demand fluctuations that are typical in the bullwhip phenomenon. This strategy fosters a closer relationship between the supplier and customer, allowing for better alignment and coordination in meeting customer needs without the reliance on uncertain demand forecasts. The other strategies mentioned may have their own benefits in specific contexts, but they tend to be less effective at directly addressing the information asymmetry that leads to the bullwhip effect when customers are resistant to sharing demand data. For example, consignment can help reduce inventory costs for the customer but doesn't inherently address the demand forecasting issue. Sole-source and single-source agreements focus on supplier relationships