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Bullwhip Effect (Chapter One)

The bullwhip effect describes how small fluctuations in customer demand at the retail level can be amplified into larger fluctuations as demand moves up the supply chain. When a retailer sells more of a product on a given day and increases their order, the distributor may respond by doubling their order from the manufacturer. The manufacturer then produces an even larger amount to be safe. This causes demand that was 100 units at the retail level to be amplified to 250 units by the time it reaches the manufacturer. The bullwhip effect is costly and can result in excess or insufficient inventory across the supply chain due to a lack of communication and inaccurate forecasts between the different links.

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Mahnoor Khalid
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121 views

Bullwhip Effect (Chapter One)

The bullwhip effect describes how small fluctuations in customer demand at the retail level can be amplified into larger fluctuations as demand moves up the supply chain. When a retailer sells more of a product on a given day and increases their order, the distributor may respond by doubling their order from the manufacturer. The manufacturer then produces an even larger amount to be safe. This causes demand that was 100 units at the retail level to be amplified to 250 units by the time it reaches the manufacturer. The bullwhip effect is costly and can result in excess or insufficient inventory across the supply chain due to a lack of communication and inaccurate forecasts between the different links.

Uploaded by

Mahnoor Khalid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Bullwhip effect

The bullwhip effect is a supply chain phenomenon describing how small fluctuations in demand
at the retail level can cause progressively larger fluctuations in demand at the wholesale,
distributor, manufacturer and raw material supplier levels. The effect is named after the physics
involved in cracking a whip. When the person holding the whip snaps their wrist, the relatively
small movement causes the whip's wave patterns to increasingly amplify in a chain reaction.
In supply chain management, customers, suppliers, manufacturers and salespeople all have only
partial understanding of demand and direct control over only part of the supply chain, but each
influences the entire chain with their forecasting inaccuracies (ordering too much or too little). A
change in any link along the supply chain can have a profound effect on the rest of the supply
chain. Given that, there are many contributors and causes of the bullwhip effect in supply chain
management.

A simplified example of the bullwhip effect

The bullwhip effect often occurs when retailers become highly reactive to demand, and in turn,
amplify expectations around it, which causes a domino effect along the supply chain. Suppose,
for example, a retailer typically keeps 100 six-packs of one soda brand in stock. If it normally sells
20 six-packs a day, it would order that replacement amount from the distributor. But one day,
the retailer sells 70 six-packs and assumes customers will start buying more product, and
responds by ordering 100 six-packs to meet this higher forecasted demand.

The distributor may then respond by ordering double, or 200 six-packs, from the manufacturer
to ensure they do not run out. The manufacturer then produces 250 six-packs to be on the safe
side. In the end, the increased demand has been amplified up the supply chain from to 100 six-
packs at the customer level to 250 at the manufacturer.

This example is highly simplified but conveys the sense of exponentially increasing misalignment
as actions and reactions continue up and down the chain. The bullwhip effect also occurs as a
result of lowered demand at the customer level (which causes shortages when inaccurate) and
can be caused at other places along the chain.

Causes of the bullwhip effect

Companies must forecast customer demand based on insufficient information, and try to predict
how much product customers will actually want while accounting for the complex factors that
enable that amount to be delivered correctly and on time. At every stage of the supply chain
there are possible fluctuations and disruptions, which in turn influence the myriad supplier
orders. Changes in customer demand directly influence all the other factors along the chain,
including inventory. However, the bullwhip effect can occur even in relatively stable markets
where the demand is essentially constant.
Forecasting demand has always been a difficult endeavor, and the increasing complexity of
today's global supply chains intensifies that difficulty, as does increasing consumer preference
for omnichannel and e-commerce. A few of the most common dependencies that can cause a
bullwhip effect are:

 Lead-time issues such as manufacturing delays


 Less-than-optimal decisions made by supply chain stakeholders at any point along the chain,
for example, customer service or shipping
 A lack of communication and alignment between each link or stakeholder organization in the
supply chain
 Over- or under-reacting to demand expectations, such as ordering too many units or not
enough
 Customer companies, often retailers, waiting until orders build up before placing orders with
their suppliers, a practice called order batching
 Discounts, cost changes and other price variations that disrupt regular buying patterns
 Inaccurate forecasts from over-reliance on historical demand to predict future demand
Impact on supply chain management

The bullwhip effect can be costly to all the organizations in the supply chain. Excess inventory can
result in waste, while insufficient inventory can lead to reduced lead time, poor customer
experience and lost business.

Most businesses use safety stock (reserve inventory) as a buffer against demand fluctuations.
However, safety stock is not a solution to the bullwhip effect, but it provides enough product to
fill orders until more arrives from suppliers.

Some solutions to the bullwhip effect

Better information is necessary to reduce the bullwhip effect. This means better communication
among supply chain partners and better forecasting methods. Some commonly recommended
actions include the following:

Foster supply chain communication and collaboration.

Use better forecasting and visibility tools.

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