How the Bullwhip Effect Impacts the Supply Chain

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Running a product-oriented business requires the implementation of an efficient supply chain management system. Ideally, an effective supply chain is able to achieve a competitive advantage by providing accurate information to suppliers so they can maintain an uninterrupted flow of products to customers. The “bullwhip effect” influences how managers evaluate the supply chain. Understanding this concept can help business owners and managers avoid costly pitfalls and maintain a top-notch supply chain.

What is the bullwhip effect?

The bullwhip effect is a phenomenon that represents the instabilities and fluctuations in product and supplier orders throughout various stages of the supply chain. In short, growing or waning customer demand directly impacts a business’ inventory. Businesses often attempt to forecast demand, amassing what they believe to be the proper amount of raw materials and resources needed in order to meet customer demand in an efficient and timely manner. When moving up the supply chain from consumer demand to raw material suppliers, variations can often be amplified, causing issues with time, cost and inventory in supply chain management.

What causes the bullwhip effect?

Variables associated with lead-time—such as delays in manufacturing, shipping and transmitting information throughout the supply chain—all influence the bullwhip effect. Other important causes include human behavior and management. Additionally, decisions made by those who oversee the supply chain at various stages will also directly influence the bullwhip effect. These managers control different aspects of the supply stage—ranging from customer service to shipping—and each one actively works on a daily basis to mitigate risk, forecast trends in demand, and maximize profits.

Sometimes, these managers can accidently make decisions that negatively affect other leaders in the chain. Supply chain errors that contribute to the bullwhip phenomenon include lack of communication and coordination, batch ordering, price fluctuations, overreaction to backlogs, errors in forecasting, inflated orders, and product promotions.

How does the bullwhip effect impact inventory, shipping time, and overall cost?

The bullwhip effect impacts the supply chain on many levels—all of which can prove costly to the company. Businesses work hard to forecast demand in order to maintain a manageable and useful inventory, but unfortunately, the variables that cause the bullwhip effect can lead businesses to have either an excess or lack of inventory. Both of these are detrimental for different reasons. Exaggerated orders based on misguided forecasts result in inadequate inventories.

Depending on the product, an excess of inventory could prove costly to the company, and if consumer demand does not increase it could result in wasted resources. On the other hand, not having sufficient inventory can lead to poor customer relations due to unfulfilled orders and unavailable products. Overall these mistakes could be expensive for businesses.

Why is safety stock involved?

In order to prepare for the unforeseen fluctuations in demand throughout the supply chain, businesses need to build and manage safety stock. Safety stock refers to the reserve inventory used as a buffer by businesses to accommodate immediate changes in customer orders. If customer demand increases rapidly, the available safety stock can be used to fill orders while managers increase their own orders to suppliers. This allows for time to increase production without imposing on customer service. This additional stock does not solve the problem of the bullwhip effect, but it can lessen the effect’s symptoms, as it is used as a safeguard for costly variables in supply chain management.

How can the bullwhip effect be prevented?

Businesses looking to ameliorate the bullwhip effect can take steps to tighten the supply chain and minimize error. The first step for businesses is to familiarize themselves with the bullwhip effect, its causes, and how it affects their overall costs. Forecasting demand is essential to supply chain management and businesses can best forecast product demands through the timely synthesis of information. This involves reducing the time for receiving projected and actual customer demand information and establishing as close to real-time product demand as possible.

Managers should also work to understand demand patterns throughout all stages of the supply chain by sharing information and collaborating with other managers of different chain stages. Other methods for preventing the bullwhip effect include reducing the sizes of orders, consistently offering good product prices as a way to avoid surges resulting from promotional discounts, improving customer service, and eliminating causes for customer order cancellations to ensure smooth ordering patterns.

Business and supply chain managers should not overlook the bullwhip effect. It is a wasteful phenomenon that results in the potential loss of financial and physical resources. Managers who understand the bullwhip effect will be better able to forecast demands and make well-educated decisions for maintaining a consistent and efficient supply chain.

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Sources

Sloan Review, “The Bullwhip Effect in Supply Chains”
Entrepreneur, ” The Bullwhip Effect and Your Supply Chain”
Institute of Electrical and Electronics Engineers, “Systems Thinking Solving Bullwhip Effect in Supply Chain: From the Perspective of System Dynamics”
Advances in Production Engineering & Management, “Bullwhip Effect Problem in Supply Chains”