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.
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.
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
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