Bullwhip Effect

The bullwhip effect typically starts at the store and moves up the supply chain to the wholesaler, distributor, manufacturer, and finally the raw materials supplier.

The bullwhip effect on a supply chain happens when shifts in customer demand prompt businesses to place more orders for products to satisfy the new demand. This result arises from the fact that the demand for items is dependent on demand estimates from businesses rather than actual consumer demand, and it can be seen in most supply chains across many industries.

Causes of Bullwhip Effect

The two fundamental reasons for occurrence of bullwhip effect in the supply chain are as follows:

1) Error in forecasting: Businesses that launch new products into the market make demand projections based on the condition of the market. Most firms in the supply chain place orders for more than they can sell to avoid product shortages and lost sales. The "excess" inventory starts to grow or shrink because of the supply and demand swings that occur in the market regularly.

2) Operational causes: Individual demand projections provided by each supplier company in the supply chain are the primary operational cause of the bullwhip effect. However, it does not affect the customers who will buy the items. Another frequent operational cause is a lack of communication; businesses may fail to pass information about current market circumstances up the supply chain, which results in incorrect inventory levels.

Example of the Bullwhip Effect

Let us say a bakery sells on average 200 packets of a particular bread variety every week. One week, though, they sell 350 packets of those bread. This might have happened because they ran a promotional campaign or other stores may have shut down temporarily.

The bakery now thinks that its customers want more of that bread because the demand increased drastically. Eventually, they decide to keep 300 packets instead of 200 to meet the higher forecasted demand. The bread manufacturer starts producing 400 packets so that they don’t run out of stock. To maintain sufficient raw material levels, the manufacturer orders more quantity from its suppliers.

Steps to Minimize Bullwhip Effect

Let us look at how we can address the causes of the bullwhip effect most effectively to reduce loss and cost.

1) Improving communication throughout the supply chain: For the past few years, supply chain partners have worked to increase communication, visibility, and transparency, but now it is more crucial than ever. Partners should establish regular weekly and daily communication as well as adopt uniform technology that is widely accepted and used to achieve this.

2) Using better forecasting models: The bullwhip effect is mostly caused by inaccurate demand forecasting. To prevent one wrong order from upsetting the entire chain, it is essential to implement improved forecasting techniques. Many cutting-edge technologies make it easier and more precise to forecast demand, from the customer all the way back to production and raw materials.

3) Consistency in pricing: Deals and discounts are effective at moving inventory and attracting new customers, but they can also lead to significant swings in trade that are challenging to manage. These kinds of swings need to be fully anticipated and planned for beforehand. Consistently providing reasonable product prices reduces sale surges that ultimately result in inaccurate demand orders and a negative bullwhip effect.

4) Customer service enhancement: Understanding what consumers want and decreasing cancelled or returned orders are both made possible by excellent customer service. A strong line of demand is created by customer service team's ability to significantly lower returns. This results in a more streamlined ordering pattern where demand is taken into consideration without speculation, loss, or harm.

Conclusion

The various participants in the supply chain, such as the buyers, suppliers, manufacturers, and retailers, have a limited amount of power over the entire process, but every participant is influenced by what others do. These various parties' efforts to adjust to shifts in demand cause ripple effects throughout the chain. Retailers, manufacturers, and other suppliers in a certain supply chain can avoid the bullwhip impact by using improved planning and communication methods.