What is meant by the bullwhip effect?
The Bullwhip Effect is a logistics and supply chain phenomenon that illustrates the way in which tiny fluctuations in demand at the retail level can result in progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels.
This effect is named after the physics involved in cracking a whip. When the person wielding the whip snaps their wrist, the relatively small movement provokes the whip's wave patterns to progressively amplify in a chain reaction.
In logistics management, the customers, suppliers, manufacturers, and salespeople all only possess a partial understanding of the demand and they only have direct control over parts of the supply chain. But in spite of this, each of them impacts the supply chain with their forecasting inaccuracies when they order too much or too little of something.
A change in any link along the supply chain can have a rather significant effect on the rest of the supply chain. There are several possible causes of the bullwhip effect in supply chain management. The bullwhip effect is also known as the Forrester effect.
Where does the bullwhip effect occur?
The bullwhip effect occurs in the supply chain when in consumer demand cause the companies (links) in a supply chain to order more goods to meet the new demand. Those links work together to meet consumer demand for a product, each focusing on their own specific processes and functions. But supply chains might stumble when market conditions change and there is a shift in consumer demand.
The occurrence of the bullwhip effect may be due to demand forecasting errors made by members of the supply chain, the management behavior of the companies at the front-end of the supply chain (retail management placing higher orders from your wholesalers because they don’t want to stock out on a popular product and the extra inventory starting to vary when the normal fluctuations in demand and supply occur), and operational causes like changes demand forecasts from individual companies in the supply chain. This could be because of companies not sending information about the current market conditions up the supply chain, leading to improper levels of inventory.
Why is understanding the bullwhip effect important for the supply chain?
The bullwhip effect impacts the way in which managers evaluate the supply chain. Understanding this concept is very important because it can aid managers and business owners in avoiding expensive pitfalls and maintaining a high-quality, seamless supply chain.
What are the four 4 impacts of the bullwhip effect on the supply chain?
The Bullwhip Effect has several negative impacts on a supply chain, including:
- Reduced efficiency: The Bullwhip Effect can cause disruptions and delays in the supply chain, which will lead to lower efficiency and productivity.
- Decreased customer satisfaction: The Bullwhip Effect can result in shortages or excess inventory, which can lead to disappointed customers and decreased satisfaction.
- Decreased profitability: The increased costs and reduced efficiency caused by the Bullwhip Effect can lead to lower profitability for businesses.
It is important for businesses to try to minimize the Bullwhip Effect in order to avoid these negative impacts on the supply chain. This can be done by improving communication and coordination within the supply chain and using more accurate forecasting methods.
What are the causes/reasons of the bullwhip effect?
Here are some of the causes of the bullwhip effect in supply chain:
- Demand forecast updating: Links in the supply chain updating their demand forecasting based on the orders that it receives from its downstream customer. The more the links in the supply chain, the less these forecast updates reflect actual end-customer demand.
- Order batching: This happens when links in the supply chain take order numbers from their downstream customers and round up or down the number of orders to suit production constraints such as equipment setup times or truckload quantities. The more links in the supply chain that engage in rounding off their order quantities, the more distortion occurs of the original quantities that were demanded by the end customers.
- Price fluctuations: These tend to be caused by discounting resulting in larger volumes of purchases. This can also be caused by inflationary pressures. This adds variability to quantities ordered and increases the uncertainty in forecasting.
- Rationing and gaming: When buyers deliver over or under their order quantities. In this situation, the seller attempts to limit order quantities by delivering only a percentage of the order placed by the buyer. The buyer is wise to this and tries to game the system by making an upward adjustment to the order quantity. Rationing and gaming distort the ordering information that is being received by the entire supply chain.
- Free return policies: When there are free return policies in place, customers might purposely overstate demands when there are shortages and then cancel when the supply becomes adequate again. Without return forfeit, retailers will continue to exaggerate their needs and cancel orders resulting in excess material.
Variables associated with lead time like delays in manufacturing, shipping, and transmitting information throughout the supply chain influence the supply chain. Human behavior and management can also cause the bullwhip effect. Managers can make erroneous decisions that have a negative impact on other leaders in the supply chain. Some of the supply chain errors that could cause the bullwhip effect are lack of communication & coordination, batch ordering, price fluctuations, overreaction to backlogs, errors in forecasting, inflated orders, and product promotions.
Consequences of bullwhip effect
The bullwhip effect is a phenomenon that occurs in a supply chain whereby small fluctuations in demand at the retail level can lead to increasingly large fluctuations in demand at the wholesale, distributor, and raw material levels. This can have a number of negative consequences for the supply chain, including:
- Excess inventory: The bullwhip effect can cause companies to overproduce, leading to excess inventory that ties up capital and incurs storage costs.
- Stock outs: Conversely, the bullwhip effect can also cause stock outs, as companies may not produce enough to meet sudden spikes in demand. This can lead to lost sales and disappointed customers.
- Inefficient production: The bullwhip effect can cause production to become inefficient as companies try to keep up with fluctuating demand. This can lead to higher production costs and lower profits.
- Poor forecasting: The bullwhip effect can make it difficult for companies to accurately forecast demand, leading to problems with production planning and resource allocation.
Overall, the bullwhip effect can disrupt the smooth functioning of a supply chain and lead to higher costs and lower profits for the companies involved.
How do you reduce/control the bullwhip effect?
When you understand the bullwhip effect and take corrective action, you can reduce your inventories by 10 to 30% and you can also reduce the chances of having to deal with stock out situations and missed customer orders by 15 to 35%.
Here are some of the techniques that can be used to control and minimize the bullwhip effect.
Be aware of the bullwhip effect and understand it
You’ve got to be cognizant of the bullwhip effect and acknowledge the fact that high buffer inventories exist throughout your supply chain. Consider carrying out a detailed stock analysis of the inventory points from stores to raw material suppliers for the purpose of uncovering idle excess inventories. As a supply chain manager, you can then conduct a deeper analysis to identify the reasons for excess inventories so that you can figure out what corrective actions can be taken.
Improve your inventory planning
Inventory planning involves carefully looking at historical trends, for seasonal demand, forward-looking demand, new product launches as well as the discontinuation of older products. You need to have an early warning system in place to avoid having major deviations from the set inventory norms.
Plan for raw materials in a better manner
Instead of keeping an extremely high buffer for raw materials, you should link raw material planning to the production plan.
Improve the communication among your purchasing managers, production managers, logistics managers and sales managers. You’d also want to make sure that all these people have their goals properly aligned.
Beer Game: Bullwhip effect
The beer game is a business simulation game that illustrates the Bullwhip Effect. The Bullwhip Effect refers to the amplification of fluctuations in demand as they move upstream in a supply chain.
In the beer game, players represent different parts of a supply chain: a supplier, a distributor, a wholesaler, and a retailer. Each player tries to meet the demand for beer by placing orders with the player upstream in the supply chain. However, because each player only has partial information about the true demand for beer and must rely on forecasts, they may make orders that are larger or smaller than necessary. This can lead to discrepancies between the actual demand for beer and the amount of beer that is being produced, which can result in shortages or excess inventory.
The Bullwhip Effect can have serious consequences for businesses, including increased costs, reduced efficiency, and decreased customer satisfaction. It is important for businesses to try to minimize the Bullwhip Effect by improving communication and coordination within the supply chain and using more accurate forecasting methods.