Bullwhip Effect in Supply Chains

What is the bullwhip effect?

The bullwhip effect is the demand distortion that travels upstream in the supply chain. Upstream in the supply chain consists of the retailer through to the wholesaler and manufacture. The distortion is created by the variance of orders which may be larger than sales.

What causes bullwhip effect in the supply chain?

The bullwhip effect can distort the whole supply chain, so it’s important to recognise what causes it. Here are just a few things to watch out for:

How can the supply chain reduce the bullwhip effect?

The bullwhip effect can be reduced by sharing your knowledge with your suppliers and customers. If members of the supply chain can figure out what information is causing the bullwhip effect, you’ll then be able to avoid it. You may want to think about incorporating technology to communicate to members in your supply chain, as this can help aid quicker response times.

So, what can you do to reduce the bullwhip effect?

What is reverse bullwhip effect?

The reverse bullwhip effect is what happens downstream in the supply chain and results in the inadequate supply of products. This can put a lot of pressure on the retailer, wholesaler, and manufacturer.

Causes of the reverse bullwhip effect are:

What is bullwhip effect with example?

Let’s consider a retailer sells on average ten ice creams per day during Summer. Following a heatwave, the retailer’s sales increase to 30 units per day. To meet this new demand, the retailer increases their demand forecast and places an increased order on the wholesaler to 40 units per day. This is to buffer any potential further increase in demand and to meet the new demand levels. This creates the first wave in the exaggerated demand being driven down the supply chain.

The wholesale notices this increase, then subsequently increases their forecast. Generating a large purchase order on the ice-cream manufacturer. This creates the second wave of demand increase

The manufacturer, feeling the increase in demand from wholesalers, increases their manufacturing run. This creates the third wave in the exaggeration of demand

The retailer may run out of stock during the heatwave, whilst the manufacturer is producing new stock and then may switch to a different brand. This creates a false demand situation, as sales appear to slump to next to nothing. The retailer may then not place further demand for the original ice cream brand, even though the manufacturer has increased their production runs. If the weather changes, and ice-cream purchases are slow, this could result in an overstock situation across the supply chain.

As you can see from this example, the bullwhip effect can lead to huge inventory investments throughout the supply chain. All parties involved attempt to protect themselves against demand variations, but it can lead to an accumulation of inventory at the manufacturers end, which will further increase supply chain costs.