The Bullwhip Effect
Supply chain management involves managing the entire supply chain from raw material suppliers to manufacturers to wholesalers to retailers and finally to end consumers. The main goal of supply chain management is to make sure products or services are available at the right time and in the right place to the end customer. There are many activities carried out in this process, including primary resource sourcing, manufacturing, distributing, wholesaling and retailing.
In order to efficiently achieve the objective of providing customers with products that they want to buy, each grouping of firms responsible for one component of the supply chain has to be in sync with the other firms. When there is a lack of communication and integration between these firms and hence severe miss-matches of demand and supply, a problem arises. This problem is the bullwhip effect, also known as the Forrester effect, as it first appeared in the Industrial Dynamics Journal (1961) in an article written by Jay Forrester.
What is the Bullwhip Effect?
The bullwhip effect occurs when orders sent by retailers to manufacturers or end suppliers are higher or lower than the actual sales to the end consumer. Take for example, a consumer who places an order for five units of a product to a retailer. The retailer overestimates the market demand and may order 10 units from the wholesaler. The wholesaler may have another retailer and hence he places an order of 20 units from the distributor. The distributor may consider the advantage of purchasing products in bulk and tell the manufacturers to produce 40 units of that product. The manufacturer may purchase 80 units of raw materials in bulk considering the advantage of economy of scale from its suppliers. Ultimately, the manufacturer has produced 80 units of a certain product when actual market demand for that particular product was only five units.
As you can see via the image above, various negative consequences result due to an inefficiently managed supply chain. The bullwhip effect impacts total revenues and inventory management. Since the oscillation of increased orders over the supply chain is reminiscent of a cracking whip, this problem is termed the bullwhip effect.
Causes of the Bullwhip Effect
Many factors contribute to the bullwhip effect. These are listed below:
1. Disintegration among the links or layers of the supply chain
2. Lack of proper communication and misconceptions among the responsible individuals
3. Return policies that are free of charge from the demand end to the supply end
4. Lack of proper forecasting of demand
5. A poorly structured supply chain
6. Price fluctuations or natural disasters that disrupt actual market demand
Minimizing the Bullwhip Effect
1. Improving the flow of information from the demand end to the supply end is the most efficient way the mitigate the bullwhip effect.
2. Cutting the order-to-delay time and reducing delays in the supply chain is another way to reduce the impact of bullwhip effect.
3. Setting consistent pricing for each product in the marketplace is also helpful.