The bullwhip effect is a phenomenon in which small changes in consumer demand, lead to increased fluctuations in orders, which are placed by retailers, distributors, wholesalers and manufacturers in the supply chain. This, can lead to either excess inventory, or shortages and increased costs for all involved parties.

Why does the bullwhip effect happen?

The bullwhip effect occurs because each member of the chain, tries to optimize its inventory levels and minimize costs. So they take actions to have a safety stock or reduces the stock, before find themselves with a surplus.

Each member in the supply chain estimates demand more and more incorrectly, because tries to predict future demand and adjust the ammount of orders, without having a clear picture.

For example, if a retailer experiences a sudden increase in demand, for a particular product, he may place a larger order than usual from supplier, in order to ensure that he doesn’t run out of stock. The supplier may then interpret this action, as an increase in demand, and place an even larger order with his own suppliers and so on.

How can we avoid the bullwhip effect?

There are several ways to mitigate the bullwhip effect and some of them are listed here:

1)Improving communication and cooperation between the links of the supply chain.

2) Exchange of demand related information.

3) Use more flexible ordering systems.

4)Implement best practices for inventory forecasting and management.

 

How important is for everyone to understand the situation?

Understanding and managing the bullwhip effect, is critical for supply chain professionals. Certainly, with the use of advanced technological systems, these days, the phenomenon has been mitigated and in some cases, completely countered.

However, it remains a research topic of great importance.