Supply Chain Management and Logistics

1 terms

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Bullwhip Effect

The bullwhip effect is the distortion of demand and increased volatility that occurs as forecasts and orders move from the retailer up to the manufacturer. When a spike in demand occurs, each party in the supply chain adds additional products to their orders to act as a buffer. In a supply chain, the bullwhip effect occurs when each party gradually escalates an initially small spike in demand. Each supply chain member overcompensates for this demand with excess product, leading to increased production, inaccurate demand forecasting, and inconsistent inventories. When a spike in demand occurs, each party in the supply chain adds additional products to their orders to act as a buffer. When one party does this, it serves the necessary function of ensuring in-stock products. However, when everyone does it, the result is inaccurate forecasting, stock hoarding, overstock inefficiencies, and out-of-stock products later. Taken from: https://www.truecommerce.com/blog/bullwhip-effect-supply-chain#:~:text=The%20bullwhip%20effect%20is%20the,to%20act%20as%20a%20buffer.

Example: Example of the Bullwhip Effect in Action Say a retailer sells personal heaters and normally sells an average of five units a day. As the temperatures start dropping in winter, sales spike to 15 units a day. The retailer adjusts their forecasting and orders enough stock to sell 20 units a day from their wholesaler to meet the demand. The wholesaler receives the order for 20 items and then orders 30 units from the manufacturer. The manufacturer receives the order for 30 items and increases their manufacturing run to 40 items. A spike in demand for 15 units a day has ballooned up to 40 units, many of which won't reach the retailer until after the demand spike is done. Manufacturing products takes time, so what happens if, while those items are being made, an early Spring appears? For the retailer, sales of personal heaters would immediately drop. The retailer's forecasts are then affected, and they won't order more units, even though production has increased. Members of the supply chain can compound the bullwhip effect by hoarding stock. When items appear scarce upstream, many buyers will place large orders to buffer their inventory and stay ahead of low stock issues. This almost ensures that upstream sources will experience scarcity followed by increased production, despite only a slight change in demand. As demand moves up the chain, inventory becomes less controllable and difficult to predict, especially since many members of the supply chain don't cooperate as well as they could. All of this amounts to periods of both overstock and low stock and unpredictability throughout the supply chain.