How the Bullwhip Effect Impacts the Supply Chains

How the Bullwhip Effect Impacts the Supply Chains

Studies suggest that knowing what consumer wants before they want it can lead to organisational success. But inaccuracy in demand prediction can also lead to the Bullwhip effect, which would have severe consequences for the business. But what exactly is a bullwhip effect, what causes the bullwhip effect, how would it impact the business and the most important of all how can we minimise its impact on the business? These are the questions that we are going to answer in this article. Now, first, let’s understand what’s a bullwhip effect.

What is a Bullwhip effect?

According to The Wall Street Journal” This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.” In simpler terms when few of the customer orders make the organisation think that they have an upward shift in demand, the organisations stock up the inventory to meet the increasing demand, and when the demand drops as it was not accurately estimated, it causes fluctuation in inventory. A small shift in demand can affect the retailer, and it will have a more extreme effect on the supply chain and a drastic impact on the manufacturer as inventory swings in larger and larger waves in response to customer demand, this whole cycle is called the bullwhip effect. See the below image to understand the concept better.
Bullwhip Effect

(Image courtesy of Grap)

Now that we have an understanding of the Bullwhip effect let us look at some of the reasons that cause the bullwhip effect.

  • Fluctuation in the price: During discounted sales or promotional events, the demand is enormous, as shoppers want to utilise the special discounts to the fullest. But this situation causes an irregular production of products based on a demand which is often short-lived, this in return gives place to the bullwhip effect.
  • Demand Forecasting: Accurate forecasting of demand is one of the crucial aspects that an organisation should focus on, errors in demand forecasting can have an adverse effect on the supply, which would lead to producing more products based on inaccurate demand.
  • Communication Issues: Communication is a vital aspect for the proper functioning of an organisation, as lack of communication can decrease productivity and can often cause the passing of inaccurate information, the lack of understanding between supply chain operators and other staff can lead to an ineffective work environment that causes inventory shortages and increase in cost.
  • Lead time: The time gap between when a customer places an order and the time when they receive it is called lead time. Supply chain operators must plan their operation in consideration of lead time, failing it can lead to overstocking of products which will have an impact on supplier demand.

How the Bullwhip Effect Impacts the Supply Chain?

  • Unfulfilled orders: The bullwhip effect can cause a negative impact on the organisation, as it causes the organisation to either to have excess inventory or can cause inventory shortages and in some cases, both can be possible, as organisations need to fulfil the demand of its customers in the supply chain. When the orders are based on inaccurate forecasting, it can fail to be fulfilled.
  • Inaccurate demand forecast: Demand forecasting is essential for every organisation, but the bullwhip effect distorts supply chain management. With surge in customer demand, organisation believe that the demand for the product has increased, which makes it to produce more of that product to meet the inaccurate demand.
  • Increased Cost: When organisations produce products based on the inaccurate demand, the addition in inventory can prove to be an extra cost to the organisation as there is no consumer demand for that product and it would in turn cause wastage of organisational resources.
  • Inventory Management Issues: In addition to having surplus inventory, bullwhip effects can also cause an organisation to have insufficient inventory. Which would have an adverse effect on the organisation, as low inventory causes unfulfilment of orders and poor customer relationship, such situations can seriously affect the profitability and goodwill of the organisation.
The bullwhip effect can be a severe threat to the organisation, and should be dealt with care and planning. Following the ways to minimise the bullwhip effect?
  • Inventory Management: Advancement in technology has given humans multifold benefits, and supply chain management is no different. Supply chain operators can make use of inventory management software that can accurately predict the demand so that there will not be any issue related to over or under-stocking of inventory. Besides, supply chain operators should also reduce the lead time, because the longer the lead time, the more chances of having a bullwhip effect.
  • Price Discounting: Timely discounts and promotional offers makes an upward shift in demand. Instead of timely discounts organisations can have stable pricing, and can even utilise the EDLP(Introduced Everyday Low Pricing) method that Walmart uses, because when there are no promotional offers or deep discounts, then it will be easy to predict the demand and forecast sales and supply.
  • Better Forecasting: Gone were the days when supply chain operators used to forecast demand using conventional methods, which were inaccurate and time-consuming. Times have changed now, by using historical data and predictive analysis in AI, supply chain operators can better estimate all the factors which can work towards precision in forecasting and planning, which can help the organisation in taking prevention action before time.

Conclusion:

The bullwhip effect is a threat to the organisation which needs to be addressed with caution, supply chain operators should be well versed with the knowledge to tackle and manage it if any situation related to bullwhip arises., As having an effective supply chain can ensure that the right goods will be delivered to the right people, at the right time, with efficiency, and cost management.

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