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Bullwhip Effect: Understanding, Managing and Avoiding Supply Chain Turbulence

vijay

Vijay Kumar

Senior Specialist - Marketing @ Shiprocket

December 27, 2023

7 min read

The bullwhip effect in the supply chain starts with a small change in demand for goods at the retailer level. This fluctuation leads to changes in inventory size at different levels, moving up to the wholesalers and distributors. Thus, this ultimately impacts the overall manufacturing. The change in order pattern at the initial level creates a chain reaction that impacts every stage of the supply chain. It is important to understand and prevent the bullwhip effect as the fluctuations it causes may lead to several challenges. Statistics reveal that preventing this effect can increase the profit levels by up to 15-30%.

bullwhip effect

In this article, we will learn about the reasons behind the bullwhip effect, its impact, ways to prevent it, and more. By gaining these insights, businesses can avoid supply chain turbulence and manage it more efficiently.

The Bullwhip Effect’s Impact on Supply Chain Management

Before we delve into how the bullwhip effect impacts the supply chain, let us understand it with the help of an example. Suppose, you have a retail store that sells grocery items. You have been selling approximately 50 packets of bread every day for the last several months. However, in the last few days, you have been noticing an increase in demand for this product. To fulfill the consumer demand, you start stocking up 70 packets of bread. The increase in demand at your end will cause a ripple effect, impacting the demand at the wholesaler and distributor levels. As a result, to meet this demand, the production of this item will increase. This phenomenon is called the bullwhip effect. It shows how a small change in demand can impact the whole supply chain increasing the inventory size at various levels.

Here are some of the repercussions businesses can face owing to the bullwhip effect:

1.  Increase in Storage Cost

You require bigger space to accommodate more inventory as you order a greater number of articles because of the increase in demand. This results in an increase in the storage cost.

2.  Increase in Transportation Cost

The transportation cost also increases as a greater number of products need to be transported.

3.  Production Inefficiencies

To fulfill the increase in demand for goods, workers at production units often work hastily, thereby leading to production inefficiencies.

4.  Bloated Inventory and Obsolescence

At times, the change in demand is merely seasonal or due to discount offers and thus does not last long. As the demand goes back to usual after a few days or weeks, it gives way to bloated inventory. The excess stock often tends to get obsolete after some time thereby causing wastage.

5.  Strained Relationship Among Supply Chain Partners

Oftentimes, the manufacturers struggle to fulfill the sudden increase in demand for consumer goods. They are not able to deliver as promised. This may also happen at other levels owing to different reasons. This can lead to strained relationships among the supply chain partners.

Factors Leading to the Bullwhip Effect

There are several factors that lead to the bullwhip effect. Here is a look at some of those:

·         Inaccurate Demand Forecasting – One of the major reasons behind this ripple effect is inaccurate demand forecast. This may occur because of a lack of proper real-time data. When people at different stages of the supply chain use their forecasting methods to predict the demand, it may lead to the bullwhip effect.

·         Variation in Order Placement – If organisations place large orders in an uncertain manner, it can also result in changes in demand at different levels in the supply chain.

·         Discount Offers – Discounts and schemes often lead to an increase in the demand for goods. Supply chain participants respond to it by stocking more inventory than usual to meet the growing consumer demand.

·         Lack of Communication – This effect may even take place because of a lack of communication at any step in the supply chain hierarchy.

Preventing the Bullwhip Effect

You can avoid the bullwhip effect with strategic planning and effective communication. Let us take a closer look at some of the ways in which you can prevent this effect from occurring:

·         Efficient Forecasting

It is important to assess historical data as well as real-time information to efficiently forecast an increase or decrease in product demand. Investing in advanced forecasting models and tools can help in this direction. Regularly reviewing the forecasting algorithms is also necessary.

·         Effective Communication and Transparency

There should be clear communication about inventory levels, customer demand, and production capabilities among supply chain partners. Maintaining transparency about such information is necessary.

·         Use Advanced Technology

The use of advanced supply chain management systems and the latest analytics software is necessary across supply chain partners.

·         Consistent Ordering Policies

To meet consumer demand promptly, it is suggested to encourage consistent ordering policies. This may include ordering at regular intervals and ordering fixed quantities to avoid a sudden surge in demand. Large, infrequent orders must be avoided as they can lead to delays and production

inefficiency.

·         Strategic Pricing and Offers

Float discount offers and schemes strategically to avoid sudden spikes in demand. It is essential to observe the impact of promotional offers closely and order accordingly.

·         Implement Performance Metrics

Implement performance metrics that encourage supply chain partners to focus on overall system efficiency.

·         Constant Monitoring and Adjustments

It is essential to constantly monitor the supply chain performance and modify strategies depending on changes in consumer demand. Continual monitoring and improvisations are necessary for minimising the bullwhip effect.

The Reverse Side of the Bullwhip Effect

The reverse side of the bullwhip effect gives way to a scenario where an increase in consumer demand does not result in amplified supply. The supply remains insufficient even as the demand rises. This may happen at any level in the supply chain process. Scarcity of the products in demand can lead to price rises and dissatisfaction among consumers. The problem it causes is greater than that caused by the bullwhip effect. Many businesses face this issue due to a lack of proper communication, planning, and management.

Conclusion

The bullwhip effect can result in increased costs, production inefficiency, and customer dissatisfaction. It is important to prevent this phenomenon by using advanced forecasting tools and ensuring effective communication across the supply chain. Clear communication, transparency and efficient coordination can minimise the chances of excessive inventory and increased storage costs among other issues.

How does effective communication among supply chain partners help in preventing the bullwhip effect?

Effective communication among supply chain partners can prevent the bullwhip effect as it helps in understanding the demand across various channels. However, this is just one of the ways of avoiding this effect. Several other methods must be adopted to prevent it.

How to improve demand forecasting?

Demand forecasting can be improved by leveraging advanced technology. Real-time data analytics and advanced forecasting tools facilitate better demand forecasting. Both historical as well as real-time data must be taken into account to achieve better forecasting.

Is the reverse bullwhip effect a bigger challenge in the current times?

Yes, the reverse bullwhip effect is a bigger challenge for businesses in the current times. Many businesses these days are witnessing insufficient supply as the demand for their products is increasing. This is disrupting the supply chain operations and creating dissatisfaction among the consumers.

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