The Bullwhip Effect: Big Swing, Oscillations, Changes in Market Demand– Wreaks Havoc in Supply Chain Management…

The term, bullwhip effect, owes its origin to the fact that a slight motion of the handle of a bullwhip can make the tip of the whip thrash wildly at speeds up to 900 miles per hour, about 20% faster than the speed of sound, creating a sonic boom (the crack of the whip).

In the context of a supply chain, the bullwhip effect manifests through increasing demand variability as you move upstream in the supply chain. Small changes to the customer demand on the retailer are magnified as the demand information is passed up the supply chain, creating increasingly higher variation in the orders received by upstream suppliers.

The bullwhip effect produces tremendous inefficiencies in the supply chain. It results in excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, and ineffective transportation and production schedules… Many enterprises have gained a significant competitive advantage by understanding the underlying causes of the bullwhip effect and working with their supply chain partners to reduce it. The joint effort between supply chain partners results in reduced inventories and a supply chain that is more responsive to customer demand…

The concept first appeared in Jay Forrester’s book ‘Industrial Dynamics’ (1961), and it’s also known as the Forrester effect. The term was first coined around 1990 when Procter & Gamble perceived erratic and amplified order patterns in its supply chain for baby diapers. Procter & Gamble, now, employs vendor-managed inventory (VMI) in its diaper supply chain, starting with its supplier, 3M, and its customer, Wal-Mart.

The goal of any supply chain is to get the right selection of goods and services to customers in the most efficient way possible. To meet this goal, each link along the supply chain must not only function as efficiently as possible; but it must also coordinate and integrate with links both upstream and downstream in the chain.

The keystone for a lean supply chain is accuracy in demand planning. However, unforeseen spikes in demand or overestimation of demand stimulate the supply end of the chain to respond with changes in production, which impacts consumer-end of supply chain– it’s a ripple up-and-down the chain...

Some causes of the bullwhip effect include; consumer demand swings, natural disasters disrupting low of goods and services, over-or-under inventory issues, inaccurate forecasting… A few steps that help to mitigate the bullwhip effect include; know and understand drivers of customer demand, effective supply chain communication, efficient inventory management, more accurate forecasting …

In the blog What is the Bullwhip Effect? by adaptalift writes: The bullwhip effect can be explained as an occurrence detected by the supply chain when orders sent to supplier create larger variance, as they relate to the end customer sales. These irregular orders in the lower part (customer-end) of supply chain develop to be more distinctive (magnified)  higher-up (production-end) in the supply chain.

This variance can interrupt smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations. For example; let’s say that an actual demand from a customer is 8 units, but the retailer may actually order 10 units from the distributor, where the extra 2 units are used to ensure they don’t run out of floor stock. The supplier, then increases the order to 20 units to the manufacturer, which allows them to buy in bulk for a better price, as well as, having enough stock to guarantee timely shipment of goods to the retailer.

Next, the manufacturer increases the orders to 40 units to their supplier, which allows them to buy in bulk for a better price and ensures economy of scale in production to meet demand. Now, 40 units have been produced for a demand of only 8 units, which means the retailer is now under pressure to increase market demand, for example; more marketing, advertising, price reduction… or, supply chain must deal with additional inventory… The bullwhip effect can be a difficult problem for supply chain management, but by knowing  causes and through collaboration with partners in the supply chain, managers can develop and implement strategies that can alleviate the issues.

In the article The Bullwhip Effect in Supply Chain by Osmond Vitez writes: The supply chain is a complex group of companies that move goods from raw materials suppliers to finished goods retailers. But, unfortunately, supply chains may stumble when market conditions change and consumer demand shifts. The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in the supply chain to order more goods to meet demand. Usually the effect flows-up the supply chain starting with; retailer, wholesaler, distributor, manufacturer… and finally raw material supplier.

The bullwhip effect is normally driven by management behavior at front-end (retailers) of the supply chain, for example; retail management never wants to have a stock-out on popular goods, which leads them to higher orders from the wholesalers. This eventually squeezes each company in the supply chain… Another major behavioral effect is ordering too much inventory when consumer demand has fallen for a specific item. For example, retailers may have raised their inventory levels to avoid a stock-out, but are now met with goods that cannot be sold, quickly. This creates overstock of inventory for each supply chain company.

However, main operational cause of the bullwhip effect comes from–individual demand forecasts from each company in supply chain,  which may not accurately reflect real consumers demand… Also, a prevalent operational cause is lack of communication between companies about the real market conditions, and that can cause improper levels of inventory. Technology is an important tool for managing data and detecting swings and fluctuations in consumer demands. It allows supply chain company to access information directly from any link in the supply chain; accurately, quickly, and make adjustments to mitigate the bullwhip effect…

In the article Globalization, China, and the Bullwhip Effect by Chris G. Christopher, Jr. writes: The relationship of the U.S. and China offers a clear example of how bullwhip effect applies on an international scale. When we talk about the bullwhip effect— the magnification of order fluctuations at each upstream point in a supply chain– we usually are referring to a particular company’s experience. But these occurrences can also play out in a much larger theater.

The relationship of the U.S. and China offers a clear example of how it applies on an international scale. Anecdotal evidence indicated that certain regions of China were producing 70 to 80% of the global production of footwear, clothing, and other final consumer items… When U.S. consumers curbed their spending during global financial crisis, the impact on Chinese exports was highly significant. Thousands of mid-sized factories in China went out of business almost overnight, and millions of migrant workers headed back to their home villages.

These and other data indicate that supply chain dynamics have become extremely volatile after a prolonged period of moderate volatility. They also make it clear that China remains tied to the U.S. economy; and as long as it does so, it will feel U.S. bullwhip effect. During first half of 2009, U.S. retail, wholesale, manufacturing, imports, and Chinese exports began to rebound.  The strength of the Chinese economy also promoted the growth of U.S. exports…

According to Kevin Dooley: The bullwhip effect posits that retailers are most effective at reacting to changing demand signals because they are closest to the customers who trigger that change in the market. As such, retailers confronted with changing demand patterns tend to be proficient at making corrections, neither under-reacting nor over-reacting, to signals in terms of altering inventory levels…

However, as you continue upstream (from retail to production) in the chain– volatility increases. That means wholesalers are likely to overreact to market signals, by aggressively reducing demand, while manufacturers — the furthest removed from market signals — are prone not only to overreact, but also to react in a delayed fashion. They wait too long to take action when demand changes, thereby they can get stuck with obsolete inventories. Or, they can lose sales because they don’t have enough inventories to meet demand…

According to Srimathy Mohan; during this recession the bullwhip effect should not have happened, because everyone up-and-down the supply chain knew that a decrease in consumer demand was occurring. So the fact that it did happen, tells us that wholesalers and manufacturers were not communicating and didn’t believe (or ignored) the macro-level market signals. Instead, they continued to just pay attention to what their downstream partners were doing…

When a person cracks a bullwhip, small movements at the wrist produce huge waves at the other end of the whip, which describes how information about market demand becomes increasingly exaggerated and distorted as it moves up the supply chain: From customer to manufacturer to supplier– driving-up costs and hurting efficiency. According to Hau Lee; the bullwhip effect is common in many industries but varies widely… For example, when you snap a bullwhip, you create small waves near the handle, which become large waves near the tip of the whip.

Suddenly ‘a small hiccup is translated into big swing’, in market demand. To mitigate the effect, companies must verify incoming demand information and collaborate with all their supply chain partners to ensure complete alignment with the real market demand. According to Steve Geary, Stephen M Disney, Denis R Towill; bullwhip has a long tradition for causing disruptions, i.e., massive over-swings and under-swings in demand; where over-swings results in unnecessary ramping up of production (usually with great inefficiencies), and under-swings results in much pain via paid idle time and redundancies. 

One way to improve the supply chain process is to systematically remove all avoidable causes of uncertainty. The underlying supply chain objectives must include; smooth material flow, smooth and transparent information flow, time-compression of all processes, holistic controls, and the abolition of barriers that cause functional silos to exist. The effective consequence is movement away from traditional, adversarial process, towards a minimal bullwhip seamless supply chain scenario.

The future of bullwhip lies not in revolutionary new supply chain methodology, but instead in promulgation of best practice. Having the knowledge of the bullwhip issues that match the particular needs of the individual supply chain value streams is critical for an effective solution.

However, the big challenge for mitigating the bullwhip effect is the elimination of the functional silo mentality and its replacement by a new era of collaborative management that satisfies the true demands of the marketplace…