The bullwhip effect is a phenomenon or, more precisely, a problem within the supply chain. It is a situation where observed minor fluctuations in customer demand are gradually amplified as orders pass up through the other actors of the supply chain information flow and finally become demand distortion. These actors are retailers, distributors, manufacturers, and suppliers. One can say the bullwhip effect is of a domino effect nature. It is also worth noting that this issue is common in many industries.
Why it is a Problem
The bullwhip effect is considered a problem because it negatively affects many processes in the supply chain. One of the detrimental consequences of this phenomenon is excess and fluctuating inventories and shortages of items or even stock-outs. As the bullwhip effect sweeps across the higher levels of the supply chain structure, lead times become longer as well as the cost of transporting and manufacturing goods increases. Ultimately, it leads to mistrust among all participants in the supply chain and loss of revenue.
How to Alleviate the Bullwhip Effect
In order to alleviate the bullwhip effect, companies have developed effective methods and practices. The first step to minimizing the problem is to identify obstacles to efficient supply chain coordination and reconfiguration. The following measures include modules outsourcing, information lead-time reduction, production rescheduling, model flexibilization, establishing zonal offices, turnaround time optimization. It is also worth mentioning other practices such as sharing information, push-pull manufacturing, implementing the order-placement process, following the sales force estimation method, and material requirement planning.
Forecast Error and the Bullwhip Effect
Forecast error is one of the primary causes of the bullwhip effect in the supply chain. In terms of supply chain management, it is the difference between actual demand and the one that was projected. Miscalculated forecast errors undermine the whole process of demand forecasting and lead to incorrectly calculated forecast accuracy. Miscalculated forecast accuracy magnifies perceived minor fluctuations in customer demand. It is where the bullwhip effect begins to emerge and spread and further turns into demand distortion on all levels of the supply chain.
Other Causes of the Bullwhip Effect
There are other factors that contribute to the bullwhip effect. An independent approach to demand forecasting by supply chain nodes is one of them. Order batching and price fluctuations also influence the possibility of a bullwhip effect. When a company applies the inventory-rationing method to the distribution of items in the supply chain, the chance of the problem is increased. Relying on signals of an increase and decrease in demand in calculating an expected demand, complex forecasting techniques, a decentralized system for obtaining demand information, all this also leads to a bullwhip effect.
The Bullwhip Effect on Supply Chain Responsiveness
As noted above, the bullwhip effect affects all elements of the supply chain structure. Change in supply chain responsiveness is the best example of it on supply chain performance. The bullwhip effect increases order fulfillment lead times. There are two effective strategies to improve responsiveness and speed up many supply chain processes affected by the issue under discussion. One of them is the centralization of channels gathering demand information, as the rapidity of informational flow highly determines responsiveness. Another strategy involves the implementation of a decentralized supply chain model for all business partners. It is noteworthy that information sharing is also would be helpful.