What is the bullwhip effect?
Picture the cracking of a whip. A relatively small flick of your wrist begins a chain reaction that amplifies as you move further down the whip until it is literally the speed of sound and thus – makes the “cracking” noise.
The “bullwhip effect” is used in business to describe how subtle changes in consumer demand are felt exponentially hard the further down you go on a supply chain. I.e., Consumer > Retailer > Distributor > Manufacturer > Raw Material Suppliers.
The end of the supply chain feels this distorted demand (and thus overcompensates) the most – even with products that have relatively consistent demand. The end result? Inaccurate demand forecasting, inefficient product inventories, and loss of profits. Do note: the bullwhip effect can go either way – resulting in either excess or shortage of products.
To an extent, the bullwhip effect is unavoidable… as brands * have to * make (educated) guesses about customers’ future behavior based on current behavior. But, you can mitigate the level of its volatility via strategic business decisions.
What are ways to limit the bullwhip effect at a company?
I actually found a great article on how avoiding and/or lessening the bullwhip effect on Thomasnet. Here are the keys:
- Improved communication between various stages of the supply chain
- Investing in more advanced forecasting methodologies/tools (especially via technology). Don’t leave it up to personal judgment!
- Reduce lead times and delays where possible. It can never be “0” but how close can you get?
- Reduce order sizes and order more frequently. I.e., order batching.
- Maintain one steady price instead of seasonal sales if possible. Sales can create a hockey stick effect in sales which makes a supply chain “noisy”.
- Improve the quality of products (thus avoiding returns and repairs costs)
What is a real-life example of the bullwhip effect?
Publication, Tech Target, provides an example of when Volvo – as a response to increased purchase of green cars – decided to manufacture more of them. Only to later learn, that this spike in green car sales was due to sales promotions dealerships were running to get rid of this car color. Thus, at the end of the year, Volvo had excess inventory (again).
