Everything You Need to Know About the Bullwhip Effect and Its Impact

The bullwhip effect in the supply chain, known as the whiplash or the whipsaw effect, is the distributional channel occurrence in which inefficiencies occur between the supply chain. More minor fluctuations in retail level demand can cause more significant changes to wholesale, raw material suppliers, and marketers. The word bullwhip effect was invented by Jay Forrester, a leading American computer engineer and system analyst well-known for his inventions. The concept first came into existence in Jay Forrester's book Industrial Dynamics and is thus known as the Forrester effect. Later Stanford University helped to incorporate the concept into supply chain management.

Over the last two years, the globe has faced a lot of shortages, and obviously, it is due to the pandemic situation. Still, an economic phenomenon explains the bullwhip effect, which affects supply chain management. The effect is a constant source of difficulty for supply chain managers. Research and studies say that a five percent fluctuation in the supply chain may demand up to forty percent change overall. In supply chain management, the salespeople, marketers, and suppliers will only partially understand that a minor change may cause a more significant difference in their forecast. A little flick in the retail chain may cause an enormous whip to the wholesale marketers. 

The bullwhip effect in the supply chain causes extreme changes in supply chain management, resulting in lower forecast accuracies, leading to higher inventories. 

An Example of the Bullwhip Effect

Let us consider a retailer selling 100 apparel per day during a festival or demanding occasion. The retailer's sales may increase; the retailer may order an increased quantity from the wholesaler to meet the demand. The retailer's increased demand for the wholesaler will create the first wave of exaggeration, where there would be a bullwhip effect in the supply chain. The wholesaler noticing the increased demand due to the large order from the retailer, will place an increased order with the manufacturer to produce an incremental increase. It will further increase a second of the wave of exaggeration, which will again be a bullwhip effect. 

The manufacturer also senses an increased demand from the wholesaler and will produce more apparel which creates the third wave of exaggeration. The retailer may run out of stock even if they had placed a bulk order with a wholesaler. So to adjust to the current situation, the retailer may take an alternative option to switch over to a new manufacturer to maintain the demand. Alternatively, when the festive occasions get over, the end customers will slow down their purchases. This will result in the overstocking of supplies. Finally, the retailer, wholesaler, and manufacturers will have to face this impact. This is the best example of the bullwhip effect.

Causes for the Bullwhip Effect in Supply Chain

Companies must forecast or survey the customer demands based on insufficient information and should predict how many products the customer wants while accounting for the factors that enable delivering the products on time. Usually, in every stage, there will be interruptions, fluctuations, and confusion in the supply chain management as there is an increase and decrease in demands by the customers. The bullwhip effect in the supply chain management can occur even when the supply chain is consistent. With the demand for the products rising, there may be a considerable difference in the supply chain. Below listed are the causes for the bullwhip effect in the supply chain management:

• Demand forecast updating: When the retailers demand increased stock, there will be changes in the forecasting. Production of materials may increase, which brings up changes in the supply chain.
• Order batching: When there is an increase in demand, the retailers may have to change their orders all of a sudden. The usual quantity of the order may be increased or decreased due to the end customers' demand.
• Price fluctuations: Discounting the products can bring up price fluctuations, which result in more extensive sales with low profit.
• Rationing and gaming: The order quantities may increase or decrease due to customer demands. 
• Communication: A lack of communication can affect a link between the stakeholders in the supply chain management
• Increased orders: Overreacting to the demand expectations, the retailers may over order or order less where there will be changes in the supply chain

Impact of a Bullwhip in the Supply Chain

The most significant impact by the bullwhip effect in the supply chain may affect the supply chain management, but the more significant impact will be on raw material suppliers. Increased demand by the retailers will make the marketers excessively order more goods from the manufacturers. The manufacturers purchase more raw materials to produce the end product, so if the demand is decreased at this point, there will be a more significant impact on the manufacturers who produce an end product with the raw materials.

If the business network has insufficient data about the customer demands and trends, it may lead to poor forecasting. Insufficient forecasting will create a bullwhip effect. Time is taken for the goods to be manufactured or supplied, and this will affect the network. Companies and industries can lose valuable customers if they do not deliver the goods on time. The time issues and loops to the bullwhip effect will affect the sales count and business. Out-of-stock situations can also occur in supply chain management when there is a sudden increase in demand. These fluctuations impact the supply chain, significantly impacting retailers, marketers, and manufacturers.

A few businesses use safety stock to tackle the demand differences. But it is not the solution for the bullwhip effect in the supply chain; instead, it fills up the stock until the supplier supplies the product. The customer relationship can also be affected if there is less stock to fulfill their demands. Business can be affected, and then the sales go down, impacting everyone in the supply chain. The bullwhip effect in the supply chain can lead to many traumas to the business that can highly impact the inventories, supply chain, sales, and relations between the networks. A balanced supply chain management network will create a good business. Coordination between retailers, marketers, and manufacturers will be critical to a successful business.

Measures to Avoid the Bullwhip Effect

Every firm's supply chain, inventory locations, and complexity are distinct. However, by understanding the bullwhip impact and applying improvement measures, stocks may be decreased by 10 to 30 percent, while stock out problems and lost customer buys can be reduced by 15 to 35 percent. Some of the tips offered below may help reduce the bullwhip effect in supply chain management.

Understanding the Bullwhip Effect

First and foremost, the supply chain management network must understand the consequences of the bullwhip effect. Most companies fail to maintain their inventory. A balanced inventory analysis from store to supplier will cover the supply chain management.

Improving the Stock Process

The introduction of new stocks in the market may eliminate the old ones, so stock analysis is necessary. Regular reporting and early waning have to be maintained to do balanced inventories.

Perfect Communication Along the Supply Chain

Constructive communication between the persons in the chain may help avoid excess production, wastage of raw materials, pricing problems, and delays in deliveries. Maintaining perfect word communication with the customers can maintain the demand levels and accurate forecasts.

Reduction of the Network in the Supply Chain

Reducing the number of persons in the supply chain may decrease interruptions. Network size reduction of the supply chain marketers can reduce disruptions, and the communication can be clear cut to achieve and settle the demands. This measure can increasingly reduce the bullwhip effect in supply chain management. 

Consistent Pricing Techniques

Sales and unnecessary bulk discounts may affect the inventories and trigger the bullwhip effect. Maintaining a regular price during difficult situations can encourage orders according to the customers' needs. One can avoid bulk discounts and reduce overstocking for the wastage of raw materials.

Monitoring the Stocks

Maintaining the stock levels is essential to maintaining the supply chain. One can use regular reporting and early warning systems to maintain the stock levels so that demands can be satisfied and the bullwhip effect can be avoided.

Conclusion

You must maintain the above tips and tricks to balance inventory levels and satisfy demands. The effect has a more significant impact on the network flow of supply chain management. Fashinza is an apparel manufacturing company, a B2B model platform. The company helps to connect with the clothing brands to make sales with the suppliers. Fashinza deploys design to delivery, and the only action to be done by the supplier is to order the apparel. They make the process of manufacturing apparel fast, hassle-free, and transparent for brands. Get the best apparel from them today!