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OM/U4 Topic 8 Bullwhip Effect in SCM

The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect is a distribution channel phenomenon, rather problem, in which demand forecasts yield supply chain inefficiencies. This mostly happens when retailers become highly reactive to consumer demand, and in turn, intensify expectations around it. This results into inefficient asset allocations and high inventory fluctuations, moving down in the supply chain.

  • The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier.
  • This effect can be observed through most supply chains across several industries; it occurs because the demand for goods is based on demand forecasts from companies, rather than actual consumer demand.
  • The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer.
  • These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain.

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How Do we minimize the bullwhip effect?

Every industry has its own unique supply chain, inventory placements, and complexities. However, after analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30 percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed customer orders can be achieved. Below are some of the methods to minimize the bullwhip effect.

  1. Accept and understand the bullwhip effect

The first and the most important step towards improvement is the recognition of the presence of the bullwhip effect. Many companies fail to acknowledge that high buffer inventories exist throughout their supply chain. A detailed stock analysis of the inventory points from stores to raw material suppliers will help uncover idle excess inventories. Supply chain managers can further analyze the reasons for excess inventories, take corrective action and set norms.

  1. Improve the inventory planning process

Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking demand, new product launches and discontinuation of older products. Safety stock settings and min-max stock range of each inventory point need to be reviewed and periodically adjusted. Inventories lying in the entire network need to be balanced based on regional demands. Regular reporting and early warning system need to be implemented for major deviations from the set inventory norms.

  1. Improve the raw material planning process

Purchase managers generally tend to order in advance and keep high buffers of raw material to avoid disruption in production. Raw material planning needs to be directly linked to the production plan. Production plan needs to be released sufficiently in advance to respect the general purchasing lead times. Consolidation to a smaller vendor base from a larger vendor base, for similar raw material, will improve the flexibility and reliability of the supplies. This, in turn, will result in lower raw material inventories.

  1. Collaboration and information sharing between managers

There might be some inter-conflicting targets between purchasing managers, production managers, logistics managers and sales managers. Giving more weight to common company objectives in performance evaluation will improve collaboration between different departments. Also providing regular and structured inter-departmental meetings will improve information sharing and decision-making process.

  1. Optimize the minimum order quantity and offer stable pricing

Certain products have high minimum order quantity for end customers resulting in overall high gaps between subsequent orders. Lowering the minimum order quantity to an optimal level will help provide create smoother order patterns. Stable pricing throughout the year instead of frequent promotional offers and discounts may also create stable and predictable demand.

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