Operations

The bullwhip effect

The ‘bullwhip effect’ illustrates the impact of coordination problems in traditional supply chains

The 'bullwhip effect' illustrates how coordination challenges undermine traditional supply networks. It's based on the idea that when you move deeper back in the supply chain, little changes in customer orders become amplified. If you understand the effect, you can put measures in place to manage it.

When to use it

● To figure out why customer deliveries are late or why you have a lot of inventory.
● To grasp the complexity of a complicated supply chain.
● To increase the efficiency of the supply chain.

Origins

The term "bullwhip effect" was coined by Procter & Gamble executives in 1990 to characterize a series of irregular order patterns in the company's baby-nappy supply chain. Since the late 1950s, the phenomenon has been investigated in the field of systems dynamics as the "whiplash" or "whipsaw" effect.

Systems dynamics is a technique for modeling the complex interactions between the components of a system, such as a business, and it can help explain some of the system's unexpected behaviors. Jay Forrester and colleagues at MIT invented the "beer game" simulation to help students comprehend the core concepts of systems dynamics in the 1960s. This is still widely used by MBA students today, and it allows them to observe firsthand how little changes in client orders may have a big influence on the amount of product produced.

What it is

Customers' information is used by individual enterprises in a supply chain to make production decisions. However, the system as a whole frequently runs inefficiently because to delays and mistakes in the information collected, as well as each company's restricted self-interest. The 'bullwhip effect' is a common occurrence in which small changes in consumer demand can result in large changes in upstream orders. In reality, as you move further back in the supply chain, even when customer demand is stable, supply shortages and inventory pile-ups are prevalent.

A multitude of events can generate the bullwhip effect. The majority of these involve downstream entities (such as retailers or distributors) acting in their own best interests while keeping their suppliers in the dark about genuine demand for their products. Actively reducing inventory levels, combining orders, and ordering more components than usual to avoid future shortages are all likely to generate problems for suppliers. A lack of information about the total level of demand in the supply chain exacerbates the bullwhip effect.

For nearly half a century, MBA students have been playing the well-known 'beer game,' which divides the class into four positions for a beer brand. As customers, retailers, wholesalers, and suppliers, they must ensure that there are no stockouts. No communication is permitted, and each player can only act on information received from the player downstream. When little changes in consumer sales are conveyed across the supply chain, the consequence is always the same: the end-of-chain provider produces either too much or too little merchandise.

How to use it

To avoid the bullwhip effect, a variety of techniques are available, including increased information exchange, better channel coordination, and increased operational efficiency (for example, by reducing lead times). Some specific solutions for coping with the bullwhip effect are as follows: ● Provide actual customer demand data to 'upstream' sites so that everyone can plan using the same raw data.
● Smaller, more frequent shipments should replace huge batch orders. When demand rises, the likelihood of an upstream supplier overreacting to an unusually large batch order decreases.
● To discourage merchants from engaging in forward-buying, manufacturers should impose a one-price policy. Similarly, rather of offering periodic discounts, merchants which adopt "everyday low prices" send a clear message to suppliers to those stores regarding pricing.
● When a product is in short supply, it can be helpful to assign products based on a customer's recent purchasing history. During times of scarcity, this inhibits 'gaming.'

● Return policies should not be excessively lenient. If reasonable return penalties are enforced, customers are more likely to buy what they intend to use.

Top practical tip

While the bullwhip effect is most obvious in multi-step production, the basic premise that variability grows as you move upstream may be applied to a variety of industries. If you manage a supply chain, the most important thing is to understand the bullwhip effect and be able to explain why it occurs.

In addition to the precise tactics listed above, there are other larger things you can perform. The first step is to decide whether to manage inventory using a pull or push strategy. When demand is predictable, a push strategy can be adopted, but when demand is unpredictable, a pull strategy is frequently preferable because it prevents excess inventory. The bullwhip effect, on the other hand, is a risk with a pull strategy.

Another wide topic is the importance of knowledge exchange. Expenses rise regardless of where you are in the supply chain when there is a lack of visibility to demand shared across the supply chain. As a result, encouraging your trading partners to share information is a good idea. While some businesses are wary of disclosing what they consider proprietary information, the bullwhip effect demonstrates that the benefits of sharing often outweigh the drawbacks.

Finally, consider the complexity of your product portfolio, as the bullwhip effect gets stronger as the system gets more sophisticated. Slimming down your product range can often save you a lot of money.

Top pitfall

Many of the proposed bullwhip effect solutions are technological, involving the use of computer systems to provide real-time inventory and supply data. But keep in mind that technology is only one piece of the puzzle. Even if it goes against the system's greater goals, individual managers will frequently act in ways that favor their narrow interests (such as having enough stock to meet their immediate clients' requests). These behavioral issues must be addressed as part of a comprehensive bullwhip impact prevention strategy.

Notion Templates

Get this high quality templates to help you with implemenation!

● Value chain ● Traction channels