What is Bullwhip Effect?
The concept of the Bullwhip Effect first appeared in Jay Forrester’s “Industrial Dynamics” (1961). Hence it is also termed the Forrester effect. It is often interpreted as “the observed propensity for material orders to be more variable than demand signals and for this variability to increase the further upstream a company is in a supply chain”.
It is a phenomenon often observed in the distribution channels where demand analysis and forecast yield inefficiencies in the supply chain and is characterized by either inefficient production or excessive inventory. To the nightmare of procurement managers, the frantic hoarding and rationing during the onset of the Covid-19 pandemic created feedback loops with increased demand for everything from medical supplies to household items.
How Was the Term Coined?
When a whip is hurled, the distortion in its wave pattern increases further away from its point of origin. And the amplitude increases down the length. Similarly, the accuracy of forecasting estimates decreases as one goes higher up the supply chain.
Example Of Bullwhip Effect
To give a crude example, from the perspective of a retail chain, the demand for Christmas ornaments and gift-giving increases during December, with a lot of e-commerce websites furnishing discounts on items. With the increase in shipping and massive use of logistics services such as FedEx, the Bullwhip Effect speaks of how the entire B2B supply and distribution chain may get disrupted due to misestimates of sellers.
In the same example, Christmas isn’t celebrated as grandly in India, compared to the US, and sellers might misestimate the demand for such items in the Indian market, causing them to purchase in bulk from manufacturers who will produce more under the impression that demand is high. It will give rise to the Domino Effect as a small misreading of data on the seller’s part created a large bulk of products with drastically low demand, resulting in insurmountable losses.
What Are Its Causes?
Disorganization, lack of communication, free return policies, order batching, price variations are all common causes of the incitement of this effect. However, it can be divided into Behavioural and Operational.
- Behavioral causes are mostly due to the irrational behavior of humans in the supply chain, as well as the trade-off between stationary and dynamic performance, use of independent controllers, etc. Misuse of base-stock policies, misperceptions of feedback and time delays, panic ordering reactions after unmet demand also come under its ambit. Interestingly, it has been observed that people with an enhanced need for stability and safety seem to perform worse than those who take risks in a simulated supply chain environment; those with higher levels of self-efficacy experience comparatively less trouble in the same scenario.
- Operational- In 1997, four major causes of the Bullwhip Effect were proposed, which later became a standard in identifying the effect. Demand forecast updating is the gradual increase of each safety stock by the component individuals in the supply chain. Gaming and Rationing incite inconsistencies in the ordering information received as well as a supply made. Order batching and Price fluctuations create artificial variability making data more erratic.
What Are the Countermeasures?
Kanban or the scheduling system of lean manufacturing used by Walmart’s distribution system is a near-perfect success in this regard. Increased information circulation helps in accurately assessing demand and reducing costs throughout the supply chain. Order smoothing is another strategy against the Bullwhip effect. Several other methods are used, such as eliminating pathological incentives, strategic partnerships, demand-driven MRP, Just In Time Replenishment (JIT), Vendor managed inventory , etc. Cutting delivery time in half is said to reduce the effect by nearly 80%.