For Your Supply Chain, Bullwhips Sink Ships

In the wonderful world of supply chains, there is a phenomenon to watch out for called the Bullwhip Effect. If you have been in business for several years, you likely have encountered it once or twice. It’s that funky time when a small consumer demand causes ripples at the retail end, and when it gets to your suppliers and manufacturers, it’s a full-blown demand hurricane! It’s almost like a flick of a bullwhip’s handle causing an epic crack, hence the name. The phenomenon leads to inventory chaos and resource management headaches. In this article, we will learn more about the Bullwhip Effect and how to prevent it.  

So, let’s start by defining the Bullwhip Effect more clearly. In simple terms, it means upstream demand amplification. It’s where small fluctuations in consumer demand lead to large fluctuations in inventory levels. These fluctuations cause imbalances as you move up the supply chain. It’s basically when retailers, wholesalers, and manufacturers in your supply chain overreact to changes in customer demand. When this happens, it leads to excessive inventory because the retailer may have ordered more products than they needed in response to the perceived fluctuations in demand. Now, the wholesalers must carry excess inventory, and the pattern continues up the supply chain.  

The Bullwhip Effect also creates supply chain inefficiencies. The manufacturer might increase production to meet the inflated demand signals, only to experience a distinct drop in the actual demand. Costs increase throughout the supply chain due to inefficiency. It costs money to carry the goods and store them, and leads to waste as the product could become obsolete or unsellable. This is especially true for perishable items. 

Let’s look at an example of a fictional store that sells umbrellas. The store experienced a sudden increase in umbrella sales due to an unexpected rainstorm. Your friend saw the spike, and in response, they ordered a large quantity of umbrellas from the wholesaler to ensure they didn’t run out of stock. By the time the order reached the wholesaler, the rainstorm had already passed, and the demand for the umbrella returned to its average level.  

Seeing the large order, the wholesaler assumed that there would be a sustained increase in demand and decided to order more umbrellas from the manufacturer. Now that the manufacturer received this large order, they increased production of the umbrella accordingly. The problem is that the increased production comes just as demand returns to normal. Now, the manufacturer has all the extra umbrellas in their inventory. All of this came from the store’s exaggerated response to a short-term change in their demand. It is the Bullwhip Effect in action. Each step in the supply chain amplified the demand fluctuation, leading to inefficient allocation of resources and ultimately wasted time and increased costs. 

How do we prevent the Bullwhip Effect? Preventing the Bullwhip Effect in the supply chain involves implementing strategies and practices that improve communication, coordination, and ease demand forecasting among supply chain partners. Sharing information with retailers, wholesalers, and manufacturers about inventory levels, sales, and customer feedback can help all parties better understand the actual demand.  

In the umbrella example, all the store owner had to do was communicate with the wholesaler and describe the situation to them. More than likely, the wholesaler would have marked it as a short-term demand spike and stopped the whip from cracking then and there. Analyzing past sales collaboratively with your suppliers can promote this kind of communication and strengthen your forecasting beyond what’s right in front of you.  

Another handy trick is to reduce the lead times. The shorter the lead time, the more you must think about decisions when demand spikes. If the store owner could order 100 new umbrellas on same-day delivery, they likely wouldn’t have overreacted as much. A group order could have also been helpful in avoiding the Bullwhip Effect. The store owner could have combined multiple orders from the wholesaler and filled a more significant, consistent production to minimize disruptions caused by smaller erratic orders. Add a slight wait time until the orders stop coming in and place them all simultaneously.  

 Some industries are more affected by the Bullwhip Effect than others. Fashion, electronics, and seasonal goods are the most volatile industries. You never know when the winds of change will hit those markets. For business owners in these industries, do more research to learn how successful companies in your specific industry handle the Bullwhip Effect. Prioritize communicating openly with your suppliers when a demand spike hits. Use technology to your advantage, and if you have historical demand data on your product, use it collaboratively with your supply chain. Implementing these suggestions will help you avoid the pitfalls of the Bullwhip Effect.