Bullwhip Effect

Demand changes increases as one step up the supply chain away from the retail customer. Small changes in consumer demand can result in large variations in orders placed upstream. The network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomen si calles bullwhip effect.

This picture shows in a nice way how the bullwhip effect works.

There are various factors which causes the bullwhip effect.

  • Overreaction to backlogs
  • Neglecting to order in an attempt to reduce inventory
  • No communication up and down the supply chain
  • No coordination up and down the supply chain
  • Delay times for information and material flow
  • Order batching – larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of transportation economics such as full truck load economies, and to benefit from sales incentives. Promotions often result in forward buying to benefit more from the lower prices.
  • Shortage gaming: customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient.
  • Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand.
  • Free return policies

More causes could be found here.

Countermeasures to the Bullwhip effect could be:

  • Collaborative Demand Management
  • Countermeasures to Inaccuracies in Demand Forecasting
  • Countermeasures to Padding in Demand Forecasting
  • Countermeasures to Batching of Orders
  • Countermeasures to Fluctuations in Prices
  • Countermeasures to Shortage Gaming
  • Countermeasures to Delay in Order Processing and in Shipping
  • Countermeasures to Delay in Information Flow

All these countermeasures are elucidated here.

By the way here is a simulation of the “Beer Distribution Game“!






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