What is the Bullwhip Effect?
The bullwhip effect is a term based on a supply chain event where a retailer incorrectly forecasts product demand based on customer sales. It is also known as the Whiplash Effect or the Forrester Effect. The bullwhip effect is akin to when, with a flick of the wrist, a whip (a long piece of leather, nylon or similar type of material that is attached to a handle) is cracked and results in a large, amplified motion which is focused towards the tip of the whip. And since the speed of the wave of energy travelling down the whip increases, the whip tip accelerates faster than the speed of sound to create a small sonic boom.
So this bullwhip effect is mirrored in the supply chain, if product demand (customer point of sale) changes, then the result is that all key players in the supply chain can react to this change with an exaggerated change in the amounts of product they produce. This will be manifested at each stage of the supply chain moving from retailer to distributor, to wholesaler, to manufacturer and then to supplier.
The Bullwhip Effect in the Supply Chain
This following scenario below indicates a linear supply chain with a definite increase in customer demand for a product.
The key players in the Supply Chain include the following:
Customer
Retailer
Wholesaler
Manufacturer
Supplier
- Customer –> Retailer
Customer demand for a product increases. As a result, the retailer decides that extra product is required to cater for future sales.
- Retailer –> Wholesaler
Retailer then orders product from the wholesaler by a larger amount than normal. The reason is based on the recent increase in the customer demand for that product.
- Wholesaler –> Manufacturer
Wholesaler increases its product orders from the manufacturer by an even larger amount than normal. The reason is based on the change in the retailer demand for that product.
- Manufacturer –> Supplier
Manufacturer in turn requires even more materials from the supplier to produce the increase in wholesalers demand for its product.
In this scenario, a misinterpretation in the ordering of product has a knock-on effect along the supply chain and is seen to increase when moving up the supply chain (from retailers then to wholesalers on to manufacturers and finally to suppliers). As none of these supply chain entities have precise information for the cause of this demand spike, then the cascade effect results in progressive product order amplification.
Each key supply chain player increases their demand by an even larger extent which results in exaggerated fluctuations the further one moves through the supply chain. This eventually results in significant discrepancies between the amounts of product being produced and the actual demand from the customer for that product.
Minimising the Bullwhip Effect
There are ways for the supply chain to help to minimise the bullwhip effect
Real-time Data using EDI Integration, Better Communication, Greater Supply Chain Visibility, Use of Artificial Intelligence can help reduce the effect.
- Electronic Data Interchange (EDI) – allows supply chain stakeholders to exchange business documents using real-time data – providing the visibility to help reduce the factors causing the bullwhip effect.
- Better Communication – with the involvement of EDI, demand changes get communicated instantly. This communication is significant because it helps to feed information along the supply chain to reduce the over ordering that leads to the bullwhip effect.
- Artificial Intelligence – increasing forecast accuracy using AI within demand forecasting can help to significantly reduce the bullwhip effect
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