Fundamentally, the ‘bullwhip effect’ is a distortion or exaggeration of demand signals flowing through the supply chain. It works like this:
1.) The consumer wants to buy 1 widget every week, however on some weeks they will buy 2 widgets.
2.) The retailer has 1 widget in stock, and also gets a delivery of 1 per week from the wholesaler. However, due to the customer wanting 2 widgets on the second week, they don’t have the stock in order to complete the order. They therefore order 3 widgets for the following week in order to ensure they don’t run out of stock again.
3.) The wholesaler has been supplying 1 widget to the retailer every week. However, due to the retailer putting in a surprise order for 3 widgets, they also have a stock out. Due to this they then increase their order to the manufacturer up to 4 widgets a week.
4.) The manufacturer has always supplied the wholesaler with 1 widget every week, however due to the surprise order for 4 widgets, they have a stock out. In order to ensure they always have the stock they then increase manufacturing up to 5 widgets a week.
In this example it is clear that the true demand is between 1 and 2 widgets per week. However, due to the bullwhip effect the supply chain are now preparing for 5 widgets a week. So, what causes this?
1.) Demand Information – Wrong demand information is used when placing supplier orders, which leads to inflated requirements. Alternatively, communication breakdown between buyer and supplier results in a guessing game over what the true requirements are.
2.) Price Changes – Product pricing mechanisms such as sales events can temporarily inflate demand which can lead to a demand spike flowing through the supply chain.
3.) Unexpected Demand – For many different reasons demand spikes during the year, it could be due to any number of factors.
4.) Batched order cycles – Some organisations release purchase orders periodically, i.e., once a month. This can lead to demand spikes being accumulated and less granular detail on the true requirements.
5.) Automated Systems – Automation is great, but it relies on its inputs and if there is an error with the demand information it will likely process this as an order to the supplier which can kick off the demand spike.
This leads to the 3 following problems:
1.) Trust – Lack of trust within the supply chain, which breaks down relationships and makes it more difficult to do business.
2.) Stock Outs – Increased likelihood of stocking issues.
3.) Waste – Increased waste within the supply chain, in terms of excess inventory, perishing goods, opportunity cost etc.
However, there are solutions:
1.) Demand Plans – Ensure demand plans are up to date and shared openly with the supply chain.
2.) Relationships – Close relationships with your suppliers will allow these spurious demands to be discussed and managed.
3.) Time – Reduce the time between demand and order, as this give the supply chain maximum time to prepare the order, but also minimises the time they are left estimating what the demand may be.
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