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ECONOMY

The Bullwhip Effect


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What is The Bullwhip Effect?

The bullwhip effect is an instance wherein tiny fluctuations of consumption in the retailer end distribution chain are amplified as you move through into the supply chain, from end of the retail chain up to manufacturing.

This occurs when a retailer adjusts the quantity of the item it buys through wholesalers depending on a slight variation in the real or forecast demand for the product. Because they do not have complete information about the shift in demand that the wholesaler is able to increase the amount of orders it receives from the manufacturer to an even greater amount and the manufacturer having a greater distance from the manufacturer, is likely to alter its production by an even greater amount.

The term comes from a concept of science where the whip movements are equally amplified from its origin (the hand that is cracking the whip) until the point at which it reaches its end (the part that is the tail).

The risk from the bullwhip effects is that they increases the inefficiencies of a supply chain, as every step in the supply chain estimations demand in a way that is more and more inaccurate. This can result in over-investment in inventory as well as revenue loss as well as a decrease on customer support, delays to schedules, or even bankruptcies or layoffs.

Learning the Bullwhip Effect

The bullwhip effect generally is felt from the retail level all the way up the supply chain until at the level of manufacturing. If a retailer relies on the data from sales immediately to predict an increased the demand for a product the retailer would send an order for more product through its distribution partner. This distributor will forward this request to the manufacturer of the item. This is a part of supply chain processes and does not necessarily reflect an effect called a bullwhip.

The bullwhip effect can distort this process in one or two ways. The first is when the initial retail order changes are because of an incorrect demand forecast. The magnitude of the mistake tends to increase as it advances further through the supply chain until the manufacturer. The other occurs when the retailer has accurate information regarding demand however, it can lead to inaccurate conclusion about the details of the cause and the details of the order change is lost, resulting in incorrect conclusions by wholesalers, that are then amplified further higher up the chain.

 

A good example of the effect of the bullwhip.

For example, imagine the possibility of a hot chocolate shop which typically sells 100 cups daily in winter. On an especially cold day in the region the retailer will sell 120 cup instead. In the mistake of assuming that the growth in sales as an overall trend the company requests the components for 150 cups directly from its distributor. The distributor notices the rise and extends their purchase request with the producer in anticipation of more requests from other retailers, too. The manufacturer also increases its manufacturing run in anticipation of bigger demand for its products in the near future.

 

At each of the stages above the forecasts for demand, they have been becoming more distorted. If the retailer anticipates an increase in hot chocolate sales once the temperatures return to normal then it will suddenly be faced with more inventory than is needed. Manufacturers and distributors will also have more stocks.

 

The other reason that explains the dearth of data is that logistical operations at the wholesale level are slower to shift, meaning the conditions that caused the change in the demand in the retail sector could have passed before the wholesaler had reacted. Since changing production outputs in manufacturing is more time-consuming and the information from retailers is longer delayed in reaching manufacturers, the difficulties in reacting properly to fluctuations in demand rises by a significant amount.

 

Although the store accurate estimates of the demand, such as due to the beginning of the local hot chocolate festival the bullwhip effect may continue to occur. The distributor, who is not completely aware of local conditions could conclude that this is the result of a general rise in consumption of chocolate instead of specific conditions for the particular retailer. The manufacturer, even far removed from the market is less likely to be able to discern and appropriately react to the shift in demand.

Effects on the Bullwhip Effect

In the case above the manufacturer could have a large oversupply of its product. This could cause interruptions in the supply chain, and also to the business of the manufacturer–increased expenses for transportation, storage spoilage, loss in revenue, delay in shipping, and much more. The retailer and the distributor in this scenario could be facing similar issues.

 

What does an Bullwhip Effect indicate?

The bullwhip effect suggests that a tiny mistake in assessing demand for consumer goods is amplified by the supply chain. This means that communication between firms in the supply chain is inadequate, resulting in firms higher in the supply chain not having crucial information.

What is the Bullwhip Effect?

The effect of the bullwhip can be difficult to detect in real-time as it is due to a lack of communication across the supply chain. It is often an event that is discovered in the aftermath, after it is already evident that inefficiencies have been created.

 

How Can You Avoid the Bullwhip Effect?

There are numerous things that firms within a supply chain could do to avoid or at the very least, minimize the risk and extent of the bullwhip effect. They must first make sure that there is a clear and consistent communication between businesses in the upper and lower levels of through the entire supply chain. This can prevent temporary or limited shifts in supply from being interpreted as being more expansive than they really are. Companies should also be sure to consider a wider perspective when preparing forecasts for demand in order to minimize the impact of any short-term or temporary shifts. Additionally, businesses can try to improve the speed with they can adapt to shifts in demand, which means that they will be able to readjust their plans more easily when they make a mistake in their assessment of the demand. It also eliminates the requirement to over-produce or overorder in order to create an extra buffer in the event shifts in demand.


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