The bullwhip effect describes how order sizes fluctuate along the supply chain, resulting in overproduction against actual customer demand. This phenomenon is caused by factors such as inaccurate demand forecasting, order batching, pricing fluctuations, and rationing practices. To mitigate the bullwhip effect, companies should transition from a forecast-driven approach to one that emphasizes real-time demand information and information sharing with supply chain partners.

2. What is the Bullwhip Effect?

4.  The order that the manufacturer receives is often much larger than
what the actual customer’s demand is at the point of sale.
 This irregularity or variance in the size of the orders placed increases
as we move up the supply chain, i.e. from the customer to the retailer
to the distributor, and then the manufacturer.

6. So eventually, 40 units were produced against a demand of 9 units,
and now the inventory will be pushed to the customer through offers &
discounts and more investment will be made for the product’s
marketing and advertising efforts.

7. What causes this Bullwhip Effect?

8.  Demand forecast updating: Every company in a supply chain follows product
forecasting which is usually based on the past order history. This helps in production
scheduling, material requirement planning, inventory control and capacity planning.
But in this case, the fluctuations are not accounted for.
Also, the lead time of the orders varies or fluctuate drastically in some cases, which
might force the buyer to place bigger sized orders.

9.  Order Batching Practice: Larger order sizes often offer discounts and
lower cost advantages to the buyer, or at times suppliers don’t entertain
smaller order sizes. Hence, companies tend to accumulate the demand
to reach a respectable order size and develop the practice to order
monthly or weekly, which creates demand variability as the average
demand is not stable across the time-period.

10.  Pricing Fluctuations & Trade promotions:
Specific period discounts, or cost fluctuations, can lead the
buyers to order in bulk to avail the discounts which cause
demand variability in the supply chain.

11. Rationing and short gaming: When product demand exceeds supply,
a manufacturer often rations its product to customers. For example, the
manufacturer then allocates its products in proportion to the amount
ordered by the different retailers. Retailers often anticipate on potential
shortages by exaggerating their real needs when they order. If demand
drops later, this will lead to small orders and cancellations.

12. Controlling Measures:

13. The only way to counter bullwhip effect is to have the accurate, real-time
demand information. To achieve that, we need to shift from a forecast-driven
ordering system to measures that allow information sharing with the supply
chain partners and hence complete visibility of the actual customer demand.

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15. References:
1. J.W. Forrester. Industrial dynamics. MIT Press, Cambridge, MA, 1961.
2. H.L. Lee, V. Padmanabhan, and S. Whang. The bullwhip effect in supply
chains. Sloan Management Review, 38(3), 1997
3. Salmon (1993).
4. P. Sellers, “The Dumbest Marketing Ploy,” Fortune, volume 126,
5 October 1992, pp. 88–93.
5. Yossi Sheffi, “China’s slowdown: The first stage of the bullwhip effect”,
Harvard Business Review, 9 September, 2015.