The term “bullwhip effect” is often thrown around when describing supply chain demand, especially in the years since 2020, which gave supply chains everywhere a textbook example of this effect. But what is the bullwhip effect in supply chain management? In short, it is a chain reaction that grows in magnitude, creating unintended consequences.
The bullwhip effect can impact everything from the manufacturer to the distributor to the retailer and customer, and unless the right approach is taken, it can be difficult to avoid. This article explains the bullwhip effect in supply chain management, including the causes, impacts, and the best strategies for shippers to manage their supply chains and avoid the negative impact of the bullwhip.
What is the Bullwhip Effect in Supply Chain Management?
Visualize the bullwhip effect as someone holding a whip and giving it one small, quick motion to result in a significant impact at the end of the whip. The magnification of the initial motion is a characteristic that can be seen in supply chains when reactions to a change in demand are not well informed.
As an example of the bullwhip effect, consider what happens to the market for inflatable swimming pools during a heat wave early in the season. Customers drive up the demand suddenly, buying up retailers’ stock of pools. In response, retailers order more pools than they typically reorder to satisfy the new demand, plus safety stock. From the viewpoint of the wholesaler, there is a large spike in demand. Due to the increased orders, manufacturers increase the production of swimming pools to an even greater degree. At season’s end, there is likely to be an overstock of pools — not only because the demand was temporary but also due to overestimating the demand for pools.
The bullwhip effect significantly increases supply chain volatility by creating a distorted view of demand. It can be difficult to prevent the effect from getting out of control because the initial cause is the same reason that it continues to magnify — essentially, a lack of visibility and transparency in the supply chain.
Causes of Bullwhip Effects on the Supply Chain
Supply chain partners unknowingly contribute to the bullwhip effect when they make decisions based solely on their limited visibility. Here are three factors that increase the risk of the bullwhip effect in supply chain management.
- Multi-channel distribution – When offering shipping or in-store pickup, there is pressure for sellers to avoid running out of stock on hand or having a slow fulfillment process, which means they are more likely to build safety stock for each distribution channel.
- Ration gaming – If a product is scarce upstream in the supply chain, sellers may order large quantities, increasing their own stocks and adding more demand for the already-scarce product.
- Poor timing between demand and lead times – Sellers assume they can replenish the product before the demand changes. The bullwhip effect occurs either when there is a longer lead time than expected or when demand cools sooner than expected.
What are the Impacts of the Bullwhip Effect?
The biggest impacts of the bullwhip effect on supply chains stem from volatility. Supply chain partners cannot get an accurate demand forecast due to distorted data, which creates problems with scheduling production and aligning inventory to demand. The resulting supply chain delays can cause partnerships and customer service to suffer due to unmet expectations. At the same time, there is waste from overstock, which costs more to store and will need to be discounted to sell.
How Inventory Planning & Supply Chain Management Improve with Better Visibility
To avoid the consequences of the bullwhip effect, there must be better visibility and transparency between supply chain partners. This allows companies to make decisions using more accurate and complete data that contribute to more reliable predictions. With closer collaboration providing transparency, supply chain partners can set expectations and communicate demand, which helps to reduce lead times and avoid a negative impact on stocks. Ultimately, this levels out the repercussions of the bullwhip effect and can also help prevent another bullwhip situation from the beginning.
Reduce Impacts from the Bullwhip Effect with Visibility
One essential part of managing the bullwhip effect is having data that shows a complete picture of the supply chain. When it comes to shipment visibility, this starts with ocean freight and container tracking. VIZION offers real-time, complete container visibility as an API solution, providing the data for shippers to make informed supply chain decisions. Learn more about this type of visibility and how it can improve inventory planning by reaching out to VIZION today to schedule a demo.