A supply chain must get the right goods and services to their customers in the most efficient, and cost optimized, way possible. To meet this goal, each supply chain partner must function as efficiently as possible. Collaboration and extensive communication must occur in the supply chain. It must also manage, coordinate and integrate upstream and downstream in the supply chain.
Simply put: inventory swings in larger and larger “waves” in response to customer demand (the handle of the whip), with the largest “wave” of the whip hitting the supplier of raw materials.
The pulse of a lean supply chain is accuracy in demand planning. Unforeseen spikes in demand or overproduction of demand planning stimulates the supply end of the chain to respond with changes in production. Production and supply issues impact the consumer end of the supply chain and the effects ripple up and down the chain.
This is often referred to as the bullwhip effect.
(In some industries, it is known as the “whiplash” or the “whipsaw” effect.)
What Causes the Bullwhip Effect?
Supply chain management is a complex process. There are several issues that can lead to the bullwhip effect, and those issues can be seen by delays in transmitting information, a lack of coordination, inadequate communication and collaboration, up and down the supply chain.
Some causes of the bullwhip effect include:
Customer demand fluctuations: lumpy demand
Force majeure (natural disasters, unforeseen risks, and unplanned developments) that disrupt the even flow of materials, goods and services
Excessive Inventory/inadequate inventory
Demand forecasting variations, i.e., increasing the forecast to offset potential errors thereby covering up actual customer demand
Organizations may gather larger orders before processing them in an effort to reduce costs and create transportation economics. Procurement may also wait to place larger orders to benefit from lower prices offered during a promotion/sales event.
Customers can also contribute to the bullwhip effect by ordering more than they need in periods of short supply. Additionally, customers taking advantage of liberal return policies, reverse logistics, can create problems with developing accurate demand forecasts.
Lead times and price fluctuations can also cause the bullwhip affect.
The supply chain causes a ripple effect if and when any of these variables occur. You can’t plan for all variables in the supply chain, so this bullwhip affect can happen at any time, without notice. The supply chain partners have to be ready to deal with this whiplash affect as a cohesive unit.
One offsetting solution: Using the order smoothing methodology, and placing safety stock on highly volatile SKUs