Bullwhip Effect in Supply Chain Management

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Bullwhip effect

If you are an entrepreneur, then you must know the importance of supply chain management. Without efficient supply chain management, you will fail to reach your goals. It is extremely important to create a solid customer base as well.

To gain a competitive advantage, you need to pay attention to efficient SCM. The main challenges of the supply chain include time and supply of order decisions, planning, demand for the product, lack of communication, delay in procurement, etc. Problems in these stages can lead to huge blunders.

And this is known as the bullwhip effect or whiplash effect. Notably, the demand for a product has an effect on a business’ inventory. Many times, companies procure raw materials and resources as per their forecast. This helps them avoid delays and meet customer’s demands on time. However, variations can appear, thus leading to issues related to cost, time, and inventory in supply chain management.

The Wall Street Journal describes the bullwhip effect as: “This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.”

If you understand it in detail, then you can keep expensive downfalls at bay. To know more, read on.

What leads to the bullwhip effect?

Here are the causes of the bullwhip effect.

Order batching

This happens when each member takes a particular order quantity that it gets from downstream customers and rounds up or down to suit production restrictions. Some of the constraints can be truckload quantities or equipment setup times. The more members who handle such rounding of order bulk, the more issues take place.

Price fluctuations

Another reason for the bullwhip effect is price fluctuations. If the prices fluctuate on a regular basis, then you will witness the bullwhip effect in SCM. Discounts and other cost changes can lead to hindrance in the regular buying pattern.

Buyers want to gain traction from discounts provided during a short span, leading to irregular production and misleading demand data. As a business owner, you should take charge of the same and make sure it doesn’t halt your SCM in any way.

Demand information

The bullwhip effect also appears as people consider history when it comes to predicting future demand information. Depending on past information means people do not take fluctuations into account. This should be kept in mind.

Lack of communication

If there is a dearth of communication between each link in the supply chain, then issues will automatically arise, thus becoming a threat to smooth functioning. For instance, managers can identify a good’s demand differently within different links of the Supply chain. They order products accordingly. If there is no or lack of communication, then this can also lead to the bullwhip effect, which can be harmful to a business.

Free return policies

Customers may overstate demands due to lack of supply and then ultimately cancel it when the supply becomes adequate again. This can lead to excess materials. This is yet again a cause of the bullwhip effect.

How does Bullwhip exactly affect the shipping time and expenses borne by the company?

The negative effect of the bullwhip effect can be extremely expensive for any company. In order to maintain a useful inventory, companies have to work hard. It is a tricky chore. The bullwhip effect can lead to either an excess or shortage of inventory, which can be both harmful to the company. The reasons behind this are aplenty. Overstated orders on the basis of faulty forecasts often lead to incorrect inventory levels.

If there is an excess supply of items, then it can be expensive for the company. On the other hand, if demand for products does not increase, this can lead to huge wastage.

If you think about the dearth of supply, then you should also understand that insufficient supply means you are not being able to cater to the needs of customers. Unfulfilled orders can prove to be harmful to companies. You will, thereby, ruin your relationship with customers. It will not only hurt the bottom line but also, your company’s reputation in the market. Customers will think twice before placing an order with you in the future.

How to reduce the bullwhip effect?

These are a few methods in which you can decrease the bullwhip effect to some extent.

Better communication & better forecasts

To reduce the power of the bullwhip effect, one can form a good strategy, such as communication throughout the SCM process.

This results in better forecasts as well. Since business managers believe that end-user demand is more predictable than that of factories, they usually try to ignore signals being sent through the supply chain. Instead, they deal with end-user demand, which is easier to predict and work with. The methods don’t take daily fluctuations in favor of running the level into consideration.

Eliminate delays

This is another way to decrease the bullwhip effect in SCM. In this way, you can eradicate the delays along the process. This is a great method to deal with this. You can cut order-to-delivery time by half in both real supply chains and simulations of supply chains.

Good customer service

Nothing can beat the power of excellent communication and an efficient customer service team. This can lead to smooth ordering methods, minimum cancellations of orders, et al.

Reduce the size of orders

To reduce the power of the same, you can consider decreasing the sizes of orders. Offer good price points so that customers can order at ease.

 Accept and understand the bullwhip effect

Now, this is a major thing that you need to do but sadly, most entrepreneurs do not even try to understand the bullwhip effect. If you fail to acknowledge and accept it, the problems can multiply manifolds. You understand it all, you can get a detailed stock analysis of the inventory points from stores to raw material suppliers. Analyzing the reasons and taking the right actions can create a huge difference.

Improve the inventory planning process

Inventory planning is a mixture of historical patterns for seasonal demand, forecast of demand, new product introduction to the market, and discontinuation of older goods.

Safety stock settings and a min-max stock range of each inventory point need to be adjusted periodically. Inventories in the overall network need to be balanced based on regional demand for goods.

Improve the raw material planning process

To avoid issues un production, purchase managers typically order in advance and keep stock of raw materials. This needs to be linked to the production plan. Consolidation to a smaller vendor base from a larger vendor base will also enhance the reliability of supplies.

Collaboration between managers

Managers should continuously share information so that the process is a smooth one. If the departments collaborate, then the issues will reduce automatically. Encourage regular and structured inter-departmental meetings for better decision-making.

Conclusion

The bullwhip effect is a threat to companies and shouldn’t be taken casually. You should dig deep into it and take necessary actions. Prevent it by taking the aforementioned steps.

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