What is the Bullwhip Effect (Supply Chain)?

The Bullwhip effect is the theory that orders for goods at the start of the supply chain have a greater impact further down the chain. The bullwhip effect relates to orders sent to producers and suppliers that create greater variations than sales to the end customer. Variations in ordering have the possibility of interrupting the supply chain process at every level in the series - thus causing exaggerations in the fluctuations for demand of a product.

What Causes the Bullwhip Effect?

Many factors have been said to co-contribute to Bullwhip effect in the supply chain; the following are just a few of such factors: Supply chain disorganisation where larger or smaller amounts of the product needed are ordered as a result of the pre-supply chain under or overreaction. Insufficient or absence communication between each supply chain level affects the smooth of the processes. There might be varied product perception by managers in different levels of the supply chain resulting in different quantities ordered. Batching of orders where clients do not place the order immediately but accumulates them and make weekly or monthly order. The ordering method creates the demand variation; for example, they may create demand inrush at one point and followed a period of no demand. Price fluctuation, Regular payment patterns can be affected by discount and other cost charges as buyers long for the discount advantages available in short term period, the availability of discount in the short term increases the demand causing uneven production and sales Demand information, Reliance on the historical demand information in the estimation of current demand for a product is not accurate as fail to consider the overtime price variation.

Example of the bullwhip effect

The products actual demand and that of its materials begin with the customer even though the products demand is affected the supply chain for instance downwards when the actual customer's demand is eight, and the retailer might order ten from the distributor having extra two units are for stock safety. This followed by a supplier ordering for twenty units from a manufacturer to enable them to take advantage of bulk purchase discount in addition to stock guarantee for timely shipment to retailers. Subsequently, the manufacturer receives the order and makes an order of forty units utilising economies of scale. The entire series of order results in the production of forty units of a product as a result of eight units demand Even though the bullwhip effect is a frequent problem to supply chain management, understanding the contributory factors to bullwhip is very important to managers in devising their mitigating methods.