The Bullwhip Effect: Meaning and Example

The bullwhip effect is a concept of inventory fluctuations or inefficient asset allocation as a result of demand changes as you move further up the supply chain.

As such, upstream manufacturers often experience a decrease in forecast accuracy as the buffer increases between the customer and the manufacturer.

Benefits of minimizing the bullwhip effect

• Every industry has its own unique supply chain, inventory placements, and complexities.
• After analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30 percent can be reduced
• Around 15 to 35 percent reduction in instances of stock out situations and missed customer orders can be achieved.

Read: Inventory Management Concepts

Methods to minimize Bullwhip Effect

A detailed stock analysis of the inventory points from stores to raw material suppliers will help uncover idle excess inventories

Improve the inventory planning process

• Inventory planning is carefully done with historical trends for seasonal demand, forward-looking demand, new product launches and discontinuation of older
• products. Safety stock settings and min-max stock range of each inventory point need to be reviewed and periodically adjusted.
• Regular reporting and early warning system need to be implemented for major deviations from the set inventory norms.

Improve the raw material planning process

• Raw material planning needs to be directly linked to the production plan.
• Production plan needs to be released sufficiently in advance to respect the general purchasing lead times.
• Consolidation to a smaller vendor base from a larger vendor base, for similar raw material, will improve the flexibility and reliability of the supplies.
• This will result in lower raw material inventories.

Collaboration and information sharing between managers

• There might be some inter-conflicting targets between purchasing managers, production managers, logistics managers and sales managers.
• Giving more weight to common company objectives in performance evaluation will improve collaboration between different departments.
• Also providing regular and structured inter-departmental meetings will improve information sharing and decision-making process.

Optimize the minimum order quantity and offer stable pricing

• Certain products have high minimum order quantity for end customers resulting in overall high gaps between subsequent orders.
• Lowering the minimum order quantity to an optimal level will help provide create smoother order patterns.
• Stable pricing throughout the year instead of frequent promotional offers and discounts may also create stable and predictable demand.

Also Read:

• Supply chain management: Theories and Concepts