The bullwhip effect is describes how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels.
In supply chain management, customers, suppliers, manufacturers and salespeople all have only partial understanding of demand and direct control over only part of the supply chain, but each influences the entire chain with their forecasting inaccuracies (ordering too much or too little). A change in any link along the supply chain can have a profound effect on the rest of the supply chain. Given that, there are many contributors and causes of the bullwhip effect in supply chain management.
Causes of the bullwhip effect
Companies must forecast customer demand based on insufficient information and try to predict how much product customers will actually want while accounting for the complex factors that enable that amount to be delivered correctly and on time. At every stage of the supply chain there are possible fluctuations and disruptions, which in turn influence the myriad supplier orders. Changes in customer demand directly influence all the other factors along the chain, including inventory. However, the bullwhip effect can occur even in relatively stable markets where the demand is essentially constant.
Impact on supply chain management
The bullwhip effect can be costly to all the organizations in the supply chain. Excess inventory can result in waste, while insufficient inventory can lead to reduced lead time, poor customer experience and lost business.
Most businesses use safety stock (reserve inventory) as a buffer against demand fluctuations. However, safety stock is not a solution to the bullwhip effect, but it provides enough product to fill orders until more arrives from suppliers.
It is crucial to have a resilient supply if you want to be able to avoid disruptions. UNIVPM is developing a module on Supply Chain Resilience so stay tuned for more!
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