The Bullwhip Effect and How to Prevent It
- What the “bullwhip effect” is
- How it affects your supply chain
- How to prevent it
What will happen if a person who is holding a long whip gives it a little jolt at the handgrip? A motion will be initiated in the area near the handgrip. This motion will keep on increasing as we go towards the other end of the whip, with it being minimal at the handgrip. This is known as the bullwhip effect.
In a supply chain, the bullwhip effect is a fault that gives rise to artificial supply and demand ups and downs. Simply put, the supply is exaggerated and the inventory grows faster than the demand. A small bullwhip occurrence is satisfactory and nothing to worry about because it indicates the availability of sufficient supply. However, a large bullwhip can become a challenge.
In a supply chain, the final consumers hold the whip handle and they bring about a small movement in the demand. This movement keeps on increasing in the upward direction of the supply chain. Therefore, as the distance from the customer increases, the movements increase.
Minimizing the bullwhip effect is a key concern for businesses experiencing unstable customer demand.
Improve Demand Forecasting
Reducing the bullwhip effect starts with improving the forecasting of customer demands. This helps facilitate more precise ordering. This may require better management of the inventory. With the help of inventory software, companies can control and understand how buying habits change across a period of time.
Such software also provides for real-time updates on the buying choices of consumers that depend on the recent developments and trends. Doing market research before rolling out the product into the market or using recurring offers is also likely to boost demand expectations.
Keeping Prices Stable
In the latter part of 2011, apparel retailer JC Penney rolled out a daily low-price model. The reason for this was unstable customer demand due to consistently fluctuating prices.
When manufacturers keep changing the prices to discount amounts, they influence customer demand. When a consistent price structure is adhered to, customer demand, as a result, becomes more stable, consistent, and easy-to-anticipate. This makes it easy for them to purchase adequate quantities of products to be sold.
Do Away with Batch Orders
Batch orders are a contributing factor to the bullwhip effect, especially in cases when companies purchase a product in bulk but not frequently. This causes stockpiling if they exceed demand. It also results in slow responses to an abrupt rise in demand. A more routine system of smaller orders helps stay in tune with customer choices. Good customer relations and electronic data exchange with suppliers can speed up the process of placing orders and receiving consignments before shelves are empty.
Get Rid of Obstacles
Obstacles in the supply chain can also cause issues with the bullwhip effect. Late receipt of orders may cause insufficiencies in inventory in the beginning and overstock later on. Weather and transportation problems are beyond the supplier’s control, but these may hinder the delivery of goods.
Backup supplies of key products can lessen problems due to clogged supply chains. If a company has its own distribution centers, this helps to organize the company’s business process to more efficiently place orders with the manufacturer for receipt at the retail store.
How Walmart Minimizes the Bullwhip Effect
To prevent the bullwhip effect, booming retailers like Walmart have used a tactic known as “everyday-low-price” strategy. Examine your regional Walmart’s weekly advertisement. It may be evident that a large number, if not the majority, of the items in the ad, are displayed at their usual prices.
It is advantageous to have this kind of marketing strategy. Customers feel the products are being sold at a discount, even though that is not the case. Walmart can display the products they have in surplus with the expectation that customers will be attracted by the low prices.
Vendor-managed inventory can greatly reduce the bullwhip effect on a company’s supply chain. With Walmart’s vendor-managed inventory, suppliers can get online access to Walmart’s inventory data. This has two benefits:
- Quicker transportation of goods through the supply chain
- Reduction of inventory management costs
This way, Walmart’s staff is least involved in any errors of management in the flow of goods from suppliers to the company outlets.
Effective supply management is the smart use of these strategies to prevent the bullwhip effect and make the entire supply chain more efficient.
SupplyPike has created a software solution for monitoring your supply chain to further strategize against the bullwhip effect. With our Retail Intelligence software, you can create a comprehensive and elastic demand plan that uses machine learning to answer all kinds of scenarios. You can also view your instocks and monitor your On Time In Full scores to find points of pain. Get started for free today!
Retail Intelligence – Demand Planning
Written by The SupplyPike Team
About The SupplyPike Team
SupplyPike builds software to help retail suppliers fight deductions, meet compliance standards, and dig down to root cause issues in their supply chain.Read More