The Bullwhip Effect and How to Prevent It

Learn About:

• What the "Bullwhip Effect" Is

• How It Affects Your Supply Chain

• How to Prevent It

When someone gives a slight flick to the handgrip of a long whip, it sets off a chain reaction. The motion starts near the handgrip and gradually amplifies as it moves toward the other end of the whip. 

In a supply chain, the bullwhip effect leads to artificial fluctuations in supply and demand. Essentially, it means that supply gets exaggerated, and inventory builds up faster than actual demand. A small bullwhip effect is okay and indicates enough supply availability. But if it becomes significant, it can pose challenges.

mall changes in demand ripple up the supply chain, growing larger as they go. So, the farther suppliers are from the customer, the more pronounced the fluctuations become.

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, 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.

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