Introduction
The bullwhip
effect is a distribution channel phenomenon in which demand forecasts yield
supply chain inefficiencies. It refers to increasing swings in inventory in response
to shifts in consumer demand as one moves further up the supply chain.
The bullwhip effect (also
known as the “whiplash” or the “whipsaw” effect) in supply chain management refers to the phenomenon of
increasing fluctuations in inventory in response to shifts in customer demand
as one moves further up the supply chain.
Figure 1: The Bullwhip effect
Source:fibre2fashion.com
In a supply chain full bullwhip
effect, the distortion in information is escalated as it moves up the chain.
Different operators-consumers, distributors, dealers and manufactures are involved in the supply chain at different
levels and each one has its own stock management system. Different forecasting
demand models are used by different operators and these lead to distortion of
information, ultimately create bullwhip effect.
This variance created by these operators can interrupt the smoothness of
the supply chain process as each operator has over or under estimated the
product demand, ultimately leading exaggerated fluctuations.
Main factors leading to bullwhip effect
i)
Disorganization between each supply chain link-that is the manufacturer,
the distributor, the retailer and the consumers. Each actor in the link has its
own method of procurement , that is there is no uniformity among the actors and
this automatically leads to over or under reaction to the supply chain
beforehand.
ii)
Lack of communication: the actors in the supply chain work in their own
environment and decides on their own. There is no communication among these
operators and this renders it very difficult to have a proper forecast and
obviously it is difficult for the process to run smoothly.
iii)
Free return policies. Usually happens that orders exceed the demand and
the customer finds it with massive stock on hand. Therefore they return these
excessive goods to the supplier. This again distort the process and lead to
bullwhip effect.
iv)
Order Batching creates variability in the demand as there may be urge in
demand at some stage followed by no demand-infrequent and irregular demand.
Operators do not have the right method of forecasting thus leading to bullwhip
effect.
Figure 2 : Bullwhip Effect Example
As illustrated in figure 2 above, the actual demand for the customer is 10 units, the retailer then orders 15 units from the distributor, and extra 5 units in order to ensure there is no stock shortage.
Then
the supplier orders 40 units from the manufacturer so that to buy in bulk to
ensure enough stock to provide timely shipment of goods to the retailer.
The
manufacturer then receives the order and it orders from their supplier in bulk i.e.,
100 units to ensure economies of scale in the production to meet demand.
Now
100 units have been produced to meet demand of only 10 units which means that
the retailer has increase demand by dropping prices or finding more customers
that causes bullwhip effect. Each actor in the supply chain will comply with
its own stock ordering and stockholding policy.
As
we seen the amount demanded never equates the quantity ordered, there is always
a buffer to cater for unforeseen demand, stock shortage and volume orders to
benefit discounts. Ultimately the excess ordered cumulates at each link point
in the supply chain lead to a bullwhip
effect.
Figure 3: The bullwhip effect -Example 2
The
bullwhip effect tend to amplify in today’s economy due to change in
environmental situation and logistics. Covid 19 impact on the world economy,
problem of freight logistic where each player in the supply chain has increased
its buffer stock due to lots of uncertainty.
Recently we have the problem of cargo ship in the Suez Canal, this has brought about more uncertainly for procurement, delay in receipt of goods. This will contribute in distorting the market and increase the bullwhip effect.
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