Cause And Effect Of The Bullwhip Effect

The “Bullwhip Effect” (BWE) refers to the phenomenon that order variability increases as orders move upstream along the supply chain. This phenomenon is so well known that it is sometimes referred to as, “the first law of supply chain dynamics.” This effect is well documented by researchers both in theory and practice and has several important implications. The BWE can lead to excess inventory as well as unused or overused capacity. It dramatically increases the operating costs of the supply chain system and often leads to serious supply and demand mismatches and deterioration in customer service levels. A variety of causes of the BWE have been identified in the literature. These factors have been effectively classified in the seminal articles of Lee et al. (1997a, b) into four major categories: (a) Informational inefficiencies and accentuating factors (e.g., propagation of distorted demand information via erratic orders, long and/or variable lead times, uncontrollable product production etc.); (b) Order batching effects (e.g., pervasive impact of fixed costs and other economies of scale considerations in batching orders, periodic reviews, and "hockey-stick" phenomena in sales behavior etc.); (c) Dynamic pricing and promotional campaigns provide incentives for customers to wait and place large orders, thus creating hard to predict "peaks" and "valleys"; and (d) System gaming behaviors (often in environments where capacity and/or material constraints might lead to order