Causes Of Bullwhip Effect In Supply Chain

Overview

The Bullwhip Effect is a phenomenon in the distribution channel which forecasts the actual yield inefficiencies in a supply chain. It refers to the increasing fluctuations in the inventory as per response to shifts in consumer demand on moving further up in the supply chain. The bullwhip effect was named actually for the way the scale of a whip increases down its full length. The further we move away from the originating signal, the greater the distortion of the resulting wave pattern. Thus in a similar manner, we can conclude that forecast accuracy decreases as move further upstream along the supply chain.

Distorted information signals from one part of a supply chain to the other leads to massive inefficiencies

The longer it takes to update the forecast, the more likelihood of the bullwhip effect, as the orders will continue to rise in the supply chain while the participants wait for the delivery.

• Order Batching - It occurs when an establishment amasses large orders before processing them in an effort to reduce transportation costs and create economies of scale. Bulk discounts also persuade them to place larger orders in order to benefit from lower prices. This creates inconsistent demand in the supply chain which is another cause of the bullwhip effect.

• Price Fluctuation - Sales and promotion discounts also cause a bullwhip effect by forming a boom-or-bust cycle where the sales surges in the discount period while it drops afterward. This can also result in stock running out during sales, where customers have to leave empty-handed. • Rationing and Shortage Gaming - It causes bullwhip effect when customers purchase more than what they need during short supply periods. Liberal return policies can also bring about this effect where the customers can take advantage of the situation. Thus it becomes difficult to make accurate demand

In manufacturing & production area, this concept is also known as kanban which has been successfully implemented in Wal-Mart's distribution system where each Wal-Mart retail stores transmits a point-of-sale (POS) data from the sales register back to the sales headquarters multiple times a day. This information about the real time demand is then used to queue shipments from nearest distribution centre to the local store and from the nearest supplier to the local distribution centre. This in turn results in a perfect visibility of consumer demand and thus controls inventory movement throughout the Wal-Mart supply chain. So we can infer that better information tracking of sales data leads to better inventory positioning in the retail units and also lowers the transportation and inventory costs within the supply