The different players in the supply chain — including customers, suppliers, manufacturers, and retailers — have limited control over the whole process, but their actions influence everyone else. As these different parties try to respond to demand fluctuations, they create ripple effects throughout the chain. One of these is the bullwhip effect. This phenomenon is named after the movement of a bullwhip, where a small movement of the wrist becomes a much larger, uncontrolled movement at the end of the whip.
In a supply chain, the bullwhip effect occurs when each party gradually escalates an initially small spike in demand. Each member of the supply chain overcompensates for this demand with excess product, leading to increased production, inaccurate demand forecasting, and inconsistent inventories.
Fortunately, you can mitigate or prevent the supply chain bullwhip effect with the right resources and planning. Let’s look at the impact of the bullwhip effect on supply chain management and what you can do about it.
The bullwhip effect is the distortion of demand and increased volatility that occurs as forecasts and orders move from the retailer up to the manufacturer.
When a spike in demand occurs, each party in the supply chain adds additional products to their orders to act as a buffer. When one party does this, it serves the necessary function of ensuring in-stock products. However, when everyone does it, the result is inaccurate forecasting, stock hoarding, overstock inefficiencies, and out-of-stock products later.
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A spike in demand for 15 units a day has ballooned up to 40 units, many of which won’t reach the retailer until after the demand spike is done. Manufacturing products takes time, so what happens if, while those items are being made, an early Spring appears? For the retailer, sales of personal heaters would immediately drop. The retailer’s forecasts are then affected, and they won’t order more units, even though production has increased.
Members of the supply chain can compound the bullwhip effect by hoarding stock. When items appear scarce upstream, many buyers will place large orders to buffer their inventory and stay ahead of low stock issues. This almost ensures that upstream sources will experience scarcity followed by increased production, despite only a slight change in demand. As demand moves up the chain, inventory becomes less controllable and difficult to predict, especially since many members of the supply chain don’t cooperate as well as they could.
All of this amounts to periods of both overstock and low stock and unpredictability throughout the supply chain.
While the bullwhip effect starts with simple demand spikes, many elements contribute to it:
The impact of the bullwhip effect on supply chain management is significant and includes:
If you can keep the bullwhip effect to a minimum, you can ensure more predictable and profitable supply chain management. While the bullwhip effect can have a range of influences, it also has several solutions. Here are some tips on how to reduce the bullwhip effect.
The bullwhip amplifies because supply chain members don’t have a full picture of why buyers are increasing demand. Improving visibility across the chain can help everyone see the context of demand changes. Is there an increase in orders because of a discount, seasonal needs, or something else? Members can see what may be causing overreactions and address them before the bullwhip gets out of hand.
Some tools that help here include:
Smart predictions are key to better understanding demand changes. With a wide range of intelligent inventory software on the market, you can collect data on just about every business element and turn it into valuable, actionable insights for avoiding the bullwhip effect.
Predictive analytics use advanced algorithms and calculations to interpret historical trends and current events and generate forecasts of future trends. These programs can range from simple to complex, many using artificial intelligence (AI), but all of them rely on high-quality data.
Demand forecasting can be complicated, and predictive analytics can improve this process by pulling in more information. Predictive tools can also help you determine ideal inventory levels and shipping methods. Combining predictive tools like VMI with IoT devices, other data-collection tools, and EDI, means you can significantly improve inventory management. Much of the industry is already getting on board — according to Gartner, over 50% of supply chain organizations will invest in AI and advanced analytics applications by 2024.
Different members of the supply chain need to work together to avoid feeling the bullwhip effect. Shared information plays a large role here, allowing different entities to collaborate and see more of the supply chain than just the level they control. Collaboration is especially important in increasingly globalized supply chains, where products may cross borders and go through many different businesses.
Real-time data and end-to-end visibility are essential. Sending purchase orders, for example, is a far cry from strategic collaboration in which you and your partners work to improve forecast accuracy, strengthen relationships, and prevent disruptions before they occur. Aligning your key performance indicators (KPIs) and other performance measures can help everyone stay on the same page. VMI is foundational for this approach, as it puts the necessary information for working together in one place, and leverages EDI to both push and pull inventory and order data between partners.
Robust collaboration is one of the best defenses against the bullwhip effect, which generally comes from disconnected inventory practices.
Long lead times can exacerbate the bullwhip effect, with products arriving far after they’re needed and becoming overstock. Reducing lead times across the board and placing orders when demand is high can mitigate bullwhip issues.
The factors affecting lead times will vary by the needs of your business, but some strategies to shorten lead times include:
Lead times should be both short and accurate. Even if you can’t reduce your lead times much, correctly calculating them can help ensure better order fulfillment and less customer disappointment.
If you frequently run promotions or discounts, you may be disrupting typical buying patterns and have more trouble predicting demand. Evaluate your stance on these promotions and see if they might be causing more interruptions than benefits. You may not need to get rid of them altogether but consider minimizing them or incorporating them more accurately into your predictions and forecasts.
The bullwhip effect can quickly get out of control and hit every part of the supply chain with adverse effects. Visibility and transparency are some of your best resources for fighting the bullwhip effect, and the right platforms can help you find both.
Whether you’re a seller, supplier, 3PL, or another member of the supply chain, you can mitigate the bullwhip effect with TrueCommerce. We’re your one-stop-shop for trading partner communications with solutions across the board, including fully managed EDI services, a comprehensive VMI solution, and next-generation supplier management portals. TrueCommerce helps you connect with every entity of the supply chain so you can better avoid the bullwhip effect and keep your inventory consistent. All of this comes with the 24/7 expertise of our support team.
To learn more about TrueCommerce solutions and how they can help you reduce the bullwhip effect in supply chain management, reach out to a team member today or request a free demo!
About the Author: Ashley Mooney is an eLearning Specialist with more than 15 years of experience educating business users. Since joining TrueCommerce in 2013 as part of the Implementations team and then moving to the eLearning department, Ashley has helped numerous businesses navigate the complexities of EDI systems, giving them the tools they need for EDI success. Ashley lives outside of Pittsburgh, PA, and in her spare time enjoys singing, teaching piano, cheering on the Pittsburgh Penguins, and spending time with her son, Brandon.
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