What is Bullwhip effect?
Bullwhip Effect can in short be described as the variability in orders in a supply chain system moving up from consumers to core manufacturers. It is also known as the whiplash or whipsaw effect. The causes of this Bullwhip effect have been identified as:- Demand forecast
In any company order is placed with the suppliers based on the demand graph. The order is placed to fulfill the current demand and also keeping in mind any unpredictable sale, which is the safety stock. The manager next in the supply chain orders from his suppliers based on the same fundamentals and with every level the order varies exponentially, resulting in the bullwhip effect. Because the amount of safety stock contributes to this effect it is consequential that when the lead times between the resupply of the inventory along the supply chain is longer the fluctuation in the demand is higher. Order batching
Companies order from their suppliers usually either at regular intervals or on an on demand basis which is periodic or push ordering. Many costs are attached with ordering such as delivery, handling, transport and packaging. Instead of delivering few items it is usually cheaper to process and deliver one large order and suppliers usually provide good discounts for a big order that is a full truck load (FTL) order. Bulk ordering also results in longer order intervals. Any manufacturer faces the dilemma of delivering inventory as demanded by consumers. Sometimes the consumers demand may increase and then may fall below average at other times. Also there are times when the orders may overlap from different customers and demand becomes more pronounced. This increased variability contributes to an even larger bullwhip effect.
Usually stores will buy products even before there is a demand because the manufactures are giving them at good prices. The products are then sold at discounts, rebates, offers etc which results in price fluctuation....
References: Lee, Hau L; Padmanabhan, V. and Whang, Seungjin (1997). "The Bullwhip Effect in Supply Chains". Sloan Management Review 38 (3): 93–102.
Bean, Michael (2006). Bullwhips and Beer: Why Supply Chain Management is so Difficult
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