How the Bullwhip Effect Rattles a Supply Chain

The Bullwhip Effect describes a phenomenon that occurs in the supply chain world when spikes in customer demand ripple up a supply chain, causing upstream manufacturers to react by keeping surplus inventory to avoid stock-outs and missed customer orders. This reaction by upstream manufacturers creates distance between them & the customer that later results in increased supply chain uncertainty, lower forecast accuracies, and higher inventories.

How It Damages a Supply Chain

The Bullwhip Effect can create supply chain uncertainty that, in turn, creates a lack of transparency within the supply chain and thus negatively impacts the ability of the supply chain’s decision-maker to make profitable management decisions.

The Bullwhip throws the supply chain off-balance, taking focus away from minimizing costs & placing it on re-establishing that balance. This supply chain imbalance then increases costs, most especially the costs to maintain the excess inventory created & the costs to transport excess goods down the supply chain faster & more efficiently.

The Bullwhip Effect in Action

A sudden spike in customer demand for toilet paper causes Tim’s Toilet Paper Company to order more to meet the new demand. Tim’s Toilet Paper Company’s distribution requests more from its production, and its production requests more raw materials. More raw materials are stocked & shipped, but because of this sudden demand uncertainty caused by this Bullwhip Effect, Tim’s Toilet Paper Company’s raw materials provider doesn’t know the optimal amount to ship that will both decrease inventory & save on costs.

To be safe, the raw materials provider creates & ships excess materials, raising the costs of maintaining surplus inventory as well as paying more to have the excess goods shipped faster in an effort to more immediately meet the spike in demand. Production receives these excess goods and, as a result, creates excess product, which then gets shipped, in excess, to distribution and, finally, to store shelves. This newly created Bullwhip Effect has now traveled from retail to distribution to manufacturer, raising costs, decreasing supply chain transparency, and increasing uncertainty.

Mitigating the Bullwhip Effect with Easy Demand Planning

With improved demand planning analytics, retailers can understand if a spike in demand was caused by an event or a fluke to ensure that their supply chains aren’t stuck with an abundance of product, thus increasing supply chain transparency, reducing costs, & lowering inventories.

CT Global offers this through our Demand Planning Roadmap. It provides automated, accurate forecasting for industries of all kinds through a step-by-step formula that takes effort away from manual forecasting and creates more efficient, less time-consuming supply chain management.

Our Easy Demand Planning bundles combine SAS Analytics with customized service hours, cloud hosting, and models. Whether you require a ‘starter’ option or you’re looking to integrate more analytics with existing business intelligence and analytical tools, these packages can be customized for your industry and objectives.