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How To Reduce The Bullwhip Effect

October 5, 2023
Bill Kimball

It makes communication easier, and also leaves less space for the reverberations of a decision to amplify through the chain. Consistently re-evaluate the amounts of safety inventory you have, as well as your minimum and maximum inventories. Use regular reporting and early warning systems to help evaluate these factors, and base the amounts stocked in each region on the amount of demand there is for them in that region. The reverse bullwhip effect is a similar scenario, but it’s caused by volatile demand while production remains constant. Occasionally, both bullwhip and reverse bullwhip effect can combine, creating instability at both ends. An example of this can be found in the effects of coronavirus on Chinese-made medical supplies at the beginning of the 2020 pandemic. Certain supplies such as surgical masks saw a massive surge in demand, while factories in China had difficulties in restarting production because they didn’t have the supplies for it.

Despite the fact that babies use diapers at a very predictable rate and therefore retail demand is flat, P&G observed that this product created a wave of changes up the supply chain due to very minor changes in demand. The reality is that most supply chain activities are happening outside of the four walls. Therefore, it is important to look at things from an outside-in perspective. Traditional approaches of standalone planning, ERP or point-to-point B2B networks are not effective in managing a multi-enterprise supply chain. These outdated approaches have forced business operations as well as supply chain participants to continue to operate in silos which has resulted in the amplification of the bullwhip effect. Get Your Channel Incentives Technology Right Take a journey to discover what the right channel incentives technology is for your company so you can manage programs and measure performance effectively.

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Spend more time trying to understand the business processes of customers and suppliers, said Mark Struss, practice director of manufacturing operations at Patina Solutions, a supply chain consultancy. He said customers sometimes know exactly how much of a raw material they need, but don’t submit an order early because of the way early purchase orders affect their accounting processes. This model has been successfully implemented in Wal-Mart’s distribution system. Individual Wal-Mart stores transmit point-of-sale data from the cash register back to corporate headquarters several times a day. This demand information is used to queue shipments from the Wal-Mart distribution center to the store and from the supplier to the Wal-Mart distribution center.

If the end consumer demand has dropped however, the manufacturer will bloat the supply chain through overproduction. Accurately forecasting the demand and passing that information down the supply chain leads to a more controlled production process. Long-term contracts also make suppliers vested in the contracting company’s success. Most suppliers realize that improvements in their products and processes potentially improve the customer company’s position in the market, increasing sales and leading to increased demand for the supplier’s products. Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock.

The bullwhip effect refers to the fluctuating swings in response to the customer’s demands, which has a cascading impact on the supply chain. Every industry has its own unique supply chain, inventory placements, and complexities.

He established a list of four majors’ factors that are the causes of the bullwhip effect. This list had become a standard and is used as a framework to identify bullwhip effect.

How To Lower The Average Age Of Inventory

This cycle ripples through the supply chain, resulting in the bullwhip effect. Errors in forecasting lead to miscalculations that are magnified as they move up the supply chain. If your company is a retailer, use standard low prices instead of sales. If your company allows returns from customers, make sure they won’t have much reason to return or cancel orders by offering repairs or increasing your quality requirements. In order to minimize the cost and to simplify the logistics of a firm, most of the company prefers to accumulate the demand before doing the order. That way, they can benefit from a bigger sale on their order and they have possibility to order a full truck or container which reduce greatly the transport cost. Human factors influencing the behavior in supply chains are largely unexplored.

  • Regular reporting and early warning system need to be implemented for major deviations from the set inventory norms.
  • This long-term relationship makes the supply chain vested in your success and helps align the goals of both companies.
  • The retailer gives the supplier access to all the relevant data about its products via a constant data stream that is updated daily or more frequently.
  • If you look at your local Walmart’s weekly advertisement, you may notice that many, if not most, of the products in the ad are listed at their normal prices.
  • Lots of product moves during the promotional period, which is followed by lower levels of sales.
  • Forecasts are based on statistics, and they are rarely perfectly accurate.
  • Trust is built over time, which can be a major challenge, particularly if sales and procurement teams come to the table with an adversarial mentality to maintain a negotiation edge.

Manufacturers don’t have the insight available to see customer sales information at the retail level to make informed production forecasting decisions. Minimizing the bullwhip effect begins with better forecasting of customer demand to enable more accurate ordering. Inventory software often allows companies to monitor the evolution of buying over time and provides for real-time updates on buying expectations based on current trends and recent patterns.

However, studies suggest that people with increased need for safety and security seem to perform worse than risk-takers in a simulated supply chain environment. People with high self-efficacy experience less trouble handling the bullwhip-effect in the supply chain. Reducing the number of suppliers and the number of tiers in your supply chain can facilitate better communication and decrease the oscillation that creates the bullwhip effect. The restaurant industry has reduced the number of Tier 1 suppliers, which facilitates communications because restaurants have only one supplier they need to communicate with. Demand exists at every level of a supply chain, but the only demand that really matters is the end customer’s demand for the final product. Every tier should be aware of the end customer demand and not just of the orders placed by its upper tier. Businesses at each tier should also be aware of the pipeline inventory.

Build Consistency Into Sales

A retailer could order 5% more stock, leading the manufacturers that supply it to order 10% more material to make that product, on the assumption the market for that product is increasing. The makers of the raw material then order 20% more of the material to produce the raw material, and so on. At some point when the demand drops off and the retailer orders less stock, the manufacturers down the supply chain are stuck with increasing amounts of excess inventory that must be worked through. A small amount of bullwhip effect can be healthy, as it creates a cushion in case the situation whips to the other extreme. However, it can often spin out of control and hurt the companies in the supply chain, especially at the end where the whiplash is strongest. One of the many solutions for manufacturers to consider is implementing a vendor-managed inventory system in the supply chain. Manufacturers will have full visibility and control, and with the advent of IoT, it is even easier to automate and track inventory levels in-store using Radio Frequency Identification technology.

how to reduce bullwhip effect

This is when businesses buy larger quantities of product less frequently. It can also cause delays in responding to quick, dramatic upshoots in demand.

Process Equipment

As such, upstream manufacturers often experience a decrease in forecast accuracy as the buffer increases between the customer and the manufacturer. In a nutshell, buying behavior changes at one end of the supply — typically at the retailer end — getting increasingly amplified up the supply chain. Because today’s supply chains are so complicated, closing that gap between supply and demand is no small task. But smart supply chain managers and business leaders are making the effort. Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are given, companies often carry an inventory buffer called “safety stock”.

What Happens To The Equilibrium Demand Curve With No Change In The Supply Curve?

The biggest cause of the bullwhip effect is inefficiency in communicating about the needs of the market, said Michael Goulder, a business professor at John Carrol University. Understanding the causes of the bullwhip effect is critical to preventing it. Here’s a look at why it happens and ways to close the gap between supply and demand. Become part of North America’s largest and most active network of B2B buyers and industrial/commercial suppliers. Rationing and gaming is when a retailer tries to limit order quantities by providing only a percentage of the order placed by the buyer. As the buyer knows that the retailer is delivering only a fraction of the order placed, he attempts to “game” the system by making an upward adjustment to the order quantity. Rationing and gaming generate inconsistencies in the ordering information that is being received.

Similarly, in the supply chain world, the end customers have the whip handle and they create a little movement in the demand which travels up the supply chain in an increasing fashion. On average, there are six to seven inventory points between the end customer and raw material supplier .

What Are Unplanned Inventory Reductions?

The result is near-perfect visibility of customer demand and inventory movement throughout the supply chain. Better information leads to better inventory positioning and lower costs throughout the supply chain. The bullwhip effect is a distribution channel phenomenon in which demand forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in consumer demand as one moves further up the supply chain. The concept first appeared in Jay Forrester’s Industrial Dynamics and thus it is also known as the Forrester effect.

Although this article deals predominantly with how to avoid the bullwhip effect, some of these tips can also be used to deal with a combination of both effects. Order batching; companies may not immediately place an order with their supplier; often accumulating the demand first. This creates variability in the demand as there may for instance be a surge in demand at some stage followed by no demand after.

Moreover, repeated hiring and dismissal of employees to manage the demand variability induces further costs due to training and possible lay-offs. Demand forecast updating is accomplished individually by all members of a supply chain. When a player of the chain is ordering, he will automatically add to the stock he needs a safety stock to answer to an unexpected event. When the first player supplier is going to order to its own supplier, he will also add a safety stock, based on the total order of the first player. The more player there is in the chain, the safety stock will be made, resulting in an artificial raise of the demand. Many successful companies have made their supply chain an integral part of their core business processes. Toyota’s treatment of its supply chain is a major contributor to its success.

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This information is important to suppliers because they can estimate their needs for factory space and people, even if they are not entirely sure which raw materials to order. Some companies are starting to experiment with collaborative planning, forecasting and replenishment , Goulder said. This essentially generalizes vendor-managed inventory across multiple participants in a supply chain, but these efforts tend to be less organized. Because CPFR relies on diplomacy and the whims of human nature, sometimes it works well, and sometimes it does not, Goulder said. Lots of product moves during the promotional period, which is followed by lower levels of sales.

Trust grows as participants see that partners don’t take advantage of more transparent communications. Over time, both suppliers and customers can have better and deeper conversations about the business without worrying they have given away a leverage point. Everlane reduces the bullwhip effect by rarely holding sales or giving discounts, instead opting to keep prices low year-round with a smart direct-to-consumer model. Placing frequent orders for small quantities creates less of a bullwhip effect than placing larger orders less frequently. With order batching, the retailer places orders with its supplier once per month , which creates inconsistent demand for the supplier over time. Most consumers refuse to buy many products unless they’re on sale, and this has an effect on how retailers promote and advertise their products.