Bullwhip Effect in Supply Chain

Back in the mid-90s, a study conducted by logistics executives at Procter & Gamble uncovered variabilities in the supply chain which, at first, didn’t add up to what they saw in distributor orders or retail store sales. On further review, they saw that demand order variabilities in the supply chain had amplified as they moved along the supply chain. They termed this the “bullwhip” effect.

The same dynamic was observed separately by executives at Hewlett-Packard. Analysts observed huge swings in reseller orders and traced these to fluctuations that had happened unnoticed over time in the supply chain.

These big variations have numerous impacts, such as poor product forecasts, insufficient capacity building, excess inventory, and even high costs for corrections due to inaccuracies.

Since its early discovery and identification, experts have analyzed the bullwhip effect in supply chain.

At Trax, all of our initiatives aim to support transparency, accuracy, and efficiency in supply chain operations. Our transportation spend management platform accelerates progress toward TSM maturity. But what do you do when remote events create a bullwhip effect in the supply chain?

You don’t have to be caught by surprise. 

Read on to learn more about the bullwhip effect and how to safeguard against disruption.

Bullwhip Effect: a Definition

The bullwhip effect is a phenomenon in distribution channels, referring to the increasing swings in inventory as a response to consumer demands. 

You will often hear the words “disturbance,” “disruption,” “distortion,” and similar descriptives associated with the bullwhip effect.

The term references a real “bullwhip,” which is a length of rope that, when “cracked,” creates a wave pattern. Due to the physical reaction, the waves get larger as the energy travels away from its source. 

Over time, a few entities have reshaped or reframed the bullwhip effect, calling it the whiplash effect or whipsaw effect. 

For instance, the global pandemic caused unexpected shortages for all types of consumer goods, down to very basic items like paper products. Companies around the world have had to adapt fast, protecting against possible shortages but also having enough product to safeguard against inventory gaps.

A “bullwhip” is an apt visualization to describe how dynamics originating on the supply chain level have an increasing, ongoing effect on businesses.

Reverse Bullwhip Effect

A related term you may hear if you investigate the bullwhip effect is the reverse bullwhip effect. It’s a similar scenario caused by volatility in demand against constant production. 

Both the bullwhip effect and reverse bullwhip effect ultimately result in instability.

Forrester Effect

Some organizations use the term bullwhip effect and Forrester effect interchangeably. Forrester effect mapping analyzes the supply chain disturbances, seeking to find original cause and legitimate solutions.

Problems Caused by the Bullwhip Effect

The biggest fallout of the bullwhip effect is instability, which generates unpredictability for any business that relies on an efficient supply chain. 

The bullwhip effect causes big problems for companies around the world:

1. A challenge to forecasting demand due to distorted, inaccurate, or outdated data. This can result either in excessive investment in inventory or delayed production that doesn’t match demands.
2. Scheduling problems, including missed production schedules, deadlines that are out of sync with real demand, and ineffective transportation.
3. Poor partnerships and customer service. In a season of business where carrier partnerships are more valuable and important than ever, and customer service is a high priority, distortion and delays are an enormous risk.

Solution: Minimize the Bullwhip Effect in Supply Chain

The bullwhip effect wreaks havoc on the supply chain. The imperative is on business leaders to leverage every available tool to minimize its impacts. There are realistic, straightforward ways to do this.

1. Real-Time Inventory Tracking

Inventory is perhaps the biggest issue associated with the bullwhip effect. 

Example: A food wholesaler may purchase 5,000 boxes of a certain product, knowing it always sells that much to a certain customer. If the customer suddenly orders 10,000 boxes, the wholesaler may assume that demand has increased, and change the regular purchase to 10,000 boxes. Suppliers could, in turn, increase the amount of that product they stock. There will quickly be a cascading effect on supply which could result in waste or problems throughout the supply chain.

First, smaller, more frequent order sizes may offset the risk of the bullwhip effect.

Second, real-time inventory tracking mitigates over-inventorying problems, providing accurate information on your own inventory and suppliers’ inventories. This helps supply chain leaders not only stay on top of supply but also gauge safety inventories appropriately, not just as a reaction to a sudden shift in demand.

2. Clear Communication Through the Supply Chain

The number of links in the supply chain is immense. As goods pass from manufacturers to storehouses to transportation to suppliers and more, the ability to communicate to any individual party is diminished.

Technology can solve this problem in a significant way. Rather than siloed tech stacks and systems that cannot function together, the ecosystem of supply chain technology is becoming more interoperable. Advances to that end — from freight audit and payment tools to fleet tracking software — are clearing a line of sight for supply chain leaders. 

Chances are, adoption will grow and these tools will transform the trajectory of supply chain operations, reducing effects like the bullwhip and bringing clarity and shared insights to all involved.

3. Reduce Lead-Time and Delays

There is a well-documented impact of lead-time on the bullwhip effect in supply chain. The longer the lead-time, the more the bullwhip effect can disrupt. Control engineering methods, including order-up-to (OUT) policies, can help order and regulate processes that improve lead-time. 

There are a few ways strategies for reducing lead-time in supply chain ops, which include the following:

• Creating lead-time contracts as well as incentives for suppliers
• Nearshoring to build resilience in your processes
• Avoiding bulk orders
• Using automated inventory management systems
• Tightening supply chain management overall

A quicker turnaround and fewer delays leave less time for the bullwhip effect to take hold.

The Silver Bullet: Arrive at Transportation Spend Management Maturity

Aspects of the bullwhip effects are inevitable, but your company shouldn’t feel stymied by these inevitabilities. Technology is the key to increasing visibility and efficiency in the supply chain. Know your numbers. Know your cost-to-serve. Spend the time and enlist the right partners.

These steps will reliably, predictably, and gradually improve the state of your supply chain, and reduce the likelihood that the bullwhip effect will severely undermine your best efforts.

From freight audit and payment to an unrivaled approach to cost-to-serve, Trax is here to propel your company into transportation spend management maturity. Reach out to learn how we can help you.