The “Bullwhip Effect” is a term often used to describe a phenomenon that quickly turns otherwise accurate forecasts into outdated information, amplifying misinformation along the supply chain. The dust was brushed off this broad concept, and it returned to the shelves not long after COVID-19 began disrupting global supply chains.
“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”
That’s exactly what happened when an abrupt change in customer demand plus factory shutdowns put companies in the tight spot of having to forecast demand in the middle of an unprecedented, worldwide pandemic.
With demand for certain items amplified, the tiniest crack of the bullwhip’s handle caused an uncontrolled, snapping motion at the tip of that whip.
Balancing Demand Effects and Available Inventory
“When major swings in inventory occur from panic buying and hoarding, the impact of this sudden demand is magnified as it moves upstream in the supply chain (similar to the way a bullwhip’s thong amplifies in a wave as it moves away from the handle),” Jenny Reese explains in “Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” The customer feels the anxiety of empty aisles, the retailer loses sales, and customer service suffers. “Distributors are left scrambling to determine who should get how much of a given product in a shortage,” Reese continues, “and manufacturers are overwhelmed with sudden, unanticipated spikes in demand.”
With little or no visibility into demand patterns to lean on, many companies wind up flying blind and hoping for the best.
How Does the Bullwhip Effect Work?
Without accurate, accessible, and strong communication across the various partners in the supply chain, the bullwhip effect can occur in any business environment. In a supply chain made up of a factory, a distributor/wholesaler, retailer, and end customer, for example, the retailer and customer tend to be closely aligned. For instance, a customer places an order and a retailer reacts accordingly.
Continue further up that supply chain, however, and that alignment begins to diminish.
Manufacturers don’t always align their forecasts with retailers’ own projections and distributors are, frequently, caught in the middle of two entities that have zero communication with one another.
These gaps widen during events like COVID-19, with even a small variance creating a Bullwhip Effect. In fact, Jay Forrester, who first conceptualized the Bullwhip Effect in these terms, says that even a 10 percent change at either end of the supply chain can result in a 40 percent fluctuation in the middle. That’s when the wheels fall off the cart; all players in the supply chain make quick adjustments to compensate for the problem.
Why Should You Care?
Virtually every organization must address or, at least be aware of, the Bullwhip Effect. Without up-to-date and wide supply chain communication, companies risk having it adversely impact their operations and their customers. Since no organization is an island, even the most vertically-integrated companies should know the signs of the Bullwhip Effect and how to deal with it effectively.
It’s easy to recognize the Bullwhip Effect in retrospect, as customers are cancelling or returning orders that they were clamoring to buy because they bought too much, overestimating their need. In order to meet perceived demands, erratic production, excessive inventory and depletion of resources highlight this effect. During COVID 19, suppliers most at-risk from the Bullwhip Effect included makers and distributors of PPE, hand sanitizer, toilet paper, and other hard-to-find items.
As a Supply chain professional you’ve been exposed to the Bullwhip Effect. The costly consequences materialize quickly and immediately erode your profitability.
Are you able to make informed decisions based on real time data?
Transportation Insight allows your business to make evidence-based decisions. We amass data about your supply chain to give you a comprehensive understanding of your logistics network. Our expertise and tools enable contingency planning through “what if scenarios” that address the Bullwhip Effect before it impacts your bottom line. Transportation Insight monitors multiple key performance indicators that measure your business activity and reveal threats and opportunities to drive continuous optimization of your supply chain.
Tame the Bullwhip: Manage the Demand Waves
We offer more context around the Bullwhip Effect in our Supply Chain Masters Digital Event. Watch the webinar today and learn how you can manage demand fluctuations with a responsive supply chain management system:
- Best practices for collecting, retaining and analyzing supply chain data.
- Processes that encourage scalability and readinesss for decline, recovery and even growth.
Learn the supply chain strategies that minimize risk and protect your profitability today and tomorrow.