The Bullwhip effect - Logistik KNOWHOW

The bullwhip effect describes coordination and communication problems in multi-stage supply chains - mostly in so-called fragmented supply chains. It can be localised thanks to fluctuations in production planning and logistics planning (price fluctuation and bundle orders/delivery bottlenecks). With increasing numbers of production stages, the effect intensifies. In other words, the whip effect occurs when signals from the end customer along the value chain are misinterpreted. For example, there are order fluctuations, which differentiate increasingly from the customer's demand to the manufacturer's (see video).

Causes for Bullwhip Effect

The bullwhip effect shows a trend of ever-increasing fluctuations in inventory in response to changing demand, the further back you look in the supply chain of a product (from end customer to manufacturer). Lack of coordination and insufficient demand, ordering and logistics information are critical reasons for inventory fluctuations. The practice: Information and coordination itself are ignored or not communicated to optimise profits - in the final analysis, this leads to so-called build-up effects (whip movement), which in the end lead to serious chain reactions in the supply chain (supply bottlenecks, no demand).

Another reason: to avoid supply bottlenecks, retailers are ordering more as a precaution. To be on the safe side, however, wholesalers are also requesting more from manufacturers. Those are now producing more due to the apparent increase in demand. However, consumer demand has not changed.

Solution

Close cooperation between sales, planning, purchasing and logisticsacross the supply chain can lead to a significant reduction in costs and optimised flow of goods and information. The increase of orders, especially their interpretations, as well as stock levels must be balanced - preventing the best possible profit optimisation is vital. For more information on optimizing the supply chain, see Supply Chain Management. Image source: Stern - CC BY-SA 3.0

The bullwhip effect describes coordination and communication problems in multi-stage supply chains – mostly in so-called fragmented supply chains. It can be localised thanks to fluctuations in production planning and logistics planning (price fluctuation and bundle orders/delivery bottlenecks). With increasing numbers of production stages, the effect intensifies. In other words, the whip effect occurs when signals from the end customer along the value chain are misinterpreted. For example, there are order fluctuations, which differentiate increasingly from the customer’s demand to the manufacturer’s (see video).

Causes for Bullwhip Effect

The bullwhip effect shows a trend of ever-increasing fluctuations in inventory in response to changing demand, the further back you look in the supply chain of a product (from end customer to manufacturer). Lack of coordination and insufficient demand, ordering and logistics information are critical reasons for inventory fluctuations. The practice: Information and coordination itself are ignored or not communicated to optimise profits – in the final analysis, this leads to so-called build-up effects (whip movement), which in the end lead to serious chain reactions in the supply chain (supply bottlenecks, no demand).

Another reason: to avoid supply bottlenecks, retailers are ordering more as a precaution. To be on the safe side, however, wholesalers are also requesting more from manufacturers. Those are now producing more due to the apparent increase in demand. However, consumer demand has not changed.

Solution

Close cooperation between sales, planning, purchasing and logisticsacross the supply chain can lead to a significant reduction in costs and optimised flow of goods and information. The increase of orders, especially their interpretations, as well as stock levels must be balanced – preventing the best possible profit optimisation is vital.

For more information on optimizing the supply chain, see Supply Chain Management.

Image source: Stern – CC BY-SA 3.0

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