The bullwhip effect on the supply
chain occurs when changes in consumer
demand causes the companies in a supply chain to order more goods to
meet the new demand. The bullwhip effect usually flows up the supply
chain, starting with the retailer, wholesaler, distributor,
manufacturer and then the raw materials supplier. This effect can be
observed through most supply chains across several industries; it
occurs because the demand for goods is based on demand forecasts
from companies, rather than actual consumer demand.
When companies enter new products into the
marketplace, they estimate the demand of the good based on current market
conditions. Most companies in the supply
order more than they can sell, attempting to prevent shortages and
lost sales of goods. This "extra" inventory begins to increase or
decrease during the normal market fluctuations of supply and demand.
When demand increases, the companies closest to the consumer will
increase inventory to meet the consumer demand. When the demand
falls, the front-end of the supply chain will decrease inventory,
amplifying the extra inventory on each company up the supply chain.
One cause of the bullwhip effect is normally driven
by management behavior
at the front-end companies of the supply chain. Retail management
never wants to have a stock-out on a popular good, leading to higher
orders from the wholesalers. This eventually squeezes each company
in the supply chain and creates decreases in inventory.
Another major behavioral effect is the ordering of too much
inventory when consumer demand has fallen for an item. Retailers may
have raised their inventory levels to avoid a stock-out but are now
met with goods that cannot be sold quickly. This creates overstock
of inventory for each supply chain company.
The main operational cause of the bullwhip effect
comes from individual demand forecasts from each company in the
supply chain. This causes an increase in demand from companies in
the supply chain, but not the actual consumers who will purchase the
goods. A lack of communication is also prevalent during operational
causes; companies may not supply information up the supply chain
regarding current market conditions, causing improper levels of
To properly manage the fluctuations in consumer demand, implementing
a point-of sale (POS) system with a just-in-time (JIT) inventory
system. This allows each company in the supply chain to process
information electronically regarding individual goods. Understanding
consumer demand can then be evaluated based on the order information
from the POS system and allow managers to order more goods if needed.