THE BULL-WHIP

EFFECT EXPLAINED
QUESTIONS :

a) WHAT IS THE BULL-WHIP EFFECT AND EXPLAIN

ITS IMPACT.
b) WHAT ARE THE METHODS OF COPING THE
BULL-WHIP EFFECT
THE BULL-WHIP EFFECT

The bullwhip effect is the uncertainty caused from

distorted information flowing up and down the supply
chain.
CAUSES OF THE BULL-WHIP EFFECT

Demand forecast updating

Order batching
Price fluctuation
Rationing and shortage gaming
Un-forecasted sales promotions
Customers turning back sales orders
EFFECTS OF THE BULL-WHIP EFFECT

Excess inventories
Unnecessary costs
Tense supplier relationships
Stock outs
Increased wastages
Changes in buying patterns
SUPPLY CHAIN IN EQUILIBRIUM
Customer demand forecast = 10 units
Information
Products & Products & Products &
Services Services Services
miller baker retailer consumer
10 Units 10 Units 10 Units

10 Units 10 Units 10 Units

Cash

Retailers are selling product at a constant rate and price. Firms along the
supply chain are able to set their inventory to meet demand.

Key: = Inventory Levels

SUPPLY CHAIN DISRUPTED
Customer Demand forecast = 20 units
Information Flow
miller
Products & baker Products & Products &
Services Services retailer Services
consumer
80 Units 40 Units 20 Units

160 Units 80 Units 40 Units

Cash Flow
As demand increases, the retailer decides to accommodate the forecasted demand and increase inventory
to buffer against unforeseen problems in demand. Each step along the supply chain increases their
inventory to accommodate demand fluctuations. The top of the supply chain receives the harshest impact
of the whip effect.

Key: = Inventory Levels

METHODS OF COPING WITH THE
BULL-WHIP EFFECT
Improve communication along the supply chain
Improve sources of forecast data
Share Information
establish a demand-driven supply chain which reacts to actual customer orders
Break order batches
Stabilize prices
Eliminate gaming in shortage situations
IMPROVE COMMUNICATION ALONG
THE SUPPLY CHAIN
• Retailers notifying firms upstream of sales promotions will help clarify demand signals
from consumers
• Improved information will improve demand forecasts upstream in the supply chain
IMPROVE SOURCES OF FORECAST
DATA
• Firms can use data from Point of Sale computer systems to derive data from
forecasting
• Firms along the supply chain can use EDI systems to retrieve data on items
that are legitimately being purchased by customers
SHARE INFORMATION

• Lack of visibility = rise in costs. Encourage information sharing among your

partners. Be a catalyst and good example of information sharing. Work with
suppliers on releasing lead times and improving on time delivery.
ESTABLISH A DEMAND-DRIVEN SUPPLY CHAIN
WHICH REACTS TO ACTUAL CUSTOMER
ORDERS
• In manufacturing, this concept is called kanban. This model has been successfully
implemented in Wal-Mart's distribution system. Individual Wal-Mart stores transmit
point-of-sale (POS) 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 centre to the store and from the supplier to the Wal-Mart distribution
centre. 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.
BREAK ORDER BATCHES

• Use EDI Exchange to reduce the cost of placing orders. Place orders more
frequently. Ship assortments of products in a shipload to counter high
transportation costs or use a third party logistics company to handle
shipping.
STABILIZE PRICES

• Manufacturers reduce the frequency and level of wholesale price discounting to keep
customers from stockpiling
• Work to develop consistent pricing of products to avoid demand fluctuations from the
sale of inexpensive products.
ELIMINATE GAMING IN SHORTAGE
SITUATIONS
• Suppliers should allocate products based on past sales numbers.
• Eliminate return policies so retailers can't cancel orders.
Thank you..!!
The end