The bullwhip effect is a distribution channel phenomenon in which forecasts yield

supply chain inefficiencies. It refers to increasing swings in inventory in response to

shifts in customer demand as one moves further up the supply chain. The concept
first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known
as the Forester effect. The bullwhip effect was named for the way the amplitude of
a whip increases down its length. The further from the originating signal, the greater
the distortion of the wave pattern. In a similar manner, forecast accuracy decreases
as one moves upstream along the supply chain. For example, many consumer goods
have fairly consistent consumption at retail but this signal becomes more chaotic and
unpredictable as the focus moves away from consumer purchasing behavior.

Because customer demand is rarely perfectly stable, businesses must forecast

demand to properly position inventory and other resources. Forecasts are based on
statistics, and they are rarely perfectly accurate. Because forecast errors are given,
companies often carry an inventory buffer called "safety stock".
Moving up the supply chain from end-consumer to raw materials supplier, each
supply chain participant has greater observed variation in demand and thus greater
need for safety stock. In periods of rising demand, down-stream participants increase
orders. In periods of falling demand, orders fall or stop, thereby not reducing
inventory. The effect is that variations are amplified as one moves upstream in the
supply chain (further from the customer).
Disorganisation
Lack of communication
Free return policies
Order batching
Price variations
Demand information
The causes can further be divided into behavioral and operational causes.
Behavioural Causes:
Misuse of base-stock policies
Mis-perceptions of feedback and time delays
Panic ordering reactions after unmet demand
Perceived risk of other players' bounded rationality
Operational Causes:
Dependent demand processing
Lead time variability (forecast error during replenishment lead time)
Lot-sizing/order synchronization
Trade promotion and forward buying
Anticipation of shortages
Consequences:
In addition to greater safety stocks, the described effect can lead to either inefficient
production or excessive inventory, as each producer needs to fulfill the demand of
its customers in the supply chain. This also leads to a low utilization of the
distribution channel.
In spite of having safety stocks there is still the hazard of stock-outs which result in
poor customer service and lost sales. In addition to the (financially) hard measurable
consequences of poor customer services and the damage to public image and
loyalty, an organization has to cope with the ramifications of failed fulfillment which
may include contractual penalties. Moreover, repeated hiring and dismissal of
employees to manage the demand variability induces further costs due to training
and possible lay-offs.
Countermeasures:
One way to achieve this is to 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.
The concept of "cumulative quantities" is a method that can tackle and even avoid
the bull-whip-effect. This method is developed and practised mainly in the German
automotive industry.