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This Week: The Bullwhip Effect

Published on June 23, 2021

Daniel Stanton
Mr. Supply Chain® - Subscribe to "Supply Chained" my free weekly newsletter 93 articles
at supplychained.com

Remember 2019, when suppliers and carriers would provide competitive prices and offer
discounts to earn your business? Ah, yes.. the good old days! Well, welcome to 2021: where
products are scarce, transportation and warehouse capacity are tight, and prices for
everything (including labor!) are going through the roof. This week's newsletter explains
how these wild swings are actually part of a well-known supply chain phenomenon called
The Bullwhip Effect.

What Is the Bullwhip Effect?

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The Bullwhip Effect is a pattern that is observed when inventory swings from peaks
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(overstocks) to valleys (stockouts and backorders), and these swings get amplified as they
move up the supply chain. It was first identified by MIT professor Jay Forrester, so it is also
known as the Forrester Effect. Forrester observed that this pattern emerged consistently in
supply chains when there were rapid changes in demand, and demonstrated it by creating an
interactive simulation called the Beer Game. (Check below for a video showing John
Sterman leading a group of graduate students through the Beer Game.)

"The bullwhip effect refers to the phenomenon

where order variability increases as the
orders move upstream in the supply chain."

Xun Wang and Stephen M. Disney

Today, the Bullwhip Effect is in the news. The Wall Street Journal just published a column
titled Caution—Bullwhip Effect Ahead by professors Ted Stank, Tom
Goldsby and Lance Saunders from the Global Supply Chain Institute at the University
of Tennessee. I caught up with Ted to talk about the causes and impacts of the Bullwhip
Effect:

Mr Supply Chain with Ted Stank

There is a LOT of research about the causes of the Bullwhip Effect. A good place to start is
a 1997 article in MIT Sloan Management Review called The Bullwhip Effect in Supply
Chains, by Hau Lee, et al. They focused on four major causes of the Bullwhip Effect:

Demand forecast updating

Order batching

Price fluctuation Messaging

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Rationing and shortage gaming

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The following year, Richard Wilding published The Supply Chain Complexity Triangle:
Uncertainty Generation in the Supply Chain. He used Chaos Theory to show that the
Bullwhip Effect (demand amplification) is an example of how random and unpredictable
behaviors can emerge naturally from systems that seem to be well-organized. One of
Wilding's main points is that supply chains are systems, and systems generate uncertainty.

"Supply chains do not reach stable

equilibrium; small perturbations will always
prevent equilibrium being achieved."

Professor Richard Wilding, OBE

In 2016, Xun Wang and Stephen M. Disney from Cardiff University looked at 455
published research articles about the Bullwhip Effect, and shared their findings in The
Bullwhip Effect: Progress, Trends and Directions. What does all of this research actually
tell us? That the Bullwhip Effect is real, and, well, it's complicated. Which is why using a
simulation like the Beer Game is such a powerful teaching method.

What Triggers the Bullwhip Effect?

The Bullwhip Effect can emerge naturally, over time, even in a stable system. But it is
usually triggered by rapid changes in supply or demand. Under normal circumstances, an
increase in sales from a promotion can be enough to trigger the Bullwhip Effect. But in the
past 18 months, COVID has triggered numerous bullwhips. Let's recap:

Increase in demand for staples like toilet paper, with no increase in consumption.

Increase in demand for PPE, cleaning products, and vaccines, accompanied by an

increase in consumption.

Decrease in demand for products related to in-person events.

Interruption in manufacturing and distribution of products due to Covid outbreaks.

In addition, we've seen other supply chain disruptions such as:

Brexit and the U.S. / China trade dispute

Suez Canal blockage

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Colonial Pipeline cyberattack

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The results of these changes are easy to understand, when viewed through Jay Forrester's
lens:

Outbound containers clogging ports in Asia, while inbound containers are clogging ports
in the U.S.

Warehousing and transportation capacity around the world are strained.

Prices for commodities such as oil and lumber are swinging wildly.

Consumers and supply chain managers are concerned about product availability, and are
building inventory buffers.

What Can We Do About It?

While it seems we are gaining the upper hand on COVID, there are plenty of other things
that could lead to supply chain disruptions in the months ahead. Trade wars, military
conflicts, cyberattacks. natural disasters, and COVID variants, to name a few. We may not
be able to prevent the Bullwhip Effect, but there are definitely things we can do to reduce it,
and protect ourselves from its effects.

Share information up and down the supply chain

Reduce lot sizes throughout the supply chain

Reduce promotions and pricing volatility

Simplify everything

Build resilience, flexibility, and agility

Ironically, none of these are terribly controversial, but they are hard to implement because
they require investment, commitment, and trust in our supply chain partners.

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How this affects supply chain professionals? The Bullwhip Effect is a well-known
phenomenon that occurs in supply chains, where inventory levels swing from one extreme to
the other. This behavior is often triggered by rapid changes in supply or demand, and it tends
to be amplified as it moves upstream because of long lead times, poor communication, and
large lot sizes. In a turbulent market, like the one we are all experiencing now, it is important
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for supply chain professionals to differentiate short term cycles from long term trends, and
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to be both flexible and responsive to changes.

What do you think? Are you seeing the Bullwhip Effect in your supply chain? What are the
impacts on your business (and your customers!) and how can you protect yourself from the
dangers?

LEARNING Introduction to the bullwhip effect

2:48 / 3:57  

Additional Resources

Commentary: Caution—Bullwhip Effect Ahead by Ted Stank, Tom

Goldsby and Lance Saunders (WSJ)

Transportation capacity tightens further in May by Todd Maiden (Freightwaves)

The Bullwhip Effect in Supply Chains by Hau Lee, V. Padmanabhan, and Seungjin
Whang (MIT-Sloan Management Review)

The Bullwhip Effect: Progress, Trends and Directions by Xun Wang and Stephen M.
Disney (European Journal of Operational Research)

"The Business Cycle" Part 1 / Part 2 an interview of John Sterman by Paul Solman
(MacNeil / Lehrer New Hour)

The Supply Chain Complexity Triangle: Uncertainty Generation in the Supply

Chain by Richard Wilding, OBE (International Journal of Physical Distribution &
Logistics Management)
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Who is Mr. Supply Chain?

Daniel Stanton is a supply chain industry veteran and the best-selling author of Supply
Chain Management For Dummies. He is dedicated to empowering professionals through
education and technology. His courses on LinkedIn Learning (formerly Lynda.com) have
been viewed by students around the world, and he's a frequent speaker at educational
conferences and industry events.

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Published by
Daniel Stanton 93 articles Following
Mr. Supply Chain® - Subscribe to "Supply Chained" my free weekly newsletter
at supplychained.com
Published • 2h

THIS WEEK: THE BULLWHIP EFFECT

We're in the middle of a bunch of bullwhips right now.

It's up to supply chain professionals to understand what's happening, and how best to respond.

Thanks to professor Ted Stank from Global Supply Chain Institute at the University of Tennessee for joining me this
week to talk about the causes and impacts of the Bullwhip Effect.

~Mr. Supply Chain

#AlwaysBeLearning #SupplyChained #SupplyChain #Business #Technology

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Daniel Stanton • 1st 1h

Mr. Supply Chain® - Subscribe to "Supply Chained" my free weekly newsletter at supplychained.com

A shout-out to a few of the folks whose work is mentioned in this week's newsletter: Ted Stank, Thomas
Goldsby, Lance Saunders, Todd Maiden, FreightWaves, Hau Lee, Xun Wang, John Sterman, Paul Solman,
and Richard Wilding OBE (Professor).

Like · 1 Reply

Richard Sherman • 2nd 44m

Senior Fellow, Supply Chain Centre of Excellence at Tata Consultancy Services

Hi Dan - Good article and video. Jay Forrester developed the first Digital Supply Chain Twin featured in his
article in the 1957 HBR on Industrial Dynamics and launched Systems Thinking to the world.

Your article and Ted Stank's video with you articulate the two most influential causes to the Bullwhip Effect
(as clarified in my 2012 book on Supply Chain Transformation): …see more

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