Question 4

Explain in depth the so called ‘Bullwhip Effect’, including its causes and consequences.
(20 Marks)

The bullwhip effect is a supply chain phenomenon describing how small

fluctuations in demand at the retail level can cause progressively larger fluctuations
in demand at the wholesale, distributor, manufacturer and raw material supplier
levels. This mostly occurs when retailers become highly reactive to consumer
demand, and in turn, intensify expectations around it, causing a domino effect
along the chain. The effect is named after the physics involved in cracking a whip.
When the person holding the whip snaps their wrist, the relatively small movement
causes the whip's wave patterns to increasingly amplify in a chain reaction.(diann
danielhttps://www.orderhive.com/knowledge-center/bullwhip-effect#:~:text=The
%20Bullwhip%20Effect%20is%20a%20phenomenon%20in%20the,it%2C
%20causing%20a%20domino%20effect%20along%20the%20chain.)

In supply chain management, consumers wield a figurative “bullwhip” made up of

each layer of the supply chain. When trends affect purchasing decisions and their
demands shift, they snap the whip, affecting each organization involved. Retailers,
manufacturers, component creators, and raw material companies must adjust to
meet these new demands.

Most businesses will have some margin of error when it comes to assessing new
levels of demand, particularly when the shift is dramatic. Out of fear, they may
overcorrect. Each organization down the supply chain can be influenced to do the
same, multiplying the problem. Perceived consumer demand can be drastically
different at the end of the whip than what reality reflects. This can lead to those
further down the supply chain being unable to truly meet consumer demand.

An example of the bullwhip effect

Say that you are a shop owner, and you usually sell 30 sea beds a day. However,
one day extraordinarily, you deal with 65 seabeds and start to think of increasing
the order on the manufacturer side. Communicating with the distributor, you
double up the order. The distributor calls the manufacturer with the same reflex
and increases the demand more than what the retailer said. This bullwhip in the
supply chain example is remarkably simplified but reflects increasing fluctuations
as actions and reactions going on the chain.

Causes of the bullwhip effect 

Forecasting demand has always been a difficult endeavor, and the increasing
complexity of today's global supply chains intensifies that difficulty, as does
increasing consumer preference for Omni channel and e-commerce.  A few of the
most common dependencies that can cause a bullwhip effect are:

 Counting on the old demand information to forecast the current demand

information -Inaccurate forecasts from over-reliance on historical demand to
predict future demand

 Sometimes, customers overstate their demands on purpose due to shortages,

and when the supply becomes adequate again, they cancel the order. In this
case, if the retailer has a return forfeit, exaggerated needs and order
cancellations can avoid.
 Lack of communication and disorganization in the supply chain
 Order batching– Companies sometimes don’t place orders with the supplier
after receiving an order. They wait for the demand to accumulate first. This
alters the variability in demand because sometime there could be a surge
while other times there could be a dip in demand.
 Sales and price discounts –promotional discounts, special offers can disrupt
the usual demand for products. Since buyers want to make the most out of
this hiked demand in a short period, it could lead to inaccurate demand
forecasting and consequently over-production.
 Forecast errors – Decisions in every link of the supply chain are made based
on demand forecasts for businesses. Errors in forecasting lead to
miscalculations that are magnified as they move up the supply chain.
 Lead time – Lead time is the span of time between when an order is placed
and when it’s received. Failing to consider lead time when managing
inventory can lead to an overstocking of products, which in turn results in a
change in supplier demand over time i.e. the bullwhip effect.
Impacts of Bullwhip

Just as fluctuations in demand ripple throughout the entire supply chain, the
bullwhip effect can have serious consequences throughout all aspects of business:

 If the customer demand is less than usual, there is excess stock with the
retailer or distributor, resulting in understocking.
 If there is excess order of the product following a stock out, the tendency is
to see extra charges.
 The bullwhip effect can be costly to all the organizations in the supply chain.
Excess inventory can result in waste, while insufficient inventory can lead to
reduced lead time, poor customer experience and lost business.

The bullwhip effect can be reduced through revision of reordering procedures,

maintain a buffer of inventory, Streamlining your supply chain ,Optimize
inventory management , Minimize sales and discounts ,Improve inventory
planning process , Foster supply chain communication and collaboration, Use
better forecasting and visibility tools, Explore a demand-driven approach to supply
chain management. Lack of communication and information sharing among
managers and suppliers results in an over-reaction towards forecasted demand,
subsequently setting off a chain reaction of having excess inventory higher up the
supply chain. A demand-driven supply chain system will be more proactive and
hold less inventory.

https://www.cips.org/knowledge/procurement-topics-and-skills/operations-
management/bullwhip-effect-in-supply-chain/

https://searcherp.techtarget.com/definition/bullwhip-effect

https://www.logiwa.com/blog/bullwhip-effect

https://fbipro.com/fishbowl/bullwhip-effect

https://www.orderhive.com/knowledge-center/bullwhip-effect#:~:text=The%20Bullwhip%20Effect
%20is%20a%20phenomenon%20in%20the,it%2C%20causing%20a%20domino%20effect%20along
%20the%20chain.

https://onlinemasters.ohio.edu/blog/how-the-bullwhip-effect-impacts-the-supply-chain/

.https://bohatala.com/causes-of-bullwhip-effect-in-supply-chain/
https://www.marketing91.com/bullwhip-effect/