What is Bullwhip Effect?

The bullwhip effect (also known as the “whiplash” or the “whipsaw” effect) in
supply chain management refers to the phenomenon of increasing fluctuations
of inventory in response to shifts in customer demand as one move further up
the supply chain.

The order that the manufacturer receives is often much larger than what the actual customers. This
irregularity or variance in the size of the orders placed increases as we move up the supply chain,
i.e. from the customer to the retailer to the distributor, and then the manufacturer. Therefore, there
is a downstream flow of physical goods and an upstream flow of demand information.
Let’s take an example:

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So eventually, 40 units were produced against a demand of 9 units, and now the inventory will be
pushed to the customer through offers & discounts and more investment will be made for the
product’s marketing and advertising efforts.
History of BULLWHIP EFFECT
Bullwhip effect was noticed for the first time at the "Procter & Gamble" (P&G) company. While
testing order samples for one of the most sold products, their logistic experts noticed certain
fluctuations in the flows of goods, but these variances were not especially excessive. Nevertheless,
the experts were surprised by the increased level of variability in the distribution of orders. When
they checked, namely, the P&G data against their raw material suppliers, they discovered even
greater changes of variables. At first glance, the obtained results showed no sense. While the
consumers used the product at a constant pace, the order variables (demand) in the supply chain
were increasing continuously as we move along the supply chain. The P&G experts called this
phenomenon the "bullwhip effect", and it was proven that this phenomenon occurs in almost all
the organizations whose products or services include a multi-level supply
Note: The Procter & Gamble Company (P&G) boasts billion-dollar brands for home and health.
The world's largest maker of consumer-packaged goods divides its business into five global
segments that comprise its vast portfolio of hair, skin and personal, oral, family, feminine, fabric
care, grooming, and baby care product-lines.

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 Causes of the Bullwhip Effect
Based on the research related to the bullwhip effect, while lack of information sharing is the most
obvious reason, there are four main causes may be identify
Demand forecast updating;
Order Batching Practice;
Pricing Fluctuations and Trade promotions;
Re-distributions (rationing)

Demand forecast updating

Every company in a supply chain follows product forecasting which is usually based on the past
order history. This helps in production scheduling, material requirement planning, inventory
control and capacity planning.
Every company on each level of supply chain makes forecasting for production, capacity,
inventory, material requirements and demand levels. Demand forecasting is usually based on the
order history from the company’s immediate customers, i.e. on what the company actually
observes. By using simply forecasting methods, for example exponential smoothing (forecasting
of future demand based on new daily demand and it updating when new data is received) the order
that is sent to the suppliers is a reflection of safety stock plus amount that is needed to satisfy future
demand. The result is that the variability of amount of orders will increase during going on supply
chain from the end-customer to the end supplier.
Order Batching Practice
Larger order sizes often offer discounts and lower cost advantages to the buyer, or at times
suppliers do not entertain smaller order sizes. Hence, companies tend to accumulate the demand
to reach a respectable order size and develop the practice to order monthly or weekly, which creates
demand variability, as the average demand is not stable across the time-period.
There are two forms of order batching: periodic ordering and push ordering.
Periodic ordering companies may order weekly, biweekly, or even monthly.
In push ordering, a company experiences regular surges in demand. Orders regularly measured,
sometimes quarterly or annually, which causes end-of-quarter or end-of-year order surges.
When a company faces periodic ordering by its customers, the bullwhip effect results. Consider a
company that orders once a month from its supplier. The supplier faces a highly erratic stream of

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orders. There is a spike in demand at one time during the month, followed by no demands for the
rest of the month.
If all customers’ order cycles were spread out evenly (regularly) throughout the week, the bullwhip
effect would be minimal. The periodic surges in demand by some customers would be insignificant
because not all would be ordering at the same time (regularly). Unfortunately, such an ideal
situation rarely exists. Orders are more likely to be randomly spread out or, worse, to overlap.
When order cycles overlap, most customers that order periodically do so at the same time. As a
result, the surge in demand is even more pronounced, and the variability from the bullwhip effect
is at its highest.
Pricing Fluctuations & Trade promotions
Specific period discounts, or special offers, can lead the buyers to order in bulk to avail the
discounts, which cause demand variability in the supply chain.
Manufacturers and distributors periodically have special promotions like price discounts, quantity
discounts, coupons, rebates, and so on. All these promotions result in price fluctuations.
Additionally, manufacturers offer trade deals (e.g., special discounts, price terms, and payment
terms) to the distributors and wholesalers, which are an indirect form of price discounts.
For example, Kotler reports that trade deals and consumer promotion constitute 47 percent and 28
percent, respectively, of their total promotion budgets. The result is that customers buy in
quantities that do not reflect their immediate needs; they buy in bigger quantities and stock up for
the future. Such promotions can be costly to the supply chain. When a product’s price is low
(through direct discount or promotional schemes), a customer buys in bigger quantities than
needed. When the product’s price returns to normal, the customer stops buying until it has depleted
its inventory. As a result, the customer’s buying pattern does not reflect its consumption pattern,
and the variation of the buying quantities is much bigger than the variation of the consumption rate
during product discount, this create the bullwhip effect.
Re-distributions (Rationing)
In case of a situation in which there is greater demand for a certain product and the producer is not
capable of responding to it at that moment, then follows the re-distribution or rationing (division
of the product into smaller parts) of the product to their customers. For instance, if the total
purchase is only 50% of the total demand, all the customers will get 50% of what they had ordered.
Having this in mind, the customers overdo with their orders in order to get greater quantities of

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products. Later, when the demand settles down, new orders will suddenly disappear, and the old
orders will start to be cancel. This example clearly shows the large variations of orders, which
naturally results in the bullwhip effect.
One example is the shortage of DRAM chips in the 1980’s. In the computer industry, orders for
these chips grew fast, not because of a growth in customer demand, but because of anticipation.
Customers placed duplicate orders with multiple suppliers and bought the first one that could
deliver, and then canceled all other duplicate orders.
EFFECT OF BULLWHIP
Increase manufacturing cost
Increase inventory cost
Increase replenishment lead time
Low level of product availability
Lack of coordination and relationships across the supply chain
Minimizing the Bullwhip Effect
The most efficient way to mitigate oscillations caused by the bullwhip effect is for the distributors
and suppliers to understand what makes the supply and demand work, and then to jointly work on
the improvement of the quality of the exchanged information, as well as shortening of the actions
throughout the supply chain. We may say that in order to reduce the effects of the bullwhip effect,
some or all of the following actions need to be undertaken:
Establish real-time control of the actual demand for products, as precisely as possible;
Understand the demand for products at every level of the supply chain at the same time connecting
the logistic service providers;
Increase the frequency and quality of information between the subjects in the supply chains;
Identify and prevent the causes for reductions and cancellations in the customers' demand;
Allow retailers to control the inventories by planning the stocks in coordination with the consumers
that project the end demand.