In this article, our team of supply chain experts offer a concise overview of the bullwhip effect and how it can be effectively managed for minimal disruption.

Ever wondered where the term bullwhip effect when applied to supply chains first came from? It was originally identified in the early 1990s, when Procter & Gamble noticed that overall demand for Pampers brand nappies was fluctuating significantly and sought to understand why this was happening. The reasoning being that the number of newly born babies should be fairly constant, so there shouldn’t be peaks and valleys in the demand for nappies. 

What P&G discovered was that small variations in orders from retailers were being amplified along the supply chain, which progressively increased in magnitude. They likened this chain reaction to the cracking of a whip - a small movement of the wrist initiating a wave pattern that is amplified along the length of the lash. 

What are some examples of the bullwhip effect in the supply chain? 

Retailers run a promotion 

Sales often increase when retailers offer discounts, and with a promotional offer planned retailers order extra stock to ensure they have enough of the product to satisfy their customers. When wholesalers notice the uptick in order volumes, they assume that there’s a rise in demand. They place their orders accordingly and add a little extra to the total number of units ordered to avoid running out of stock. 

Now, it’s the manufacturers’ turn to notice what seems to be a rise in demand. They also don’t want to experience a shortage and miss sales, so they increase production volumes. However, because they need more production inputs they order larger volumes from their suppliers to reduce the risk of shortages.  

The bullwhip effect hasn’t run its course yet. It keeps on magnifying expected sales volumes along the supply chain all the way back to the sources of raw materials. But then, the retailer’s promotional offer, the metaphorical flick of the wrist that began the chain reaction, ends. Consumers have bought enough of the product to keep them going for some time, and demand falls, leaving the entire supply chain with excess inventory on their hands.  

Seasonal demand triggers the bullwhip effect  

Seasonal demand for certain products means there’s always a spike in sales followed by a plateau. Although sales histories show both retailers and their suppliers what they should expect, there can be a risk of overcompensating.  

Once again, it affects the entire supply chain. Beginning with retailers, each supply chain player adds to their purchases, and as one follows the supply chain back to manufacturers and raw material providers, each is left with progressively larger amounts of excess inventory. For any business, holding surplus inventory is costly. If that inventory is perishable, the potential for loss is exacerbated even further.  

Product launches 

New product launches generate a great deal of interest, but initial sales forecasts can sometimes run the risk of being too optimistic. An overly bullish approach could trigger the bullwhip effect. Retailers want to benefit from being among the first to launch new products and are eager to avoid stockouts. Supply chain players may therefore mistake initial demand for a new product as representative of sustained demand.  

While new products might attract repeat purchases and growth until the market reaches saturation point, there are no guarantees. In the absence of sales histories, supply chain partners must make their own judgement calls rather than behave reactively in response to initial demand. 

Supplier lead times 

Factors such as the current availability of production inputs can lead to comparatively long lead times. In an effort to reduce the potential for stock shortages, retailers may increase order volumes. This can skew perceptions of demand, leading to a cascade of overproduction and overstocking that is magnified along the supply chain.  

Forecasting errors 

Forecasts are based on past performance, but circumstances that may have stimulated sales won’t always recur. For example, unusually hot weather in the summer may drive sales for certain products but if the following summer is mild, sales could fail to match expectations.  

With retailers and their supply chains geared for high demand and possibly even sales growth, they may be left with unsold inventory. This means that because of the bullwhip effect magnifying upstream stockholding, manufacturers and raw material suppliers are left with even more inventory to work through. 

Order batching is interpreted as a demand spike 

When lead times are lengthy, retailers and wholesale buyers place larger batch orders to cover the time between the placement of successive orders. They’re likely to add more than what they expect to sell so that they can avoid stockouts. The placement of a large batch order can easily be misinterpreted as a sudden spike in demand, triggering the bullwhip effect. 

How does the bullwhip effect impact the supply chain? 

The bullwhip effect has multiple impacts that ultimately affect both consumers and the supply chains that service their needs. The first of these is an increase in costs. For example, suppliers are subject to higher inventory holding costs. Since inventory ties up capital and stored inventory can be subject to spoilage, cash flow is affected and there’s a higher risk of the investment in inventory going to waste.  

The bullwhip effect implies a cycle of overcorrection. At first, the supply chain goes into overdrive and more products than necessary are produced. Then, it attempts to recover, scaling back production so that stored inventory can be reduced through sales. But an overcorrection in this direction can also prove costly. Stockouts can lead to missed opportunities and consumers may seek out and decide to remain loyal to alternative products. 

What is the reverse bullwhip effect? 

Just as the bullwhip effect leads to oversupply, the reverse bullwhip effect reverberates throughout the supply chain, leading to shortages. For example, sales of a product may be lower than expected. Responding to this, retailers reduce order quantities, sending an unspoken message to the supply chain that it’s time to slow production and reduce inventory.  

A reverse bullwhip effect can be caused by a glut of inventory. With stock on hand, supply chain players don’t place orders per expectation and their suppliers scale back production. But once the inventory has been used, order volumes normalise, only to be met by a shortfall in supply. Ironically, this can re-trigger a bullwhip effect with increased order volumes to compensate for shortages. 

Practical steps for reducing the bullwhip effect

1. Use data analytics for demand forecasting

Advanced data analytics can achieve accurate demand forecasts using historical information. These forecasts can be used to spot anomalies and determine whether reactive increases in stockholding are justified. 

2. Enhance communication 

Tech-enabled supply chain management platforms allow for improved communication and access to real-time data. By working together and sharing information, retailers and their supply chains can work to optimise production, supply, and inventory.

3. Reduce lead times 

Thanks to automation in the procurement process, it’s possible to enhance supply chain efficiency and reduce lead times. This discourages batching and reduces the need for inventory-holding.

4.Optimise inventory buffers

To avoid stockouts, supply chain players hold some inventory to buffer them against shortages. But how much inventory should they hold? Analytics leverage big data to determine optimal inventory buffers, reducing the potential for excessive inventory holding and its associated risks and costs.  

Foods Connected: Specialised supply chain management tools for the food and beverage industry 

The food and beverage industry is particularly vulnerable to the negative consequences of the bullwhip effect. With perishable inputs and products increasing the risks implied by excessive inventory, leveraging real-time data spanning the supply chain helps players to analyse markets effectively.  

With our supply chain management software, companies can effectively forecast demand, plan and collaborate with supply chain partners, optimise inventories and gain a nuanced data-driven understanding of market fluctuations. 

Want to find out more? Request a demo of our award-winning suite of software solutions.

Explore more with a free Foods Connected demo