Bullwhip effect
The bullwhip effect describes coordination and communication problems in multi-stage supply chains – usually in so-called fragmented supply chains. It can be localized thanks to fluctuations in production planning and logistics planning (price fluctuations and bundled orders/delivery bottlenecks), but is intensified by the increase in production stages. In other words, the whip effect occurs when signals from the end customer are misinterpreted along the value chain. This results, for example, in order fluctuations that become increasingly differentiated from the customer’s demand to the manufacturer (see video).
Causes of the bullwhip effect
The bullwhip effect shows a trend of ever-increasing fluctuations in inventory in response to changing demand the further you look back in the supply chain of a product (from the end customer to the manufacturer). A lack of coordination and insufficient demand, order and logistics information are key reasons for fluctuations in stock levels. In practice, information and coordination itself are ignored or not communicated in order to optimize profits – this ultimately leads to so-called build-up effects (whip movement), which ultimately lead to serious chain reactions in the supply chain (supply bottlenecks, no demand).
Another reason: To avoid supply bottlenecks, retailers order more as a precaution. To be on the safe side, however, wholesalers also order more from manufacturers, who now produce more due to the apparent increase in demand. However, consumer demand has not changed.
Solution
Close cooperation between sales, planning, purchasing and logistics across the supply chain can lead to a significant reduction in costs and an optimized flow of goods and information. The increase in orders, especially their interpretations, as well as stock levels must be brought into balance – the best possible profit optimization must be prevented.
Further information on optimizing the supply chain can be found under Supply Chain Management.
Image rights: Stern – CC BY-SA 3.0