The bullwhip effect is the increase in inventory due to shifts in consumer demand up against the supply chain. It’s a distribution channel phenomenon that involves forecasting to get supply chain incapability. It includes joint problems through the different stages of a supply chain management (Lee & Whang, 1997). Some crucial factors such as demand for the supply, inefficient communication and supply of timely order requests usually result in such challenges. A supply chain consists of a web of free business enterprises whose responsibility is a satisfaction of the customer by creating another enterprise that conducts procurement, design and goods distribution. Currently, organizations operate as individual firms which decrease its effectiveness regarding reduced service and increased non-value operational costs (Jüttner et al, 2003). A phenomenon known as the Bullwhip Effect occurs when consumers overbuy goods. It is as a result of massive purchases that cause sudden changes in the supply chain management. Consequently, this paper deals in detail with the causes, consequences, and strategies of minimizing the Effect.
Its occurrence is detected where orders delivered to the manufacturers contribute to a more substantial variance that market sales made to the end consumers of the product. This variance created can lead to interruption of the smooth flow of the supply chain process. It is because all supply chain links will underestimate the goods demand that leads to high exaggerated fluctuations. The typical idea is that nodes of the supply decisions based on the demand information from lower enterprises, the resulting unnecessary details will flow up and down.(Lee& Whang, 1997).
It is caused by several factors in supply chains as follows;
Disorganization between the supply chain links. It involves requesting delivery of small amounts of goods needed because of marketers under-reacting to the supply chain. There are minimal communications between the links making it difficult for activities to operate concisely. Top-level managers can perceive a product demand differently leading to the ordering of several quantities.
The order is batching-Firms always accumulate the demand of products first and do not place direct orders with their suppliers. It leads to variability in demand due to an unexpected surge in the market at some point then followed by no market after the initial stages (Jüttner et al. 2003).
Demand information. The bullwhip effect is often caused by over-reliance previous demand data to approximate current need of a product by consumers in the target market. It does not allow any fluctuations to arise in future time.
Price volatility-Particular changes such as price discounts, bonuses can prevent regular buying patterns of customers. Buyers take merit on these discounts given during short time intervals which cause uneven manufacturing and also unreliable demand information.
Potential risks and effects on a corporation
The described fact can cause the inefficient production of goods and copious amounts of inventories because manufacturers require fulfilling the excessive demands of its consumers. Also, the continuous recruitment and dismissal of workers to manage variability induce extra costs as a result of pieces of training and layoffs. The difficulty of safety stock-outs leads to low customer services then leads to sales loss. The Bullwhip Effect causes an overreaction to certain market changes. It occurs when market demand rises. The volume of the supply chain increases more than the increased market demand. When the market demand grows the excess inventories in the backlog of a supply chain get into different nodes.
Once the demand reduces products in the backlog of the inventory causes poor cash inflows and outflows in the supply chain (Giunipero & Eltantawy, 2004). It severely affects the first operation of the chain, and lead to business failures, especially at the end of the predetermined period of small-scale business enterprises’ company has to deal with consequences of failed fulfillment such as contractual penalties and damage to the public image of goodwill due to poor customer service.
Strategies to minimize adverse effects on a corporation
Adoption of a demand drove supply chain approach
The fact that a lot of information available is unreliable makes claim inevitably to be at variance with most forecast activities. This situation makes firms to request raw materials from suppliers in a fast manner. A poor strategy in communication will provoke an overreaction of the supply chain, allowing excess inventories that inflate the cost of goods. Supply chain curve used be utilized in a manner in which one will be easy determine the level of supply rise or drop. In this strategy, the company progress will be determined based on the way it approaches its goals and plan.
Improving forecast accuracy
A company needs a demand forecast to plan for long periods of time and cover high product demand from prospective customers who order new products. In most cases, it is given that this forecast information is inaccurate. However, several steps improve the accuracy of the data. It includes taking inputs from sales and consumers. Also making sure that the right algorithm to project demand is used correctly (Lee& Whang, 1997). The future company forecast can be done through evaluation of the current rates of performance of the company. It becomes straightforward for the estimates of how the company will be in future based on the achievements made currently. The demand forecast can be weighed based on how the supply is done within the company. It reflects the level of company productivity.
Fast decisions with both insight and visibility
It is crucial to have the right degree of insight so the manager can make informed choices and avoid guesswork. It will prevent high costs, surplus inventory and consecutive deliveries. The fast decision on many occasions lands into unworthy destinations. It is essential for the analysis of each decision to make. Involving others in the decision is very important in this case.
Collaborate with suppliers and consumers
It is a strategy that improves the affectivity of supply chain. When firms relate carefully with customers, they will understand their plans and forecast to build promotions, seasonality and provide insight to the suppliers. It will help prevent the proliferation of unwarranted inventory brought about by the bullwhip effect.
The necessary keys to a significant supply chain are visibility, effective communication, and insight with these attributes a manager will have lowered the risks of shortage and excess inventories. The duty of the manager will be directed towards making sure that there is collaboration between the suppliers and consumers. The two factors are significant in any business premises. If one of these factors is absent, then the business cannot proceed. It all depends on the effectiveness of the supply chain within the company. Firms should be keen on needs of the consumers since through this they will be able to get their needs and preferences. Once the organization understands what consumers demand, it will be easy for them to improve the quality of products based on their demand.
The variability in demand gets enlarged as it approaches the final link of the supply chain which leads to a rise in product cost and decreased profit margin. Information interchange between the participants can achieve a reduction in batch sizes and various ordering policies. It can be summarized that bullwhip effect distorts information, causes procurement delays and delays in delivering goods and services to the customers. It mainly happens due to the decisions made by the manager at each stage. It’s not possible to diminish the effect. Information technology acts as a powerful tool used to reduce the impact and potential risks. Its event is distinguished where orders conveyed to the makers add to a more substantial variance that market deals made to the end customers of the item.
This fluctuation produced can prompt intrusion of the smooth stream of the store network process. It is because all store network connections will think little of the merchandise demand that inspires high misrepresented vacillations. The run of the mill thought is that hubs of the supply choices in light of the request data from bringing down endeavors, the following superfluous subtle elements will stream here and there. Customer, firm and suppliers collaboration is the critical success of the company or any business firm. It all depends on mutual benefit with one. Any given business should make sure it is linked to these other factors for efficient working and productivity.
Giunipero, L. C., & Aly Eltantawy, R. (2004). Securing the upstream supply chain: a risk management approach. International Journal of Physical Distribution & Logistics Management, 34(9), 698-713.
Jüttner, U., Peck, H., & Christopher, M. (2003). Supply chain risk management: outlining an agenda for future research. International Journal of Logistics: Research and Applications, 6(4), 197-210.
Lee, H. L., Padmanabhan, V., & Whang, S. (1997). Information distortion in a supply chain: The bullwhip effect. Management science, 43(4), 546-558.
Lee, H. L., Padmanabhan, V., & Whang, S. (1997). The bullwhip effect in supply chains. Sloan management review, 38(3), 93.
Metters, R. (1997). Quantifying the bullwhip effect in supply chains. Journal of operations management, 15(2), 89-100.