What is Bullwhip Effect
The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as you move further up the supply chain.
To put the bullwhip effect in simple terms, in looking at businesses further back in the supply chain, inventory swings in larger and larger “waves” in response to customer demand (the handle of the whip), with the largest “wave” of the whip hitting the supplier of raw materials.
Since this is the case, suppliers of raw materials see the greatest demand variation in response to changing customer orders or demand. As a result of the effect, supply-chain participants have learned to build and maintain a buffer of inventory or “safety stock” to allow for such swings in orders. But, despite knowledge of the effect, the bullwhip still gives businesses fits.
What causes the bullwhip effect?
There are numerous reasons cited for this phenomenon. First of all, there are the more obvious operational factors, some of which you have probably experienced firsthand either through the beer game, or through managing your own business
For example, lead time issues are a common supply-chain challenge. As participants often learn in the game, two overdue shipments arrive about the time customer demand has dried up. Ouch! But aside from the well-researched operational factors, supply chains are also clearly influenced by human behavior.
Human behavior in relation to perceived risk is a particularly interesting topic for me, not only from a business perspective, but also more broadly in terms of financial-market behavior. I have been an active trader for many years, so I am constantly thinking about the forces at work in volatile market action.