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The Bullwhip Effect in Supply Chain

22 September 2021
by Anna Frank  • 3 min read

During the Corona pandemic, supply and demand are not always aligned. Retailers responded accordingly with larger orders to handle the high demand for certain products. These fluctuations also affected production processes and changed the flow of goods. In logistics, challenges like these are known as the bullwhip effect. Find out what impact this phenomenon has on your supply chain and how to effectively avoid it!  

What is the Bullwhip Effect?

The so-called bullwhip effect refers to fluctuations in demand along multi-stage supply chains and has a particular impact on production and logistics planning. It arises from coordination and communication issues between the individual supply chain stages and intensifies as one moves further up the supply chain from end customer to manufacturer.   
 
In this case, demand signals from end customers are misinterpreted or forwarded too late. An example: Due to high demand, a retailer places his order with the wholesaler with additional safety stock. The wholesaler in return also places a larger order with the manufacturer. With this lack of communication, the process intensifies from stage to stage.  

What causes the Bullwhip Effect?

But why do these fluctuations in demand occur in the first place and ultimately cause the bullwhip effect? There are several potential reasons: 

Insufficient Flow of Information

On the one hand, insufficient information plays a central role in demand, orders, and logistics processes – may it due to time pressure or profit optimization. Since the various supply chain stages can only access local data and therefore only forward current sales figures to the next stage up, this stage in the supply chain registers the increase in sales volume, but not how long it is going to last and what caused it. The time lag in passing on information or orders is a challenge as well, because this forces the next supply chain level to order larger quantities, even though the increase in sales may has already stopped. 

Inefficient Order Behavior

Poor ordering behaviour is another source of error. To save on shipping costs, many companies opt for bundled orders, but these can result in excess overstock or delivery bottlenecks. In addition, new orders are often placed even though the latest deliveries are still on their way, or retailers secure additional stock from the wholesaler in order to be able to react flexibly to an increase in demand. 

Price Fluctuations

Another cause of the bullwhip effect is price fluctuations that occur between the individual stages of the supply chain and thus affect the order quantity. These fluctuations arise due to volume discounts or coupons granted by one intermediate supplier to another.   

How does the Bullwhip Effect affect the Supply Chain

If the order quantity exceeds the actual demand, this leads to high storage costs. In the worst case, the products can also no longer be utilized because they have already become obsolete or spoiled due to the long storage time. This makes the bullwhip effect one of the decisive risk factors in supply chain management.    

How to avoid the Bullwhip Effect

The whip effect in dynamic multi-stage supply chains cannot be prevented but usually contained. To do so, a transparent and intensive communication between all supply chain actors is mandatory. In this way, it is important to ensure the flow of information and to communicate sales figures, necessary order sizes, and the causes of increases in demand as well as price fluctuations to all subsequent supply chain stages as soon as possible.  
 
However, before companies start a transparent information exchange, they must first make sure that all processes within their own company are transparent, traceable and monitorable. In this scenario, not only the use of integrated order management or common supply chain management systems becomes handy, but also AI-based solutions that ensure maximum transparency in the supply chain.  

Defy the Bullwhip Effect together with Synfioo

At Synfioo, we provide you with reliable and accurate Estimated time of Arrivals (ETA) as well as live information for all stakeholders in your supply chain. To do so, we rely on innovative machine-learning algorithms that incorporate your specific transportation-based data with location information and over 70 external disruption sources into their calculations. This precise information helps to significantly ensure successful communication between the various stages of the entire supply chain.  
 
Once this transparency is set within the company, it can be shared with external players. And it pays off, because the improved exchange of all information along the supply chain optimizes the interpretation of processes and ensures transparent monitoring options to proactively reduce the bullwhip effect. You would like to know more about the whip effect and how our solutions can support you? Then contact us!  


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