THE BULLWHIP EFFECT IN SUPPLY CHAIN

Karla Berenice Gil Ruiz

Intro: The objective of supply chain management is to provide a high velocity flow of high quality, relevant
information that will enable suppliers to provide an uninterrupted and precisely timed flow of materials to
customers. However, a supply chain can be plagued with distortions in the demand information when it is
transmitted up the chain; this is what we call bullwhip effect
The bullwhip effect is defined as the effect of lack of the information exchange between components
of the chain of supplies and of occurring of non-linear interactions which they are causing for the difficulty in
administration with them. This variance can interrupt the smoothness of the supply chain process as each link in
the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.
For example:

The actual demand from a customer is 8 units

The retailer may order 10 units from the distributor
(+2 units are to ensure they dont run out of floor
stock)
The supplier then orders 20 units from the
manufacturer (+10 units so they have enough stock to
guarantee timely shipment of goods to the retailer)
The manufacturer then receives the order and then
orders from their supplier in bulk, ordering 40 units
(+20 units to ensure economy of scale in production
to meet demand)

Now 40 units have been produced for a demand of only 8 units; meaning the retailer will have to increase
demand by dropping prices or finding more customers by marketing and advertising.
The common symptoms of such variations in the supply chain could be excessive inventory, poor product
forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long
backlogs, uncertain production planning (i.e., excessive revisions), and high costs for corrections, such as for
expedited shipments and overtime.
We can as well identify 4 basic causes and their possible countermeasures:
1. Demand forecast updating : relying on past demand information to estimate current demand
information of a product does not take into account any fluctuations that may occur in demand over a
period of time Information sharing
2. Order batching : companies may not immediately place an order with their supplier; often
accumulating the demand first. Companies may order weekly or even monthly. This creates variability

in the demand as there may for instance be a surge in demand at some stage followed by no demand
after Frequent ordering
3. Price fluctuation : special discounts and other cost changes can upset regular buying patterns;
buyers want to take advantage on discounts offered during a short time period, this can cause uneven
production and distorted demand information Everyday low prices
4. Rationing and shortage gaming : customers order more then they need during a period of short
supply, hoping that the partial shipments they receive will be sufficient Forecast on sales

history
Although those situations are common problem for supply chain management, we are able to minimize their
effect on our corporation by thoroughly understanding their underlying causes. Industry leaders should be ready
to develop and implement strategies like integrating information systems, defining new organizational
relationships, and implementing new incentive and measurement systems in order to control and conquer the
bullwhip effect.