What is a 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 one moves further up
the supply chain.
Behavioral causes
 Misuse of base-stock policies
 Mis-perceptions of feedback and time delays
 Panic ordering reactions after unmet demand
 Perceived risk of other players' bounded rationality

Operational causes
 Dependent demand processing
 Forecast errors
 Adjustment of inventory control parameters with each demand observation
 Lead time variability (forecast error during replenishment lead time)
 Lot-sizing/order synchronization
 Consolidation of demands
 Transaction motive
 Quantity discounts
 Trade promotion and forward buying
 Anticipation of shortages
 Allocation rule of suppliers
 Shortage gaming
 Lean and JIT style management of inventories and a chase production strategy

Consequences

In addition to greater safety stocks, the described effect can lead to either inefficient production or excessive
inventory, as each producer needs to fulfill the demand of its customers in the supply chain. This also leads to
a low utilization of the distribution channel.
In spite of having safety stocks there is still the hazard of stock-outs which result in poor customer service and
lost sales. In addition to the (financially) hard measurable consequences of poor customer services and the
damage to public image and loyalty, an organization has to cope with the ramifications of failed fulfillment
which may include contractual penalties. Moreover, repeated hiring and dismissal of employees to manage the
demand variability induces further costs due to training and possible lay-offs.

Countermeasures
It is necessary to extend the visibility of customer demand as far as possible.
One way to achieve this is to establish a demand-driven supply chain which reacts to actual customer orders.
In manufacturing, this concept is called kanban. This model has been successfully implemented in Wal-Mart's
distribution system. Individual Wal-Mart stores t ransmit point-of-sale (POS) data from the cash
register back to corporate headquarters several times a day. This demand information is used to queue
shipments from the Wal-Mart distribution center to the store and from the supplier to the Wal-Mart
distribution center. The result is near-perfect visibility of customer demand and inventory movement
throughout the supply chain. Better information leads to better inventory positioning and lower costs
throughout the supply chain.
The concept of "cumulative quantities" is a method that can tackle and even avoid the bull-whip-effect. This
method is developed and practised mainly in the German automotive industry, with its expanded supply
chains[4] and is established in several EDI-formats between OEMs and their suppliers.
Barriers to the implementation of a demand-driven supply chain include the necessary investment
in information technology and the creation of a corporate culture of flexibility and focus on customer demand.
Another prerequisite is that all members of a supply chain recognize that they can gain more if they act as a
whole which requires trustful collaboration and information sharing.
Methods intended to reduce uncertainty, variability, and lead time:
 Vendor-managed inventory (VMI)
 Just in time replenishment (JIT)
 Demand-driven MRP
 Strategic partnership – Establish Long Term Contract with suppliers
 Information sharing
 Smooth the flow of products
 Coordinate with retailers to spread deliveries evenly
 Reduce minimum batch sizes
 Smaller and more frequent replenishments
 Eliminate pathological incentives
 Every day low price policy
 Restrict returns and order cancellations
 Order allocation based on past sales instead of current size in case of shortage

Extra
Causes:
Demand Forecast Updating
When every downstream member places an order, the upstream member readjusts the demand forecast and
then places an order to the upstream partner in the supply chain. These orders get processed and then finally
reach the manufacturer as overall demand for the product. Here, the final product demand that reaches the
manufacturer is an exaggerated demand and not the actual product demand. Due to this, the manufacturers’
product scheduling, capacity planning, inventory management, and part procurement multiplies leading to
multiple changes in all the links. This is the major contributor to the Bullwhip Effect.
Order Batching:
As demand depletes inventory, a company or a supply chain entity may not order continuously, but instead
will accumulate inventory replenishment requirements from its supplier. The wholesaler/ retailer doesn’t
place an order with the upstream member as soon as he gets information about the depleting quantity of
product. He follows his own style of order placing. He might order weekly or monthly, instead of ordering
frequently as required to reduce the cost per order. The reasons for such ordering policies can be due to the
supplier's capability of handling frequent orders, costs and time requirements of order processing or purchase
order generation. As order cycles of disparate customers tend to randomly overlap, the result is a more erratic
demand pattern than the actual demand seen by the customers - hence the Bullwhip Effect.
Price Fluctuations:
Distributors periodically have various schemes and promotions like rebates and coupons to increase customer
demand for the product. The buying pattern of the customer during such periods does not reflect buying
needs, but is a seasonal condition. This variation in buying pattern is much higher than the variation in the
consumption rate. Promotions can also be an incentive for buying more than the demand requirements.
Hoarding & Rationing:
Frequently in budget driven organizations, artificial demand for a product is created as a pre-budget hoarding
frenzy takes place. Here, the retailer/ distributor creates an artificial scarcity for the product anticipating a
price hike or a price reduction for the product. As a result, the customer tends to pay more or less than the
original price of the product. In such cases, the Bullwhip Effect is visible in the form of excess inventory piled
up in warehouses, poor customer service, high cost of correction and long-waiting time for product by the
customer
Reverse Bullwhip Effect
Reverse bullwhip effect refers to the variability of supply downstream the supply chain thereby depicting
inadequate supply in the face of adequate demand. The immediate effect of reverse bullwhip effect is seen in
cost of stock out including supplier switching costs, destroyed business relationships, fluctuating product
prices and panic buying. In the oil industry in Kenya, shortage of fuel has seen inflation rising and destabilizing
the economy. Reverse bullwhip effect is a reversal of gains made through implementation of the philosophies
of Operational Performance Management (OPM) like Just In Time, Lean production and Total Quality
Management.
In order to maintain smooth flow of products from production points to end sale points, firms need
sustainable, efficient, agile and networked supply chains.

Svenson (2005) observes that the reversed bullwhip effect is caused by factors such as deficient information
sharing, insufficient market data, deficient forecasts and capacity issues. Facilities with mass production are
responsive to supply variability while customization platforms are prone to longer production lead times.
Business processes
sub optimization by design or default can lead to a butterfly effect where a small variation can lead to system
wide variation. When customers react not only to price itself but changes in the price, some pricing strategies
implemented by the supplier may lead to reversed bullwhip effect.

2.2 2.2 The reverse bullwhip effect The term “reverse bullwhip effect” has first been used by Svensson (2003,
p. 103 - 131) and he writes that this reverse bullwhip may occur when there are uncertainties upstream in the
supply chain, e.g. limited production capacity, product quality deficiencies, unreliable deliveries/transports or
inaccurate information sharing. These uncertainties start upstream in the supply chain and amplify
downstream. According to Rong et al. (2008) does demand variability increases as one moves downstream
trough the supply chain (in contrast, the classical bullwhip effect refers to the amplification as one moves
upstream). Rong et al. (2009) write also that the forward and reverse bullwhip effects act as a system because
a sudden increase in demand gets amplified if it goes upstream, creates shortages which in turn amplifies
downstream. The uncertainty of upstream suppliers and the relation with the bullwhip effect, are both causes
of the reverse bullwhip effect.effect The term “reverse bullwhip effect” has first been used by Svensson (2003,
p. 103 - 131) and he writes that this reverse bullwhip may occur when there are uncertainties upstream in the
supply chain, e.g. limited production capacity, product quality deficiencies, unreliable deliveries/transports or
inaccurate information sharing. These uncertainties start upstream in the supply chain and amplify
downstream. According to Rong et al. (2008) does demand variability increases as one moves downstream
trough the supply chain (in contrast, the classical bullwhip effect refers to the amplification as one moves
upstream). Rong et al. (2009) write also that the forward and reverse bullwhip effects act as a system because
a sudden increase in demand gets amplified if it goes upstream, creates shortages which in turn amplifies
downstream. The uncertainty of upstream suppliers and the relation with the bullwhip effect, are both causes
of the reverse bullwhip effect.
2.2.1 Causes of the reverse bullwhip effect. Lee et al. (1997) show that the cause of the bullwhip effect lies in
price fluctuations. The demand variation fluctuates with price variation and has consequence on the supply
chain as it moves upwards. As we can see in the figure below this effect is drawn in example (b). Figure 1 (c)
shows the reverse bullwhip effect and how it starts from upstream in the supply chain with demand vibration.
The reverse bullwhip effect can be interpreted as the opposite of the bullwhip effect. Price variation is one of
the causes of the reverse bullwhip effect but as already shown there are more uncertainties than create the
reverse bullwhip effect.
2.2.2 Consequences for the supply chain In the research of Lee et al. (1997) it is stated that the result of the
fluctuations, the (reverse) bullwhip effect, in the order quantities over a time period can be much greater than
those in the demand data. This increase in inventory brings serious harm to the supply chain because more
products are made for inventory than actually the demand is. Most of the companies aspire low inventory
levels to minimize costs, although this cannot always be realised when demand is not known. A balance needs
to be found, so that inventory management does not hinder sales when a forecast is difficult. In this balance
there should be taken care of batch orders, shipments and competition in the upstream of the supply chain. All
these different consequences come down to the cost management principle that should work together with
the inventory management in order to be profitable. The alignment of information and collaboration should
prevent these increases in variation in demand.