The “bullwhip effect” in supply chain management is a reference to the increase in the variability of order sizes and the accompanying increase in inventory levels that occur moving backwards in the supply chain from consumers to retailers to wholesalers to manufacturers to suppliers. An example of the phenomenon is illustrated in the chart below.
Example Bullwhip Effect Diagram
There are many causes for the bullwhip effect including:
- If the retailer has a promotion, that may create a spike in demand. That spike proliferates through the system. Everyday Low Pricing (EDLP) is sometimes used to counteract the effect of promotions. Many mass merchants try to follow EDLP. They don’t incur these big demand spikes, inventory levels are lower, they can charge less for the product, and they can afford to execute Everyday Low Pricing. Usually the number one or number two retailers in a particular commodity can afford EDLP and the others have to offer promotions to get consumers into their stores and away from the people who are offering Everyday Low Pricing.
- Not every player in a supply chain closely follows consumer demand.
- Manufacturing, procurement, and transportation economies of scale work against smooth order and inventory patterns.
- Shortage gaming In anticipation of shortages and gaming behaviors by competitors, firms order more than needed (phantom orders). Phantom orders are cancelled when the shortage is over. and false ordering throws off forecasting systems and creates blips in demand and ordering..
- Poor forecasting and limited forecast sharing create ordering and inventory peaks and valleys.