The Bullwhip Effect

A supply chain has numerous stages, through the supply chain key factors such as time, supply of order decisions, demand for the supply, lack of communication and disorganisation can result in the problems in the management of the supply chain. This problem is known to be as the bullwhip effect.

To further explain the bullwhip effect, on occurrence detected by the supply chain where the orders that are sent to the manufacturer and the supplier results in a big variance then the sales to the customers. Resulting in irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain. This can cause big problems in the supply chain as it can affect the smoothness of the process as the supplier cannot estimate the exact demand for the product which can then result in exaggerate fluctuations.

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The causes of the Bullwhip Effect:

There are many causes to the bullwhip effect in the supply chain;

The lack of communication between the supply chains can make the process more difficult
to manage and run smoothly. With the lack of communication the managers of the
origination can perceive the product demand differently therefore order different quantities
which can cause the bullwhip effect.

 Disorganisation in the business can also cause the bullwhip effect because they can order
too much or too less of the product.

Forecasting error is also another reason. When a product is produced and ready to be sold
in to the market the estimated demand for the products based on the current market
conditions can be misleading. Most companies order far more than they can sell. The extra
inventory then begins to increase or decrease during the normal market fluctuations of the
supply and demand. So, when the demand increases, the companies will increase inventory
to meet the demand. When demand falls, the supply chain will decrease inventory.

The bullwhip effect at Hp Company

AN example of organisation involved in the bullwhip approach is Hewlett-Packard (HP) Company. Hewlett-Packard (HP) executives inspected the sales of one of its printers at a major re-seller; they found that there were, some instability over time. However, when they examined the orders from the re-seller, they observed much bigger swings. The company also discovered that the orders from the printer division to the company’s integrated circuit division had even greater fluctuations.

Hp supply chain was afflicted with the bullwhip effect which changed its demand information as it is transmitted up the chain because Hp relied on sales order from the re-seller to make production forecasts, plan capacity, control inventory and schedule production without being able to see the sales of its production at the distribution channel.

 Big variations in demand were a major problem for HP’s management and the common indications of such variations could be extreme inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long logjams, uncertain production planning and high costs for corrections, such as for advanced shipments and overtime. HP’s product division was a victim of order smacks that were exaggerated by the re-sellers relative to their sales; it, in turn, created additional exaggerations of order smacks to suppliers.(blogspot.co.uk)

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Minimising the effects of Bullwhip Effect

To minimise the effects of the bullwhip effect, the first step is to improve the quantity of communication within the supply chain, therefore the supplier and customers must work together. Getting accurate sales data can make the demand for the product much more visible, allowing the supplier to know the exact quantity that is needed to produce. Another factor that can reduce the effects of the bullwhip effect can be the pricing strategies. Erasing the incentives that may cause the delay of the orders, for example, discounts and cancellations of orders can result in reducing the bullwhip effect. Keeping the prices of the product as stable as possible can keep the supplies away from triggers caused by such as promotional discounts.

References: 

Lee, Padmanabhan and Whang, 1997. The Bullwhip Effect in Supply Chains [online] Available at:< http://sloanreview.mit.edu/article/the-bullwhip-effect-in-supply-chains/> [Accessed 25 March 2014]

University Alliance,2014, How to Manage the Bullwhip Effect on Your Supply Chain [online] Available at < http://www.usanfranonline.com/resources/supply-chain-management/how-to-manage-the-bullwhip-effect-on-your-supply-chain/#.UzwDY_ldUgo> [Accessed 24 March 2014].