The supply chain is a complex group of companies that move goods from raw materials suppliers to finished goods retailers. These companies work together when meeting consumer demand for a product; supply chains allow companies to focus on their specific processes to maintain maximum probability. Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.
Definition
The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier. This effect can be observed through most supply chains across several industries; it occurs because the demand for goods is based on demand forecasts from companies, rather than actual consumer demand.
Forecasting Errors
When companies enter new products into the marketplace, they estimate the demand of the good based on current market conditions. Most companies in the supply order more than they can sell, attempting to prevent shortages and lost sales of goods. This "extra" inventory begins to increase or decrease during the normal market fluctuations of supply and demand. When demand increases, the companies closest to the consumer will increase inventory to meet the consumer demand. When the demand falls, the front-end of the supply chain will decrease inventory, amplifying the extra inventory on each company up the supply chain.
Behavioral Causes
One cause of the bullwhip effect is normally driven by management behavior at the front-end companies of the supply chain. Retail management never wants to have a stock-out on a popular good, leading to higher orders from the wholesalers. This eventually squeezes each company in the supply chain and creates decreases in inventory.
Another major behavioral effect is the ordering of too much inventory when consumer demand has fallen for an item. Retailers may have raised their inventory levels to avoid a stock-out but are now met with goods that cannot be sold quickly. This creates overstock of inventory for each supply chain company.
Operational Causes
The main operational cause of the bullwhip effect comes from individual demand forecasts from each company in the supply chain. This causes an increase in demand from companies in the supply chain, but not the actual consumers who will purchase the goods. A lack of communication is also prevalent during operational causes; companies may not supply information up the supply chain regarding current market conditions, causing improper levels of inventory.
Corrective Measures
To properly manage the fluctuations in consumer demand, implementing a point-of sale (POS) system with a just-in-time (JIT) inventory system. This allows each company in the supply chain to process information electronically regarding individual goods. Understanding consumer demand can then be evaluated based on the order information from the POS system and allow managers to order more goods if needed.
