Bullwhip Effect In SCM

The bullwhip effect is a well-known phenomenon in supply chain management. In simple terms, linear supply chain that consists of a manufacturer, a distributor, a wholesaler and a retailer, we observe that the retailer’s orders to the wholesaler display greater variability than the end-consumer sales, the wholesaler’s orders to its distributor show even more variable, and the distributor’s orders to the manufacturer are most volatile.

Each participant of the chain should maintain its actions in a good relation to other participants and the supply chain in general and make decisions beneficial to the whole chain. If the coordination is weak , a conflict of objectives appears among different participants, who try to maximize personal profits. Besides, all the relevant information for some reason can be unreachable to chain participants,which leads to irregular comprehension.And predominantly all these lead to the so-called Bullwhip Effect resulting from information disorder within a supply chain. Different chain phases have different calculations of demand quantity, thus the longer the chain between the retailer and wholesaler the bigger the demand variation.

A retailer can realize a small variation in customers’ demands as a growing trend and purchase from a wholesaler more products than he needs.Increased order at wholesalers is larger than at retailers as the wholesaler cannot regularly comprehend the increased order. As the chain grows longer the order is larger.If a retailer plans the product promotion he can increase the order.If a manufacturer comprehends the increased demand as constant growth and in the same manner makes purchases, he will face the problem of inventory surplus in the end of promoting period.A variation in demands increases production expenses and expenses of the whole supply chain in an effort to deliver the ordered quantity in time. A manufacturer accomplishes demanded capacity and production but when the orders come to a former level, he remains with the surplus of capacity and inventory.

Bullwhip =Variance of demand / Variance of orders

The bullwhip effect:

• Increases the level of inventory, accordingly the warehouse space is more

occupied,all of which leads to an increase in holding or carrying costs of storage services.

• Prolongs the lead time – the time period from the moment of purchasing to the

  moment of receiving the order.

• Demands more efficient transportation to satisfy the increased demand, which

   leads to a high transportation cost.

• Increases labor costs.

• Decreases the level of product availability,which can lead to deficiency of retail inventory.

Let us see and understand with the help of an example:

So,in order to avoid bullwhip effect,a company should take care of Demand forecasting( at individual level of channel).