Bullwhip Effect in Supply Chain

Developments in the ordering process, which is one of the basic functions of the supply chain, affect each of the supply actors forming the links of the chain. At each level of the supply chain, demand variation increases exponentially, depending on the order from the previous level. This triggers a chained demand fluctuation in the supply chain called the “whipsaw effect”. The bullwhip effect is a significant, far-reaching managerial problem that causes unnecessary cost burden. We have summarized this issue, which creates interconnected negative effects on many issues in the supply chain, for you.

The whip effect, also known as the “Bullwhip Effect”, is the unpredictable fluctuations in demand in the supply chain at many stages from end consumers to producers. In this case, as customer needs reach maximum levels, there are large unpredictable fluctuations in inventory and demand can increase gradually by swinging like a whip.

The term “whipsaw effect” was first defined by Proctor & Gamble in the 90s. One of the organisation’s highest-selling products, the Pampers brand of nappies, showed fluctuations in demand from distributors that caught the attention of logistics managers. Subsequently, when suppliers’ orders were analyzed, it was seen that the fluctuation variation grew even larger. As seen in the Pampers example, the whipsaw effect can be defined as demand forecasting distortions where consumer demand changes slightly, but from the bottom up, i.e. from suppliers and distributors, demand causes large fluctuations.

The main reason for the whip effect arises from the interaction of demand and supply due to the nature of the system. When customer demand decreases, the producer reduces its stocks/production in order to avoid high costs. On the contrary, when customer demand increases, stocking is used. Since this structure is one of the main features of the supply chain, the whip effect shakes this balance. In the literature, the causes of the bullwhip effect are; demand forecast update, order grouping, price fluctuation, supply shortages, delays and backlogs, communication problems, increased workload causing human errors, inadequacy / failure of automation and management of services. The whip effect also refers to behavioral effects. For example, with social-psychological effects, stockpiling can also cause this effect in cases where panic increases.

There is a wide range of reasons why small changes in consumer demand can lead to large fluctuations all the way to suppliers at the other end of the supply chain. For example, disruptions in the flow of information from the end customer to the supplier, prolonged procurement, ordering and delivery processes, errors in forecasting and forecasting, backlogs in orders, price changes, promotions and product mix changes, problems in demand management, problems in customer or supplier relationship management can be listed as internal causes; issues such as disasters or epidemics can be listed as external factors. In addition, when indirect effects are considered; not using human resources more efficiently by supporting them with technological developments and thus insisting on a slow order and follow-up process that lacks a systemization that is free from human errors may also cause a whiplash effect. Therefore, many reasons can be listed from different fields ranging from social developments to human resources management.

Sharing information in the supply chain is of critical importance. The effects of incorrect or incomplete sharing of information lead to disruptions and inefficiencies in the chain. A fluctuation that affects a chain of supply actors consisting of suppliers, manufacturers, distributors, retailers and logisticians is likely to cause, for example, a surplus in inventory investment and thus various financial burdens at every stage of the process. Exaggerated order levels also lead to storage and logistics problems. This can lead to supply problems similar to those experienced in the early part of the recent Covid pandemic.

Fluctuations in the supply chain caused by the bullwhip effect may create excess inventory. Orders placed with exaggerated figures based on misguided forecasts may result in reaching the wrong inventory levels. The resulting inventory overhang leads to costly overhang and misallocation of resources. Undeliverable orders and trust problems arising from out-of-stock products may lead to undesirable results in customer relations.

At every stage of communication in the supply chain; communication flow should be ensured with timely, accurate information. By utilizing technology in the management of communication flow, possible crises should be avoided with minimum error. Another issue to be considered is the reality of the demand. Questioning and analyzing the reality of the demand and calculating the margin of error helps to reduce uncertainty.

What can be done to reduce the whip effect can be summarized under the following headings:

The road maps drawn towards future sales targets by considering the tables formed by past sales may undergo unplanned changes from time to time. The importance of automation, digital transformation, systemization and strategic planning in every field are important building blocks for supply managers to grasp in the supply chain, where significant fluctuations can increase exponentially, except for organic deviations caused by unforeseen or misinformed forecasts. Otherwise, it may be inevitable to fall behind in the competition or to regress with losses that cause cost burden.