All You Need to Know about BULL WHIP EFFECT IN INDUSTRIES

Why is there a build-up in inventory of certain companies happening? and how it will be Reduced ? ?

The term is derived from a scientific concept in which movements of a whip become similarly amplified from the origin (the hand cracking the whip) to the endpoint (the tail of the whip).

The danger of the bullwhip effect is that it amplifies inefficiencies in a supply chain as each step up the supply chain estimates demand more and more incorrectly.

This can lead to excessive investment in inventory, lost revenue, declines in customer service, delayed schedules, and even layoffs or bankruptcies.

Example of the bullwhip effect

For instance, imagine a retailer selling hot chocolate that typically sells 100 cups a day in the winter. On a particularly cold day in that area, that retailer sells 120 cups instead. Mistaking the immediate increase in sales for a broader trend, the retailer requests ingredients for 150 cups from the distributor. The distributor sees the increase and expands its purchase order with the manufacturer to anticipate increased requests from other retailers as well. The manufacturer increases its manufacturing run in anticipation of greater product requests in the future.

At each stage above, demand forecasts have been increasingly distorted. If the retailer sees a return to normal hot chocolate sales when the weather returns to normal, it will suddenly find itself with more supplies than needed. The distributor and manufacturer will have even more excess inventory.

Another reason for the lack of information is that larger logistics operations at the wholesale level take longer to change, meaning that the conditions that caused a change in demand at the retail level may have passed by the time a wholesaler has reacted. As changing manufacturing output takes longer still and information from retailers is even more delayed in getting to manufacturers, the difficulty of reacting correctly to changes in demand increases even more so.

Even if the retailer had accurately assessed demand, for example, due to the start of a local hot chocolate festival, the bullwhip effect can still occur. The distributor, not being fully aware of local conditions, may assume this is due to a broad increase in the demand for hot chocolate, rather than specific conditions for that retailer. The manufacturer, being even more removed from the situation, would be even less likely to understand and correctly react to the change in demand.

Impacts of the Bullwhip Effect

In the example above, the manufacturer may be stuck with a significant surplus of product. This can lead to disruptions to the supply chain and to that manufacturer's business—increased costs associated with storage, transportation, spoilage, losses of revenue, delays to shipments, and more. The distributor and the retailer in this example may also see similar problems.

What Does a Bullwhip Effect Indicate?

A bullwhip effect indicates that a small error in assessing consumer demand has been amplified through a supply chain. This means communication between firms in a supply chain is imperfect leading to firms up the supply chain missing important information.