What is the Bullwhip Effect and How to Prevent it

Supply chain consists of several layers, through which a product reaches a consumer. These layers include suppliers, factory, warehouse, distributors, retailers and customers.

Some of the aspects of the supply chain such as delays, decisions such as time and supply of orders taken by the people in the network of the supply chain, demand for the supply, etc., result in bullwhip effect. These kinds of demand distortions, fluctuations and variance amplifications in the supply chain lead to this effect.

Beer distribution game is a simulating game that depicts the concept of this effect. This game was created in 1960s by MIT Sloan School of Management professors, to make their students understand this effect and other principles in supply chain management.

The product used in this game is 'beer' and so the name, beer distribution game. Multiple teams consisting of minimum four players each, were allowed to play in this game. The players in the supply chain start playing by receiving the orders from the downstream of the supply chain and then place orders to the players in the top of the supply chain.

The rule of the game prohibits verbal communication between the players. Backlogs in the inventories were also apparent during the game. The total time of the game is 60-90 minutes, and debriefing takes the same time approximately.

The demand in each layer of the supply chain varies from the customer to the supplier. The quantity expectation decreases down the supply chain from the supplier to the customer. So, if something goes wrong in forecasting the demand, it may cause distortions in the supply chain.

Retailers, in order to reduce the processing and transportation charges, increase the quantity of orders per batch. This causes misconceptions in the suppliers layer and they increase their production due to which variations occur in the demand cycle of the supply chain.

There are several factors that determine the price of a commodity. The quantity of products being sold, will increase during sales offer and discount period.

Also, there are certain economic factors like inflation, deflation, etc., that change the attitude of the consumer to buy more or buy less. All these things put together causes this effect in the supply chain, as it is not possible to predict the future price of the product.

During a certain period of time, the supplier restricts the flow of items in the supply chain. This process is called rationing. Rationing is mainly done to complement the price control measures and also to preserve the goods for later use, when it becomes scarce.

But the customers in the supply chain presume that there is shortage in the production of goods and they tend to order more, expecting that they might receive only half of the quantity they ordered. This will affect the flow of the supply chain and cause this effect.

Production and supply of goods according to the demand will help to reduce this effect. To implement this strategy, it is important to analyze the statistics of consumers who demand the particular product.

For example, if the product involved is a shaving cream, it is important to estimate the number of men in a particular region who might use shaving cream. This can be found by deducting the number of woman and children in the area of demand.

There are several other factors such as income, age, price, preferences, customer satisfaction, etc., that determine the demand which needs to be analyzed in order to prevent this effect.

The reducing variability concept is simple and it will be clear from the following example. Suppose, there is a bike manufacturing company X which manufactures three different types of bikes, but produces same type of tires for their bikes.

X supplies the bikes to a retailer company Y, which expects the bikes with different tire sizes. In this case, variability problem comes into existence. To avoid this effect, reducing the variability is advisable.

Vendor Managed Inventory (VMI) is a strategy used in production sector, where the manufacture manages the quantity of the goods produced by his industry and the manufacturer will decide how much inventory he should ship to the retailer and how much inventory he should reserve in his stock.

Lead time is the time taken for a product to reach the customer from the time of placement of order. The three stages of lead time are preprocessing time, processing time and postprocessing time.

• Preprocessing time, which is also known as the planning time, is the time needed to decide on the quantity and quality of the product, before placing the order.
• Processing time is the time required by the other company to manufacture the product.
• Post processing time is the time required to do the quarantine and inspection process, after manufacturing.

After the lead time, the product will be available in the inventory after receiving the item from the manufacture or retailer. Lead time can be reduced by measuring and eliminating the errors made during the lead time process.

Lead time can also be reduced by using Electronic Data Interchange (EDI) strategy. "Just-in-Time" (JIT) is a popular strategy used by manufacturing and production companies to improve efficiency in their business.

Thus, for stable supply chain and development in the business growth, it is important to understand the causes and effects of this effect.

Implement the business strategies and identify the errors that pull you down in your business; more importantly, analyze the supply chain process, and take the suitable decisions without precipitation, to tackle the demand variations.