The Bullwhip Effect
Causes. Countermeasures.last updated Wednesday, January 15, 2020
#Bullwhip Effect #
| John Burson | Subscribe |

CONTENTS
An unmanaged supply chain is not inherently stable. Demand variability increases as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result in large variations in orders placed upstream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomenon is known as the bullwhip effect and has been observed across most industries, resulting in increased cost and poorer service.
Causes of the Bullwhip Effect
Sources of variability can be demand variability, quality problems, strikes, plant fires, etc. Variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect. The following all can contribute to the bullwhip effect:
-
Overreaction to backlogs
-
Neglecting to order in an attempt to reduce inventory
-
No communication up and down the supply chain
-
No coordination up and down the supply chain
-
Delay times for information and material flow
-
Order batching - larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of transportation economics such as full truck load economies, and to benefit from sales incentives. Promotions often result in forward buying to benefit more from the lower prices.
-
Shortage gaming: customers order more than they need during a period of short supply, hoping that the partial shipments they receive will be sufficient.
-
Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand.
-
Free return policies
Countermeasures to the Bullwhip Effect
While the bullwhip effect is a common problem, many leading companies have been able to apply countermeasures to overcome it. Here are some of these solutions:
-
Countermeasures to order batching - High order cost is countered with Electronic Data Interchange (EDI) and computer aided ordering (CAO). Full truck load economics are countered with third-party logistics and assorted truckloads. Random or correlated ordering is countered with regular delivery appointments. More frequent ordering results in smaller orders and smaller variance. However, when an entity orders more often, it will not see a reduction in its own demand variance - the reduction is seen by the upstream entities. Also, when an entity orders more frequently, its required safety stock may increase or decrease; see the standard loss function in the Inventory Management section.
-
Countermeasures to shortage gaming - Proportional rationing schemes are countered by allocating units based on past sales. Ignorance of supply chain conditions can be addressed by sharing capacity and supply information. Unrestricted ordering capability can be addressed by reducing the order size flexibility and implementing capacity reservations. For example, one can reserve a fixed quantity for a given year and specify the quantity of each order shortly before it is needed, as long as the sum of the order quantities equals to the reserved quantity.
-
Countermeasures to fluctuating prices - High-low pricing can be replaced with every day low prices (EDLP). Special purchase contracts can be implemented in order to specify ordering at regular intervals to better synchronize delivery and purchase.
-
Countermeasures to demand forecast inaccuracies - Lack of demand visibility can be addressed by providing access to point of sale (POS) data. Single control of replenishment or Vendor Managed Inventory (VMI) can overcome exaggerated demand forecasts. Long lead times should be reduced where economically advantageous.
-
Free return policies are not addressed easily. Often, such policies simply must be prohibited or limited.
Subscribe to Paperfree Magazine
Free Paperfree Concierge Service
Paperfree Concierge
Get dedicated service, from finding the right information to complex investment challenges.

Real estate investment strategies

Multifamily investment strategy to boost investment portfolio returns.
Diversify in multifamily investment strategy to lower volatility and boost portfolio returns.

Value add real estate strategy helps investors drive capital growth.
The value add real estate strategy's first goal is capital growth, the second goal is some income. The strategy works with all property types

Investing in senior housing. Invest in senior housing real estate to drive stable returns.
Senior living investments will create social impact on the market with strong fundamentals: growing demand, resilience to economic cycles.

Invest in build to rent investment funds
Build to rent investment funds for passive real estate investing.

Invest In Real Estate Private Equity
Discover diverse private equity real estate investment opportunities.

Core real estate investment strategy to drive income vs capital growth
Core Real Estate Strategy is one of the most conservative modern real estate investment strategies focusing primarily on income.

Passive real estate investing, best investment strategies, opportunities and more.
Passive real estate investing allow you to be a silent partner in large-scale real estate investments that can produce earnings and return on investment.

Invest in Syndication Real Estate
Investing in real estate syndicates as a part of alternative investments strategy

Investing in apartment buildings
Apartment investments are a sound investment option for numerous investment strategies.

Multifamily value add strategy
The main attribute of the multifamily value add strategy is the focus on capital growth. The investment strategy has a median risk profile.

Core plus investment strategy real estate to generate income
Core Plus Strategy focus to generate income based on mid-low risk profile. Learn more.

Opportunistic real estate investment
Opportunistic real estate investment strategy drives capital growth with heights risk of default.

EB5 investment projects
Find the best fit your immigration and investment goals EB5 investment projects