Bullwhip Effect: 3 Causes of the Bullwhip Effect

The bullwhip effect occurs when customer demand shifts at the retail level, leading retailers to overreact and change their demand forecast in too stark of a way. One misplaced diagnosis about demand from one retailer can cause the entire supply chain to produce more or less of a good than necessary.

This small action at the end of the supply chain causes distributors further back in the same chain to drastically change their own ordering, leading to potential disruptions, overstocking, delayed lead times, shortages, and a reduction in profitability for everyone involved. The effect can happen on both a localized scale or more broadly in global supply chains.

The effect gets its name from the idea a mere flick of the wrist can cause a bullwhip to oscillate wildly as it stretches out. Another name is the “Forrester effect” after Massachusetts Institute of Technology (MIT) professor Jay Forrester, who lectured on supply chain fluctuations.

Supply chain partners must all remain vigilant to prevent the bullwhip effect from having an adverse impact on their sales. Follow along with these stages to learn how the effect manifests:

• Retailer to wholesaler: As an example of the bullwhip effect, suppose a convenience store keeps fifty cases of soda as a safety stock in their store—in other words, enough to comfortably meet demand in most circumstances. Now imagine something happens—a heat wave, a successful marketing campaign for the soda, or something else—to cause people to buy forty-five cases, depleting the safety stock to just five cases. These changes in demand then cause the retailer to order more cases from their wholesaler.
• Wholesaler to manufacturer: Suppose a retailer increases their usual order of fifty cases of soda to seventy cases to compensate for a recent rise in demand. This will, in turn, cause their wholesaler to believe they need to increase their own available backlog for order batching. In a bullwhip effect scenario, they will do so even if increased demand is entirely transitory, leading to a potentially needless ballooning of excess inventory as the wholesaler orders still more goods from the initial manufacturer.
• Manufacturer to raw materials supplier: Once a wholesaler places a larger-than-usual order with the manufacturer, the manufacturer will then repeat this on an even grander scale with their own raw material suppliers. They do so to be able to send more goods down through their distribution channels. If the demand remains truly high, the system works as intended; however, if it was merely a blip and the demand returns to more realistic levels shortly thereafter, this can lead to overstock and damaging price fluctuations as a result.

The bullwhip effect happens for various reasons. Here are three primary causes of the bullwhip effect in supply chain management:

1. 1. Inaccurate data: Sometimes a retailer might merely mistake a certain data point and send that mistake all the way up the supply chain. This inaccurate demand forecasting leads to market inefficiencies, improper inventory levels, and increased pricing variability.
2. 2. Lack of communication: If a retailer makes a forecast error, they can sometimes stop the bullwhip effect before it begins by submitting the right customer demand information to their wholesaler before the process starts. Vigilant operations management is essential at each level of the supply chain for this and many other reasons.
3. 3. Surprise shifts in demand: Occasionally, buying patterns shift unexpectedly, and it’s nearly impossible to avoid making a potentially inaccurate forecast as a result. All you can do in this scenario is ensure you remain communicative about the most accurate product demand news of which you’re aware. The sooner you can nip inaccurate information in the bud, the sooner you’ll be able to get to more efficient and suitable levels of product replenishment.

Learning how to forecast demand appropriately is just the first step in reducing the impact of the bullwhip effect. Keep these tips in mind as you set out to optimize your operations management:

• Communicate clearly. It’s common to rely heavily on automation for information sharing about product demand. In most cases, this makes the supply chain more efficient. Still, in the case of the bullwhip effect, do what you can to communicate changes in demand to your wholesaler directly. Aim to balance software optimization with a manual override of sorts if you notice a discrepancy like this arise.
• Keep a level head. Unexpected demand signals can disrupt your production planning or ordering schedule. Do your best to avoid an overreaction in these scenarios. Keep a cool head and view any surprising increases or decreases in demand at the retail level with a cool head. This frees you up for more objective real-time decision-making.
• Seek out more effective methods. Adopt better forecasting methods to streamline your process and mitigate the bullwhip effect. For example, consider pursuing a vendor-managed inventory (or VMI) strategy in which vendors make decisions about inventory from a more objective, wide-angle perspective rather than retailers who can only see demand on a local scale.

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