Bullwhip Effect in Supply Chains refers to the large variability in the number of orders which affect companies. These companies are avoiding excess stocks and try to foresee the future product demand to cope with the market. This case study discusses the bullwhip effect, what it is, and why it is considered a problem. It also looks into the possible ways to alleviate its impact in the supply chains of these companies.
V. Padmanabhan, Seungjin Whang, Hau Lee
Harvard Business Review (SMR029-PDF-ENG)
April 01, 1997
Case questions answered:
- Discuss the bullwhip effect, what is it, why it is a problem, what are possible ways to alleviate its impact?
- The case notes that demand forecast error is a major cause of the bullwhip effect. Discuss this aspect of operations and how to forecast error within a company may lead to the bullwhip effect in the supply chain.
- What other aspects may also lead to the bullwhip effect?
- Provide recommendations on how the bullwhip effect might be mitigated.
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Case answers for Bullwhip Effect in Supply Chains
Introduction – Bullwhip Effect in Supply Chains
Bullwhip effect is a situation that results from a distortion of information from one end of the supply chain to the other. It can lead to tremendous inefficiencies in the supply chain. The negative impact of bullwhip can be costly to a company. Bullwhip effect can lead companies to have ineffective transportation, poor planning, and scheduling, and excess inventory, or lack of inventory.
Surplus inventory can be costly to a company, especially if the customer’s demand does not increase hence resulting in wasted resources. On the other hand, insufficient inventory can lead to poor customer service due to unfulfilled orders and unavailable products. Such mistakes can seriously affect the cooperation, relationships, and profitability of an organization.
The main problem presented in the case is demand variability due to forecasts errors and its impact on manufacturing, inventory management, and logistics operations. Another problem is the lack of coordination in terms of information sharing and forecasting demand at each stage of a supply chain that affect supply chain performance.
Other aspects that also lead to the bullwhip effect include order batching. It may occur when order quantities from customers are rounded up or down to suit production constraints or when there are price fluctuations as a result of offering discounts. It may also be a result of other cost changes that disrupt the regular buying patterns, long lead times due to delays in shipping and manufacturing, and unexpected high or low orders.
Forecasting errors and bullwhip effect.
Estimating demand based on demand forecasts rather than actual customer demand leads to forecasting error. Bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, and then manufacturer. A change in any link along the supply chain can have a severe effect on the rest of the supply chain.
For example, a retailer might observe a significant demand or sales than expected and may decide to order more inventory than is needed to prevent shortages or lost sales in the future. This is passed to the wholesaler who observes more demand, some of which are not actual demand than usual and decides to increase inventory. The distributor may then respond by ordering double inventory from the manufacturer to ensure they are no shortages. This causes more demand for the manufacturing company forcing the manufacturer to produce more stock as well. In the end, the increased demand has been raised, leading to a bullwhip effect in the supply chain.
Discounts, price variations, and cost changes can disrupt the…