The bullwhip effect is a supply chain phenomenon where small changes at the demand level can have massive fluctuations the higher up the chain one goes. It’s not a new phenomenon since managers have been aware of it for years. However, in the past, mitigating it was a touch-and-go thing. It relied heavily on intuition, knowledge of the demand-supply dynamics of the core audience, and an ability to pivot quickly. Having too much stock as opposed to too little was seen as an acceptable tradeoff. Naturally, this led to highly inefficient supply chain management dynamics. Today’s interconnected supply chain offers us potential solutions to this problem.
Understanding the Bullwhip Effect in Action
The bullwhip effect may be due to several factors, including:
- Price Fluctuations: In situations where prices drop due to a discount, consumption rises and may impact the supply chain through the more significant demand.
- Order Batching: Occasionally, outlets may not place an order with a supplier until they have a particular “critical demand” value. This value will alter the variability in demand because it doesn’t directly represent the market demand thanks to the lag-time.
- Disorganization: In each chain, information isn’t passed efficiently from one link to the next. This lack of transparency in knowledge leads to disorganization, which further exacerbates the bullwhip effect.
As we can see, some of the issues involved in the bullwhip effect are mathematical, and others are social. These diverse sources complicate mitigating the impact since the causes can be all over the place.
Analytics and Digital Transformation Strategies to Help
Mathematically, the problem with the bullwhip effect is that it’s hard to pin down what’s causing the issue. A company can control its prices, but then it loses out on customer demand during sales. It could potentially stop order batching, but then it would lose out to paying extra transportation costs. Information sharing is one of the easiest ways to solve some of the bullwhip effect’s issues on the supply chain. Most businesses have had to estimate numbers when calculating the hard mathematical facts in the supply chain. Unfortunately, a minimal difference at the retail level can have a massive ripple at the supply level. The only way to face this issue is to implement a trust-based architecture for the supply chain.
Designing a New System
Building a system to deal with information sharing isn’t as complicated as the strategy planning that USEO performs. The technology to achieve this is already present in SAP and its linked systems. Most planning processes in supply chains have existed for decades without change. The rule of thumb is that if it’s not broken, don’t fix it. However, this las led to inefficiencies piling up. Now, all it needs is a very minor shift to bring the entire thing crashing down. Measurement is crucial in determining how the bullwhip effect impacts the supply chain from the bottom up. These numbers become more straightforward and less convoluted as information sharing improves across the supply chain. A new trust-based system needs to take into account the people that form the supply chain. By aligning it to their skills and knowledge, a business can create a unique architecture that allows for easy flow of information from and to all stakeholders.