By Marie Flounoy
A supply chain business faces many challenges as customer demand fluctuates over time. These fluctuations are best described as waves based on forecast-driven distribution channels. Usually, the highest link on the supply chain is hit the hardest. This phenomenon is called the bullwhip effect.
If you’ve been bullwhipped, you know the negative effects it can have on your business. If you’re not familiar with this occurrence, below are sure-tell signs to know if you have been bullwhipped, along with preventive actions and next steps to take.
What is the bullwhip effect?
The bullwhip effect, according to SAP Experts, is a “distribution channel phenomenon, in which forecasts yield supply chain inefficiencies” related to the increase or decrease of inventory in response to consumer demand. The supply chain consists of the manufacturer, wholesaler or distributor, retailer and consumer. The consumer is the whip holder, since a small change via the consumer demand can result in large variations upstream via the supply chain.
What causes the bullwhip effect, and how to prevent it
The top three causes of the bullwhip effect: A lack of communication or information, order batching and disorganization. The bullwhip effect can be decreased with strategic decision making and the solutions to the causes, below:
- Lack of communication and information. Without a clear flow of communication between each link in the supply chain, it is difficult to remain on the same wavelength. Also, each supply chain manager via each link may receive and perceive information differently. To prevent this, put in place a demand-driven supply chain (DDSC) management system. This allows the network to have less inventory and be more responsive. Accurate and timely information is crucial in supply chain management.
- Order batching. Order batching is used often to cut order costs. Each link has different order schedules, operating either weekly, bi-weekly, or monthly. To prevent this, companies can work with consumers and suppliers to build promotions and better understand trends.
- Disorganization. Thanks to technology and the internet, the logistics of your supply chain can be up-to-date and organized with the tap of a button. Tech combined with an adept manager, forecasting, planning and a good warehouse and shipping system can reduce the chances for the bullwhip effect to take hold—or simply tame it, if it occurs in your organization.
What are the signs that your company has been bullwhipped?
When your company has been a plagued with the bullwhip effect, there are various signs. These signs include distorted information, bad customer service, decreased revenue and delayed production schedules.
I’ve been bullwhipped now, what?
So, you’ve been bullwhipped; there are several actions you can take to reduce its effects.
- Review and update communication systems. As mentioned, the flow of communication and information is crucial to the success of each link in a supply chain. Each manager in the supply chain should develop a system. This system must determine market trends, including demands via consumers and market fluctuations.
- Avoid delays in the supply link. With various technology systems in place, many businesses can eliminate order to delivery time. This can result in a decrease of fluctuations, as well as operating costs. Find a better system or consider another service or supplier who can guarantee a faster delivery time for your business.
- Keep pricing consistent. Consumers buy more when market conditions are bad. While it may be the best decision to lower pricing to match bad market conditions, don’t. Keeping prices consistent will lower the risk of the bullwhip effect.