The bullwhip effect is the unanticipated distortion in a supply chain brought on by a recurrent fluctuation in demand.
It can cause a variety of supply chain issues that can be expensive for businesses.
Because customer demand will change all the time, the bullwhip effect will happen at some point in any business, hence accurate planning and forecasting are crucial to prevent stock-outs or surplus stock.
In today’s post, we will help you with how to reduce bullwhip effect successfully.
What is the definition of the Bullwhip Effect?
In supply chain management, the term “bullwhip effect” (sometimes called “whipsaw” or “whiplash”) describes the phenomenon of rising inventory variations in reaction to shifts in demand from customers as one proceeds higher to the supply chain.
In other terms, as customer demand serves as the whip handle, inventory swings in increasingly larger “waves.” The greatest “wave” of a whip strikes the raw material provider, which results in the greatest volatility in demand as a result of shifting consumer demand.
There are a plethora of circumstances that can contribute to the bullwhip effect, but a few of the most frequent ones are as follows:
Forecasting mistakes. On the basis of business demand estimates, decisions are taken at every stage of the supply chain. Forecasting mistakes result in computations that get worse as they progress up the supply chain.
Order batching. Smaller orders placed more frequently have less of a bullwhip impact than larger ones placed less commonly. Order batching allows the retailer to make purchases with its provider only once a month (as opposed to numerous times all through the month), which over time results in inconsistent demand for the provider.
Lead time. The lead time is the period of time between placing and receiving an order. While managing inventory, failure to take lead time into account can result in overstocking of goods, which in turn causes a change in supplier demand over time or the bullwhip effect.
Promotions and price cuts. A boom-and-bust cycle is produced through sales and discounts. During the period of the promotion, a lot of product is moved, followed by a decline in sales. The bullwhip effect is caused by this cycle, which has an impact on the entire supply chain.
The bullwhip effect occurs when minor decisions made at the top of a supply chain produce consequences that are amplified as they move further down the chain. This poses a particularly high risk because the supply chain’s demand is rising.
On the idea that the market for a certain product is expanding, a retailer might order 5% more inventory, which would prompt the suppliers to order 10% more raw materials to build that product. The producers of the raw material then place another order for 20% more of the material.
The manufacturers farther down the supply chain are saddled with growing amounts of surplus inventory that have to be dealt through when demand eventually declines and the seller orders fewer goods.
Bullwhip effects are sometimes beneficial as they act as a safety net in case things go too far in one direction. Nevertheless, particularly at the end when the whiplash is sharpest, it can frequently spiral out of hand and harm the supply chain companies.
How to minimize the bullwhip effect
All industry has a different supply chain, places for their goods, and complexity. Yet, inventories can be lowered by 10 to 30% after studying the bullwhip effect and taking corrective action, and the frequency of stockouts and missing customer orders can be decreased by 15 to 35%.
The bullwhip effect can be reduced using some of the techniques listed below.
Recognize and appreciate the bullwhip effect
Recognizing the bullwhip effect’s existence is the initial and most crucial step toward development. Many businesses ignore the fact that the supply chain has substantial buffer inventories.
Discovering idle excess stocks will be aided by a thorough stock assessment of the inventory sites from retailers to suppliers of raw materials. Supply chain leaders need to set norms, take remedial action, and further evaluate the causes of excess inventory.
Enhance the process of planning your inventory
Planning your inventory involves carefully balancing past demand patterns for seasonal changes, desire for new products, product launches, and product discontinuations.
Every inventory point’s safety stock levels and min-max inventory range need to be examined and updated from time to time. It is necessary to balance the network’s inventories based on local demand. The implementation of regular updates and early alert systems is required for significant departures from the established inventory norms.
Optimize the planning of the process of the raw material
Procurement managers typically place advanced orders and maintain large raw material reserves to prevent production interruptions. Planning for raw materials must be closely related to the manufacturing schedule. The production schedule must be made public far enough in advance to take into account the typical lead times for purchases.
For similar raw materials, consolidation to a small supplier base from a larger supplier base will increase the suppliers’ flexibility and dependability. Lower inventories of raw materials will follow from this.
Information exchange and cooperation among management
Targets set by purchasing, production, logistics, and sales managers may be in competition with one another.
Collaboration across various departments will be improved by giving common business objectives more weight when evaluating performance. Additionally, having frequent, organized interdepartmental meetings can enhance communication and decision-making.
Increase the minimum order amount while maintaining pricing
There are generally large gaps between consecutive orders since some products have high minimum order quantities for end users. It will help to produce smoother order patterns if the minimum order quantity is decreased to an ideal level.
A steady and predictable demand could also be produced by consistent prices all year long as opposed to regular promotional offers and reductions.
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Apply technology to boost processes
To optimize and streamline the supply chain activities, including inventory management and planning, raw material planning, and managing supplier relationships, businesses might think about investing in supply chain automation.
Your business may encounter difficulties as a result of the hastened transition to e-commerce, including a quick increase in online sales, uncertain demand, personnel shortages, and increased standards for safer operations.
Your business should use technology to streamline its warehouse because labor-intensive operations are frequently vulnerable to faulty sorting.
Your business was able to streamline warehouse operations, lower labor costs, and increase sorting accuracy and efficiency thanks to the use of technology.
Continuous inventory evaluation
Company supply chain managers should regularly review their safety stock levels and the minimum-to-maximum inventory range of every inventory point, and adjust as needed. To better analyze these issues, companies may choose to use regular reporting and technologies like early detection systems.
Cut back on delays and lead times
Bullwhip impact danger can be considerably decreased by reducing the purchase and delivery time. Less inventory is built up the faster raw materials travel thru the supply chain to become final goods. Businesses can think about sending a variety of goods on the same truck or using 3PLs to reduce shipping expenses for smaller orders.
Lower purchase quantities and provide reliable pricing options
Businesses can also cut back on their order volumes, which will provide them more flexibility and quickness in how they react to market activity. Additionally, companies can provide standard low pricing rather than frequently promoting reductions that may trigger unexpected changes in demand.
These are five recommendations that supply chain experts can use to lessen the bullwhip effect’s negative effects on their supply chain. Your supply chain will be more stable overall and will prevent the negative effects of the bullwhip effect with careful design and implementation of these best practices.
Upgrading your forecasts
Your program may need to be upgraded for this, but it isn’t required. Additionally, you can solicit feedback from your sales staff and consumers and assess the algorithm to determine whether it is the best choice for your business and your industry.
The Bottom Line
Decision-makers will be searching for more effective ways to enhance information passed down the supply chain and optimize supply chain management procedures as more organizations start to understand the consequences of the bullwhip effect.
It could take some time to protect your supply chain from the bullwhip effect, but we believe that by deliberately implementing some of these strategies, you’ll be better equipped to manage it in the face of a variety of market situations.
It’s crucial to have a forecast that can constantly change to low or high demand as well as the capacity to evaluate your supplier’s performance!