Where did it come from?
Also Known as: "Forrester Effect" or "Whiplash Effect"
Definition: Small changes in consumer demand may result in large changes upstream. As we know consumer demand is rarely known, thus forecasts are necessary to gauge demand. As inventory moves up the supply chain, from end consumer to OEM, it is apparent that each supply chain partner has a greater observed variation in demand; resulting in a greater need for safety stock.
Example: Company A has information about a slight change in demand for a product. This leads to Company B and Company C to keep more inventory for Company A. Once it is realized that the information was not accurate the ripple that began with Company A's demand forecast, has led to large waves throughout the distribution driven supply chain. Therefore if there are small changes in demand on a consumer level, whether that is a small increase or decrease, you will see how larger effects as you move upstream on the supply chain. There is no perfect supply chain management method and no pre-determined equilibrium point; only the ability to get more accurate information in shorter amount of time.
Contributors to the Bullwhip Effect: The Bullwhip effect can be seen if there is an overreaction to backlogs, if one neglects to reorder products in effort to reduce inventory, lack of communication and coordination both up and down the supply chain, and if there are time delays for information. Also if there is an anticipation of a shortage, it typically results in panic ordering to make up for lack of inventory previously, leading to a stockpile the next month.
What can be done to help control the Bullwhip Effect?
As information technology becomes stronger, and more companies use unified communication, there will be no lag times between channel partners. Furthermore, with most companies using electronic information flows, they are allowed to view suppliers and even their customers suppliers supply chains. Wal-Mart uses systems like this to try and keep ripples from becoming larger waves. Once an item is scanned at the register, that product is automatically ordered from their suppliers. Again, this system may never be perfected, but with advancements in communication technology, perhaps the end of the whip will not hurt as much as it did in past years.
Operations Management System