April 11, 2022

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The Bullwhip Effect


If you have been wondering why the supply chain has been so chaotic, you can blame "The Bullwhip Effect." "The Bullwhip Effect" describes what happens when changes in consumer demand have an outsized impact as they travel back through the supply chain. The term relates to the effect of cracking a bullwhip; a slight movement of the handle can make an outsized movement at the end of the whip.


Here is a description of how it works using ice cream sales as an example. I found this on the CPIS website (Chartered Institute of Procurement and Supply):


Let’s consider a retailer sells on average 10 ice creams per day in the summer season. Following a heatwave the retailer's sales increase to 30 units per day, in order to meet this new demand, the retailer increases their demand forecast and places an increased order on the wholesaler to 40 units per day in order to meet the new customer demand levels and to buffer any potential further increase in demand, this creates the first wave in the exaggerated demand being driven down the supply chain.


The wholesaler noticing this increase in demand from the retailer may then also build an incremental increase into their forecast so generating a larger order on the ice cream manufacturer, rather than ordering 40 units to be manufactured, the wholesaler may order 60 units from the manufacturer, this will further exaggerate the demand down the supply chain and so creates a second wave of demand increase.


The manufacturer also feeling the increase in demand from the wholesalers may also react to the increase by increasing their manufacturing run to 80 units, this creates a third wave in the exaggeration of demand.

The retailer may run out of stock during the heatwave whilst the manufacturer is producing new stock and may take the option of switching to an alternative brand to meet customer demand, this will then create a false demand situation as sales appear to slump to next to nothing so the retailer may then not place further demand for the original ice cream brand even though the manufacturer has increased their production runs. Alternatively, if the weather changes and the end consumers slow down on purchasing ice creams, this could result in an overstock situation across the supply chain as each tier of the supply chain has reacted to the heatwave sales and increased their demand. This is an example of the waves and troughs in the bullwhip effect.