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The Bullwhip Effect is a phenomenon in the supply chain and distribution channels in which forecasts reveal supply chain inefficiencies. This mostly occurs when retailers become highly reactive to consumer demand, and in turn, intensify expectations around it, causing a domino effect along the chain.
The bullwhip effect was named for the way the amplitude of a whip increases down its length. Here, the end customers have the whip handle, and as they create a little movement, whip amplifies traveling up, increasing the buffer between the customer and the manufacturer. On average, there are 6 to 7 inventory points between the end customer and raw material supplier.
Better communication among supply chain partners, better forecasting methods, and a highly demand-driven approach can help reduce inventory waste or over-stocking that result out of the bullwhip effect.
Some of the factors contributing to the bullwhip effect are –
Let’s take a look at an example of the bullwhip effect. As we know, the actual demand for a particular product and its materials begin with the customer demand and requirements. However, there are times when the actual demand for the product gets distorted or disturbed going down the supply chain.
Let’s assume for a while that the actual demand of the customer is 8 units, and the retailer may then order, say 10 units from the distributor – here the extra 2 units are to ensure there is safety stock in place and the retailer is not running out of floor stock.
Coming back to the supplier, he, then orders 20 units from the manufacturer, allowing the retailer to buy in bulk so that there is always enough stock to guarantee the timely delivery of goods to them. Now, the manufacturer makes sure that there is enough quantity to ship to the supplier, so they manufacture 40 units to stay on a safer side.
What happened here is clear. There are 40 units manufactured for something that has a demand of 8; meaning the retailer now has to push himself when it comes to increasing the demand by either dropping the prices or finding more and more customers via marketing or advertising.
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The nature of the supply chain and inventory management practices differs from each industry. Below are some of the ways in which you can minimize the bullwhip effect in your supply chain and distribution channel.
The strategy for an efficient supply chain and distribution channel is open communication and collaboration between customers and suppliers, and information sharing within the management of the company. These small but essential improvements will streamline the supply chain process and prevent risk and loss associated with excess inventory.