The bullwhip effect is an important phenomenon in supply chain operations that clearly outlines how minor spikes in consumer demand at the retail level can magnify bigger problems when they move upstream within the supply chain ecosystem. This, in turn, causes inefficiencies such as excessive inventory, understocking, and spikes in operational costs.
In this blog, we will understand how the Bullwhip effect works by taking a practical example, its causes, how it impacts supply chain operations, and how a mobile warehouse management solution (WMS) works best to minimize this effect.
Consider a retailer whose business is to sell umbrellas. During the rainy season, sales increase by over 40% due to demand for umbrellas. With this, the retailer develops a false impression that demand will continue and hence places a larger order with its distributor. The distributor, seeing this demand from multiple retailers, places a much larger order with the manufacturer. The manufacturer ultimately increases the production output to match this unusual demand increase.
However, once the rains drop and winter sets in, this unusual consumer demand drops all of a sudden to its normal levels. The retailer is now left with excessive inventory, while the distributor and manufacturer need to brace up with surplus inventory.
The bullwhip effect is caused due to several factors as follows:
A complex chain with multiple intermediaries such as retailers, distributors, and manufacturers lacks visibility across multiple stages. Each entity within this supply chain fosters independent decision-making, taking into consideration archaic or unrelated data, which in turn maximizes demand fluctuations.
Poor or incoherent communication between multiple supply chain partners amplifies this problem. For instance, when there is a delay in sharing sales or inventory data, it results in excessive production or underproduction, which hinders supply chain agility. Fostering trust between the partners and sharing the right information at the right time minimizes this effect.
Considering only the historical data without taking into consideration real-time trends leads to inaccurate forecasts.
Placing huge orders at infrequent intervals can minimize transaction expenditure but generate unusual demand spikes that ultimately distort production schedules and proper inventory planning.
When you place more emphasis on promotional activities, it can create artificial demand, enabling suppliers to overestimate future requirements. However, when demand comes to its normal stage after the promotional activities end, it leads to the building up of excess inventory.
When there is a delay in manufacturing or shipping, it leads to businesses maintaining higher safety stock levels that negatively impact the costs and efficiency.
Here’s how the bullwhip effect negatively impacts supply chain efficiency:
Irregular ordering trends generate either excess inventory or under inventory levels. Excessive inventory leads to capital getting tied up, increasing storage costs. On the other hand, under-inventory leads to lost sales and poor customer satisfaction.
Manufacturers face the challenge of enhancing production schedules on account of unpredictable demand surges or drops. This leads to increased setup costs and poor resource utilization.
Irregular demand patterns lead to increased deliveries or inefficient transportation routes. This increases logistics and warehouse costs due to excessive stock.
When stockouts arise due to fragmented supply chains, they negatively impact customer satisfaction and brand loyalty.
Suppliers face a multitude of challenges to meet unreasonable demand forecasts, resulting in surged production costs and potential quality concerns. Over a period, these challenges negatively affect relationships across the supply chain.
To effectively mitigate the negative effects of the Bullwhip effect, adopt the following strategies:
Foster clear communication methods among your supply chain partners by constantly sharing real-time time on sales patterns, inventory levels, and market dynamics.
Leverage advanced forecasting solutions that use real-time data and predictive analytics, instead of depending primarily on historical trends. Demand-driven prediction aligns your production requirements with current market trends.
Always adopt smaller but more frequent orders, rather than going for bulk orders for seamless demand patterns across the supply chain.
Refrain from excessive or extravagant promotions that generate unusual demand surges. Adopt a dynamic pricing pattern to maintain consistent consumer dynamics.
Optimize logistics processes by fruitfully collaborating with suppliers. On the other hand, optimize transportation routes to minimize delays in order deliveries.
An automated solution such as a warehouse management solution (WMS) or an inventory management solution (IMS) can positively impact the Bullwhip effect in an organization’s supply chain. An automated desktop solution can positively impact your inventory operations. However, such a desk-top, ERP-based solution may not be suitable for all types of personnel, specifically those working across remote warehouses, where accessing quality data is a challenge. In such a scenario, a mobile WMS serves as the best alternative to the traditional ERP systems and offers much more to make the lives of your warehouse personnel comfortable and fruitful.
In this context, adopt a good mobile WMS as offered by Propel Apps, a leading digital transformation company. This solution seamlessly integrates with your in-house ERP system (Oracle or SAP), enabling your workforce to access and process inventory transactions, anytime, anywhere. In other words, this solution extends the power of the ERP platform to your front-line workforce, simplifying their work with inventory, manufacturing, warehousing, and asset maintenance.
By adopting this solution, your warehouse personnel can enjoy the following benefits, while effectively combating the bullwhip effect:
To know more about this solution and how it can optimize your organization’s supply chain ecosystem, schedule a free demo with us.
The bullwhip effect is a major headache across a supply chain eco-system, negatively impacting all the connected entities – retailers, distributors, and manufacturers, However, by digging deep into the real causes of this effect and implementing corrective measures, an organization can significantly minimize this impact. Above all, adopting a good mobile WMS solution can work wonders and can provide a plethora of benefits, right from providing real-time insights and accurate demand forecasting to effective collaboration across all the stakeholders of an organization. So, fasten your seats and audit your supply chains to make them more agile, transparent, and customer friendly.
