Which of the following activities is most likely to reduce the bullwhip effect?

Imagine a person having a long whip in his hand, and if he gives a little nudge to the whip at the handle, it creates little movements in the parts closest to the handle, but parts further away would move more in an increasing fashion.

Similarly, in the supply chain world, the end customers have the whip handle and they create a little movement in the demand which travels up the supply chain in an increasing fashion. As we move away from the customer, we can see bigger movements. On average, there are six to seven inventory points between the end customer and raw material supplier (as shown below in figure 1). Everyone tries to protect themselves from stock-out situations and missed customer orders, by keeping extra inventory to hedge against variability in the supply chain. Hence, huge buffers of inventories up to six months can exist between the end customer and raw material supplier. This bullwhip effect ultimately causes the upstream manufacturers to have increased uncertainty which results in lower forecast accuracies leading to higher inventories.

If you’re wondering how to get the bullwhip effect under control, we’ve written this guide for you. We’ve covered more extensively what the bullwhip effect is, what triggers it, and how it works in our Insights section, but here we’ll be going over some strategies to keep the bullwhip effect from negatively impacting your business.

What is the Bullwhip Effect?

The bullwhip effect happens when small decisions at the end of a supply chain have amplified effects the farther down the supply chain they go. There is a special danger of this as demand in the supply chain is increasing. A retailer could order 5% more stock, leading the manufacturers that supply it to order 10% more material to make that product, on the assumption the market for that product is increasing. The makers of the raw material then order 20% more of the material to produce the raw material, and so on. At some point when the demand drops off and the retailer orders less stock, the manufacturers down the supply chain are stuck with increasing amounts of excess inventory that must be worked through. A small amount of bullwhip effect can be healthy, as it creates a cushion in case the situation whips to the other extreme. However, it can often spin out of control and hurt the companies in the supply chain, especially at the end where the whiplash is strongest.

What is Reverse Bullwhip Effect?

The reverse bullwhip effect is a similar scenario, but it’s caused by volatile demand while production remains constant. Occasionally, both bullwhip and reverse bullwhip effect can combine, creating instability at both ends. An example of this can be found in the effects of coronavirus on Chinese-made medical supplies at the beginning of the pandemic. Certain supplies such as surgical masks saw a massive surge in demand, while factories in China had difficulties in restarting production because they didn't have the supplies for it. Although this article deals predominantly with how to avoid the bullwhip effect, some of these tips can also be used to deal with a combination of both effects.

How to Avoid the Bullwhip Effect

There is no single magic bullet to keep the bullwhip effect from affecting your company. However, you can use a combination of preventative measures and strategies to steady your supply chain and keep the bullwhip effect from becoming destructive.

• Take detailed stock of not only your own inventory, but also your suppliers’ inventories. Many companies don’t realize what the inventory of their suppliers looks like. When bullwhip effect is in force, your supplier’s supplier could have tons of spare inventory piled up, or they could be dropping their level of inventory right as you’re seeing a need for bigger orders.
• Consistently re-evaluate the amounts of safety inventory you have, as well as your minimum and maximum inventories. Make sure they are appropriate and adjust them as necessary. Use regular reporting and early warning systems to help evaluate these factors, and base the amounts stocked in each region on the amount of demand there is for them in that region.
• Communicate clearly down the supply chain. Make sure everyone knows what the final customer needs, and companies in each tier are aware of the outstanding inventory of their suppliers and customers. At the same time, ensure there is effective communication and sharing of information between internal departments to avoid misordering. Finally, regularly communicating with your customers is also important to make sure you have accurate and up-to-date forecasts. Know their inventory, busy seasons, forecasts, and their market’s level of demand.
• Cut down on lead time and delays. Cutting delivery time in half reduces the bullwhip effect by 80%. The faster materials move through your chain to become finished products, the more it avoids inventory piling up somewhere. You can ship multiple types of items per truck or use third-party logistics to continue to help save in shipping costs with smaller orders. In the same vein, avoid bottlenecks by keeping extra spares of critical parts and reducing order times.
• Reduce order sizes and order more frequently. This allows you to respond to the market’s activity with more agility, which can also help with reverse bullwhip effect. Make sure your production plan also leaves enough time to order the materials for it, since not taking lead times into consideration can leave you overstocked. A demand-driven supply chain can help as well, since it eliminates the need to plan in advance. However, as has been shown with pandemic supply chains, these methods can be risky since supply chain disruptions can leave you without inventory. The more of your supply chain is local, the less danger you are in of missing inventory from international lockdowns.
• Reduce your supply chain. Minimizing the amount of suppliers and the number of tiers in your supply chain can help to shorten the bullwhip. It makes communication easier, and also leaves less space for the reverberations of a decision to amplify through the chain.
• Improve your forecasts. This can involve upgrading your software, but it doesn’t have to. You can also gather input from your sales team and customers, and evaluate the algorithm to see if it’s the right one for your company and your market.
• Use technology to help you. Supplier portals can help with communication, and supply chain automation software can speed up the process and streamline your supply chain. You can also use inventory management technology to avoid human error and save time.
• If your company is a retailer, use standard low prices instead of sales. Sales can create rushes from customers trying to get a deal. If your company allows returns from customers, make sure they won’t have much reason to return or cancel orders by offering repairs or increasing your quality requirements.  

Conclusion

Proofing your supply chain against the bullwhip effect may not be an overnight process, but we hope that by strategically applying some of these tactics, you’ll be better able to control it in the midst of all kinds of market conditions. If you’re interested in learning more about demand planning, or other logistical and technical topics, feel free to check out our technical guides section. If you’re more interested in finding the suppliers to make up your supply chain, you can also visit our Supplier Discovery page, which has detailed information on over 500,000 North American companies.

Sources:

1. https://www.nsf.gov
2. https://www.dummies.com/business/operations-management/how-to-avoid-the-bullwhip-effect-in-operations-management/
3. https://blog.gppcpa.com/blog/2015/07/30/4-ways-supply-chain-management-can-reduce-the-bullwhip-effect
4. https://blog.arkieva.com/what-is-bullwhip-effect/
5. https://www.tradegecko.com/inventory-management/bullwhip-effect
6. https://www.supplychain-academy.net/understanding-the-bullwhip-effect-in-supply-chains/
7. https://yourbusiness.azcentral.com/reduce-bullwhip-effect-14400.html

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• What is a Request for Offer (RFO)?
• Make to Order vs. Make to Stock: What's the Difference?
• The Role of the Chief Procurement Officer
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• Is Make-to-Stock (MTS) the Right Process for Your Manufacturing Company?
• What is Sourcing?
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• 8 Types of Waste in Lean Manufacturing
• Vertical Integration 101: Considering Your Supply Chain Options
• What is Carrying Cost of Inventory?
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