The Bullwhip Effect

What it does:
Helps manufacturers and wholesalers maximize the efficiency of production distribution.

Where it comes from:
The 2004 article "The Bullwhip Effect in Supply Chains" by Seungjin Whang, Sloan Management Review.

Summary:
In theory, manufacturers should be able to plan their outputs and inventories easily, based on consumer demand for their products. In reality, this is not the case. Outputs are influenced by The Bullwhip Effect, in which variable factors in the supply chain distort the rate of demand that manufacturers experience.

Case study: Seungjin Whang's article in Sloan Management Review analyzed P&G's production of diapers. The pattern of demand they experienced for diapers was determined not by consumer buying, but by orders placed by regional retailers concerned with stockpiling enough diapers to keep shelves stocked. If those retailers suddenly had too many diapers in stock, they cut orders. If they ran short of diapers, they placed unexpectedly large orders. The result was an artificial fluctuation in product demand that was largely independent of customer behavior. Interestingly, this fluctuation affected P&G's suppliers even more strongly than it did P&G itself. According to Whang, this is a normal aspect of the Bullwhip Effect: unpredictable variations in supply-chain demand cause disproportionately large ripples for manufacturers and their suppliers.

The negative results of The Bullwhip Effect include:
- Inefficient inventory management.
- Backlogged orders and poor service to product outlets.
- Unpredictable production schedules.
- High prices for raw materials because of immediate need.
- Lost revenues.

What else you need to know:
Information is the key to anticipating wildly fluctuating Bullwhip demands that result from information downstream (closer to the consumer) in the supply chain. The goal is to closely align production with real-world demands of distributors and retailers.