Bullwhip Effect: Causes & Effects

Bullwhip Effect: Causes & Effects
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  • 0:20 Bullwhip Effect Defined
  • 0:51 Example
  • 2:52 Causes Of The Bullwhip Effect
  • 3:42 Costs Related To The…
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Lesson Transcript
Instructor: Shawn Grimsley
Failure to manage a supply chain effectively can lead to inefficiencies. In this lesson, you'll learn about the bullwhip effect, including what it is, its causes and effects, and what to do to stop it. A quiz follows.

Bullwhip Effect Defined

If you have ever dropped a stone into a calm pond, you've probably noticed that the ripples at the point of impact are about the size of the stone, but they quickly grow larger and larger as they move out. A small impact can create large consequences. The same is very much true in a supply chain, and we call it the bullwhip effect.

The bullwhip effect is a distortion in the supply chain that occurs when suppliers up the supply chain order more goods based on forecasted consumer demand rather than actual consumer demand. This results in an excess of inventory in the supply chain. We use the term 'bullwhip' because the oscillation in demand builds up the chain, like the oscillations in a whip that is cracked tends to grow larger as the force is moved down to its tip.

Example

While the bullwhip effect may sound technical and complicated, it really isn't. A quick example will illustrate the rather simple idea.

Let's say that you are the store manager of a local supermarket chain in a large U.S. city. Unbeknownst to you, there has been a series of block parties in the neighborhoods surrounding your store. As a consequence, there was an unusually high demand for potato chips this weekend. You can think of the partygoers as the person cracking the whip. You misread the situation and forecast demand for potato chips that is actually far more than what real consumer demand will be next weekend. In fact, you compound your overestimation as you order more than you think you need because you don't want to run out of inventory. The whips oscillation gets bigger.

The whip's not done yet. Your potato chip distributor notices an uptick in your order and, thinking the same way you do, orders more inventory than it forecasts as necessary to make sure it can fill all your orders. And of course, you're not the distributor's only customer, so the distributor aggregates all of its orders from you and the other grocery stores and places a huge order to its suppliers. The whip's still not done yet, and the oscillations are getting bigger.

The manufacturer of the potato chips misreads the demand from your distributor and the other distributors it services and ratchets up its production and demand for supplies from its suppliers. And as you probably expect by now, the manufacturer's suppliers of potatoes, cooking oil and seasonings also overproduce. Again, notice that at each link back up the supply chain, the oversupply gets bigger than the link below it.

Finally, when you and the other retailers figure out that actual demand did not meet forecasted demand, you reduce your orders and everyone up the supply chain is left with excess inventory.

Causes of the Bullwhip Effect

Several different things can cause the bullwhip effect. Let's take a quick look.

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