Bullwhip effect refers to the increase in quantity ordered by suppliers as one moves up along the supply chain towards the production end. It is the variability in quantity demanded as one moves up the supply chain towards the producers or further away from the final consumers. Carranza and Villegas (2011) define bullwhip effect as a situation in which a small change in quantity demanded by consumers results into large variations in quantity ordered by suppliers. Bullwhip effect usually results from attempts by individual organizations within the supply chain to solve shortages in quantity supplied from individual perspectives.
Bullwhip effect is usually caused by factors such as lack of proper coordination along the supply chain, increased delay in exchange of information amongst suppliers, reduced flow of materials and products within the supply chain, lack of clear and open communication and neglect by suppliers to place orders in attempts to reduce holding costs associated with inventories. It can also be caused by variations in quantity ordered, for example, suppliers may order large batches in order to enjoy economies of scale like trade discounts and cheap transportation. Bullwhip effect also results from inaccurate forecasting of demand for products. Buchmeister et al (2009) summarize that bullwhip effect usually results from overestimation or underestimation of demand for products by the suppliers, thus leading to acute fluctuations in quantities supplied. It can also be caused by sales returns from customers.
Bullwhip Effect and Supply Chain Performance
Bullwhip effect often leads to increased inefficiencies within the supply chain which negatively impact the performance of the supply chain. Lee, Padmanabhan and Whang (2006) also assert that bullwhip effect often lead to unexpected distortions that have severe effects on the performance of supply chains. For example, bullwhip effect usually results into high stock levels, provision of poor or low quality services, reduced usage of storage capacity, higher holding costs and reduced trust amongst suppliers within supply chains. In addition, bullwhip effect also leads to unreliable forecasting of demand for products. According to Disney and Lambrecht (2008), bullwhip effect usually leads to increased costs of providing products to consumers and provision of poorer or low quality services by the suppliers.
Bullwhip effect usually occurs because supply of goods and services within the supply chain are based on demand forecasts made by individual suppliers and not the actual demand made by final consumers. Thus, bullwhip effect can be reduced using Just-in-time (JIT) and vendor managed inventory (VMI) techniques, increased sharing of information and removal of incentives like trade discounts within he supply chain. In my view, it is important to control bullwhip effect in order to ensure that the supply chain performs effectively and efficiently.