THE BULLWHIP EFFECT

The bullwhip effect is one of the most well-known supply chain concepts. Proctor & Gamble (P&G) coined the term when studying the demand fluctuations for Pampers, their disposable diapers. Despite the fact that babies use diapers at a very predictable rate and therefore retail demand is flat, P&G observed that this product created a wave of changes up the supply chain due to very minor changes in demand.

Behavioural Causes

The first theories focusing onto the bullwhip effect were mainly focusing on the irrational behavior of the human in the supply chain, highlighting them as the main cause of the bullwhip effect. Since the 90’s, the studies evolved, placing the supply chain’s mis-functioning at the heart of their studies abandoning the human factors. Previous control-theoretic models have identified the following causes:-

1) The trade-off between stationary and dynamic performance, as well as,

2) The use of independent controllers

In accordance with the study conducted by Dellaert, Udenio and Vatamidou (2017), one of the main behavioural causes that contribute to the bullwhip effect is the under-estimation of the pipeline. In addition, the complementary bias, (over-estimation of the pipeline), also has a negative effect under such conditions. Nevertheless, it has been shown that when the demand stream is stationary, the system is relatively robust to this bias. In such situations, it has been found that biased policies (both under-estimating and over-estimating the pipeline) perform just as well as unbiased policies. Some others behavioral causes can be:

Factors Leading To Bullwhip Effect

In 1997, studies on the bullwhip effect showed that this last was not solely a result of irrational decision making. More than that, this effect seems to find its source because of the rational behaviors of the players within the supply chain’s infrastructure. The factors may be as follows:

1) Demand Forecasting Updating: Demand forecast updating refers to the situation where demand is non-stationary and one uses past demand information to update forecasts.

2) Rationing Gaming: The rationing gaming refers to the strategic ordering behavior of buyers when supply shortage is anticipated.

3) Order Batching: When fixed order cost is nonzero, ordering in every period would be uneconomical, and batching of orders would occur.

4) Price Variations: Price variations refer to non-constant purchase prices of the product.

5) Communication: Lack of communication between various actors in the supply chain can lead to bullwhip effect.

6) Non Responsive Supply Chain

In addition to greater safety stocks, the described effect can lead to either inefficient production or excessive inventory, as each producer needs to fulfill the demand of its customers in the supply chain. This also leads to a low utilization of the distribution channel. In spite of having safety stocks there is still the hazard of stock-outs which result in poor customer service and lost sales. In addition to the (financially) hard measurable consequences of poor customer services and the damage to public image and loyalty, an organization has to cope with the ramifications of failed fulfillment which may include contractual penalties.

Moreover, repeated hiring and dismissal of employees to manage the demand variability induces further costs due to training and possible lay-offs. The impact of the bullwhip effect has been especially acute at the beginning stages of the COVID-19 pandemic, when sudden spikes in demand for everything from medical supplies such as masks or ventilators to consumer items such as toilet paper or eggs created feedback loops of panic buying, hoarding, and rationing.

Coping With The Bullwhip Effect

**Source Credits:

1)-> www.business2community.com . . . . 2) -> www.mbaskool.com

Content Curated By: Dr Shoury Kuttappa