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AF19 SCM Bull whip Effect

AF19 AFMI -SCM -BL01M12-Day14-01Feb21 AF19

What are the effects of bullwhip effect on supply chain?

Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, and missed production schedules

What is the bullwhip effect and how does it occur?

The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler, distributor, manufacturer and then the raw materials supplier.

4 Ways Supply Chain Management Can Reduce the Bullwhip Effect

Collaborate with customers and suppliers.

Improve forecast accuracy.

Enable fast decisions with visibility and insight.

Adopt a demand driven supply chain management approach.

Companies can counteract the bullwhip effect:

  1. Avoid multiple demand forecast updates. Companies can make demand data from downstream available upstream. ...

  2. Break order batches. ...

  3. Stabilize prices. ...

  4. Eliminate gaming in shortage situations.

What is the bullwhip effect and what causes it?

The bullwhip effect is caused by demand forecast updating, order batching, price fluctuation, and rationing and gaming. Demand forecast updating is done individually by all members of a supply chain. Each member updates its own demand forecast based on orders received from its “downstream” customer

In other words, inventory swings in bigger and bigger "waves" in response to customer demand, which acts as the handle of the whip. The largest "wave" of the whip hits the supplier of raw materials, causing them to see the biggest demand variation in response to changing customer demand.

The bullwhip effect can be caused by a huge number of contributing factors, but some of the most common causes of the bullwhip effect include:

Forecast errors – Decisions in every link of the supply chain are made based on demand forecasts for businesses. Errors in forecasting lead to miscalculations that are magnified as they move up the supply chain.

Order batching – Placing frequent orders for small quantities creates less of a bullwhip effect than placing larger orders less frequently. With order batching, the retailer places orders with its supplier once per month (rather than several times throughout the month), which creates inconsistent demand for the supplier over time.

Lead time – Lead time is the span of time between when an order is placed and when it’s received. Failing to consider lead time when managing inventory can lead to an overstocking of products, which in turn results in a change in supplier demand over time i.e. the bullwhip effect.

Sales and price discounts – Sales and discounts create a boom-and-bust cycle. Lots of product moves during the promotional period, which is followed by lower levels of sales. This cycle ripples through the supply chain, resulting in the bullwhip effect.

The bullwhip effect exists in all supply chains and is the root of the boom-and-bust cycles in many operations. Left unchecked, it can have detrimental effects on a business, which is why it’s so important to manage it proactively, as we’ll see below.

What happens when the bullwhip effect hits the supply chain?

Just as fluctuations in demand ripple throughout the entire supply chain, the bullwhip effect can have serious consequences throughout all aspects of business:

Too much stock on hand, leading to increased inventory holding costs

Unfulfilled orders

Poor customer service

Lost revenue

Misguided demand forecasts

Missed production schedules

P&G Bull whip Effect Study

Taking the bullwhip by its handle

Although most supply chains will experience the bullwhip effect to some degree, the outcomes above are a result of long-term mismanagement of the supply chain. Thankfully, there are 4 simple ways to mitigate and control the effects.

1. Streamline your supply chain – Reducing the number of suppliers and the number of tiers in your supply chain can facilitate better communication across teams and decrease the swing that creates the bullwhip effect. Utilizing supply chain automation technology helps link together all aspects of the supply chain and consolidate communication channels.

2. Optimize inventory management – Keeping track of stock levels, orders, and demand with inventory management software leads to more accurate ordering from suppliers, decreasing the bullwhip effect.

3. Minimize sales and discounts – Maintaining a steady price point even during market fluctuations decreases the bullwhip effect by encouraging a regular stream of customer demand. Clothing and accessories business Everlane reduces the bullwhip effect by rarely holding sales or giving discounts, instead opting to keep prices low year-round with a smart direct-to-consumer model.

4. Maintain consistent, smaller order sizes – Offering bulk discounts may attract customers but it also unnecessarily increases inventory levels and magnifies the bullwhip effect. Encouraging orders according to customer need instead of bulk discounts helps mitigate the bullwhip effect.

Review Questions 1. What do you understand by Bullwhip effect 2. what are ways to cope up with Bullwhip effect 3. What are the most important contributing factors for Bullwhip effect

Classroom Scenario Discussion

You are in charge of Delivery of Daily requirements of Grains and Pulses to the Food Chain which is across the City. The purchases are weekly and you are required to make plans for weekly consumption of the Food. A very popular dish in the chain is "Mallige Idlis" which are prepared by a special blend of Rice sourced from Andra Pradesh and Pulses from Tamilnadu. both AP and TN vendors need one month advance information or requirements. delivery of grains happens every week, and payment happens one a month on every 7th of month. What are the important points you will consider for monthly orders, if there is fluctuations in demand due to forecasts of change in behaviour by the marketing department.

Teacher' note - the bullwhip effect that was discussed in the class was the scenario discussion. Students are encouraged to do research and analysis on scenario to come up with probable solutions

RUCHITHA.C Forecasting the consumption patterns of the product and to ensure the transportation


Timely delivery, Quality check,

Good communication and understanding during fluctuations "


1. Record operational financial transactions

2. Record monthly journal entries

3. Keep a track of demand fluctuations in the market and accordingly prepare information for delivery of grains and pulses.


Order should be before requirements and have advanced facility to provide orders and payment securely...


1) Demand across the city.

2) What sold and what not.

3) required time for selling.


If the change in demand occurs frequently then I will look for the alternative buyer in order to avoid the extra charges like warehousing and others


In advance we order more than the requirement, then we will store bcz it's non -perishable


I will take a pre-order from the customers

Anusha Upadhye

Proper software which maintains the records accurately helps in easy

handling of the situation


1. Define the market and find the ways to get the required grains

2. Divide total industry demand into its main components.

3. Forecast the drivers of demand in each segment and project how they are likely to change.

4. Conduct sensitivity analyses to understand the most critical assumptions and to gauge risks to the baseline forecast."


Quantity and quality of product and will take the order before the given time


Take pre order from the customers...should understand their market saturation point


Forecasting the demand and arranging the supply.

PALLI ANJALI Instead of weekly purchases implementation of breaking the orders in batches would be better

VETAPALEM SWETHA 1.By supplying the exact quantity of Grains and pulses.. ,2. Due to fluctuations will increase or decrease the cost of grains and pulses according to its demand.


I will check how much is the consumption per month for particular family.


Keep stock available

Record all the finnancial transactions

Quality and quantity orders"

GOLLA HARI KRISHNA We analysis the customer demand

Balayogindrareddy reddem We take pre order from customer

Vedukala Himabindu I will look into other buyers

Lakshminarasimman V Rao | SCM| Class notes | Study Material | AFMI | Corporate Neeti Consulting | Mysuru

All data above is a combination of data from Internet, purpose of this doc is for research and education only and responses received from Class students and interaction.

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