As you proceed up the supply chain, demand shifts might cause inventory fluctuations or poor asset allocation, this phenomenon is known as the bullwhip effect. In simpler terms, it is the process through which demand signals gain strength as they pass through the supply chain.
Imagine holding a long whip in your hand. If you gave the whip a little nudge at the handle, the parts closest to the handle would move very slightly, but the parts farther away would move more and more in an increasing manner.
Similar to this, in the realm of the supply chain, the end users are in charge of causing a small shift in demand that moves up the supply chain in an escalating manner. We can observe larger movements as we advance farther away from the consumer.
Generally, it begins with an unanticipated shift in customer demand or a flick of the wrist at the whip handle. The rising demand encourages businesses to place more orders with their suppliers for parts.
However, sometimes purchasers are limited to placing batch purchases with a minimum quantity, such as ten units even though they only require one. The supplier, therefore, perceives a higher demand for their goods as a result of the higher volume.
What causes bullwhipthe effect?
- Disorganization at each supply chain link, including ordering more or less of a certain product than is necessary as a result of an excessive or insufficient response to the supply chain beforehand.
- Processes have a hard time running smoothly when there is a lack of communication between each component in the supply chain. Within various nodes of the supply chain, managers may have quite varied perceptions of a product's demand, leading them to place different orders for different quantities.
- Businesses may delay placing an order with their supplier and frequently build up demand. As a result, there may be fluctuations in demand, such as a spike in demand followed by a period of low demand.
- Buyers who want to take advantage of discounts offered for a brief time period can disrupt regular buying patterns with price variations, special discounts, and other cost changes. This can lead to uneven production and distorted demand data.
To reduce uncertainty over product availability and delivery timeframes, an open interchange is essential. As a result, businesses may enhance production planning and produce more precise demand estimates. The use of cooperative supply chain risk management is necessary in this situation. It enables businesses and their partners to handle risk situations together that can result in delays or shortfalls.