How Does the “Bullwhip Effect” Impact Supply Chains?

The term “Bullwhip Effect” is industry shorthand for the exaggerated impact slight changes in consumer demand can have on the broader supply chain.

Sometimes referred to as “demand amplification,” the bullwhip effect is a handy visual illustrating just how complex it can be to source raw materials and components, produce consumer-ready goods and get them into the hands of eager customers on a large scale.

Here’s everything you need to know about why the bullwhip effect occurs, practical strategies for mitigating its effects and how our team can help your business develop a more consistent supply chain.

What Is the Bullwhip Effect?

The bullwhip effect can creep into almost any supply chain, but is particularly challenging in industries requiring months of forecasting and preparation to produce goods.

The “Bullwhip Effect” in Motion:

You can see where things might start to spiral from here; once-regular delivery schedules are disrupted, raw materials have to be expedited and labor costs increase as Whitney’s employees work overtime to aid in the restocking efforts.

Similar chain reactions can be traced within virtually every industry. Without adequate preparation and communication, the effect of retail decisions (even seemingly successful ones) can cascade into a series of larger challenges by the time they reach upstream suppliers, wholesalers and manufacturers.

What Causes the Bullwhip Effect?

The bullwhip effect illustrates just how complicated demand forecasting can become as a supply chain evolves, and how crucial communication between each link in the chain can be.

Consumer reactions to trends or paid promotions are often difficult to predict. Without consistent communication between retailers and their vendors, supply chains risk inflated (or deflated) perceptions of demand at the customer level.

In our example above, miscommunication and flawed forecasting processes led Whitney to press her suppliers in an attempt to accelerate production — potentially harming her crucial vendor relationships and raising the costs of acquiring last-minute bottling components.

Gaps in forecasting and communication can also evolve into more complex challenges, including:

Long Lead Times

Bad forecasting may be the primary cause of inventory problems, but excessive lead times are just as adept at robbing a company’s supply chain of its efficiency — it does little good to receive a bulk order too late to capitalize on a surprise spike in demand. In Whitney’s case, any delay in acquiring bottles and corks means pushing the 3-month waiting period even further out.

Batched Orders

One fairly consistent truth of any supply chain is it’s generally cheaper to order goods in bulk — but when retailers try to approximate (round up/down) the number of units required to serve upcoming demand, manufacturers responsible for cranking out the new batch of goods might get an inaccurate read on consumers’ true appetite for the item. Whitney may not have the storage space or the need for excess bottles — particularly once the promotion ends.

Poor Campaign Timing

Marketing techniques like flash sales, exclusive pre-orders and other promotional strategies can throw even the most faithfully data-driven forecasting completely out of orbit. By the time manufacturers and shippers catch up, the promotion’s moment in the spotlight might have expired. In Whitney’s case, the promotion was designed only as a temporary measure to spark interest in club subscriptions — keeping it going too long could end up costing her more than it’s worth.

3 High-Level Fixes For the Bullwhip Effect

1. Strengthen Relationships with Suppliers

Success in navigating your company’s supply chain fluctuations largely comes down to reducing the number of variables involved. A good working relationship with suppliers paves the way for agreements or contracts to keep prices within stable ranges — and keeps your supply chain’s major role players on the same page in the event your company finds itself in a bind.

2. Audit and Adjust Safety Stock Levels

Safety or “buffer” stock is the supply you keep on-hand to mitigate unforeseen circumstances. It is a retailer’s first line of defense against changes in customer buying habits and unexpectedly long lead times.

You can imagine why regular safety stock evaluations might be useful in smoothing out an erratic supply chain, but bear in mind some ebbs and flows in demand are totally natural — toothpaste sales are more likely to stay consistent over the course of a calendar year than, say, frozen turkeys.

3. Fine-Tune Your Forecasting

Accurate demand forecasting takes a ton of data. Historical sales, fill rates, replenishment cycles and supplier performance insights (along with dozens of other key metrics) rely heavily on the degree to which businesses have enabled visibility within their supply chains. More visibility means more data, which makes for a more confident demand forecast.

If the bullwhip effect is wreaking havoc on your shipping strategy in the form of delays, empty shelves and excessive charges for emergency-expedited goods, it’s likely an issue best identified and resolved by improving supply chain visibility.

Softening the Bullwhip Effect with First Call

Businesses trying to keep pace with every erratic shift in shopper behavior risk overpaying for expedited delivery, overtime labor and excess warehousing space, only to discover their forecasts to be vastly (and repeatedly) overblown.

Neutralizing the bullwhip effect takes preparation, supply chain visibility and a rock-solid line of communication throughout the shipping process — services First Call provides through a combination of team expertise, vetted carriers and the best in integrated WMS and TMS software.

These services provide partners with the following safeguards against costly bullwhip effect-driven overreactions:

• Enhanced freight visibility. Through FCL’s customer portal, our shipping partners receive accurate updates and ETA projections throughout their shipment’s journey to ensure goods arrive on time as planned.
• Streamlined communication and collaboration. Our logistics experts are in constant communication with both shippers and carriers to optimize routes, avoid disruptive hazards and mitigate the bullwhip effect’s impact on production schedules.
• Over/understock protection. If your product stock fluctuates too much, customers will either a) stockpile items when available or b) ditch the product entirely in favor of a competitor. Neither of these scenarios makes it any easier to forecast demand, which is why a consistent flow of evenly stocked goods is crucial to limiting the bullwhip effect’s reach within your supply chain. FCL’s warehousing facilities are strategically placed throughout the country and managed via WMS for accurate product counts and visibility to keep excess product stock close at hand when needed.
• A trusted carrier network. Working with pre-vetted carriers helps prevent freight delays, loss and damage. Just as shipping partners work closely with vendors and suppliers to keep supply chains running smoothly, our carrier network keeps products moving consistently to mitigate sudden jolts in demand.

Improve shipping visibility, streamline communication and shield your business from the bullwhip effect by contacting FCL’s logistics experts today!