What Is The Bullwhip Effect In Forecasting?
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The ‘Bullwhip Effect’, also known as the Whiplash Effect within forecasting is a way of describing the effect of large swings within the supply chain.
Any supply chain is not stable, it will have variations and fluctuation that arise when customers increase demand, or conversely when they find that demand decreases. The closer a supplier is to the bottom of the supply chain (i.e. closer to the raw materials end of the supply chain) then the more they will find that they are vulnerable to large fluctuations in demands, which when looked at on a graph resembles a whip being cracked, hence the term ‘bullwhip’ effect.
The bullwhip is negative, because the increased fluctuation can result in panic buying of stock, resulting in shortages and customer service levels not being met, there is also an increase in costs, as the more demand is expressed, the higher the cost becomes, in line with the elasticity of demand.
Causes Of The Bullwhip In Detail
There are many causes of the bullwhip effect, with the main focus of the blame being apportioned to forecasting, but this is not strictly accurate. The whole issue of forecasting within the supply chain is one that will be inaccurate, such is the nature of forecasting. Instead there are some detailed and often very complex reasons why the bullwhip effect can become dominant.
An Unstable and Unmanaged Supply Chain:
Having a very unstable supply chain that is not properly managed will result in the bullwhip effect being quite pronounced. The unstable supply chain has poor communication and there is little done to co-ordinate the supply chain or ensure that it is protected against fluctuations.
This makes the supply chain volatile and the more volatile it is, the worse the bullwhip effect will be.
Keeping Stock Levels high:
If the company tries to keep stock levels high over a long period, it will eventually end up with a high level of safety or surplus stock. However there is then a tendency to start reducing stock levels. This means that no orders are placed to replenish stocks. Then stock levels start to dwindle and there is a sudden demand as the company starts to replenish its stock as soon as possible.
Batching Orders:
The more orders that are batched together by companies the more variances there will be in the supply chain. These variances skew the levels of demand which results in the whip effect again.
Hedge Betting:
When a product is in short supply some suppliers will panic buy, to preserve their stock levels. But others may seek to exact a profit and they will buy more of a product when it is in short supply, so that they hedge their bets and pass on the increased costs to the customer.
Lead Time Variances:
There can often be variances in lead times, which results in the demand levels fluctuating wildly.
Managing The Bullwhip Effect:
The bullwhip effect can be managed by the supply chain itself being kept stable. The orders should be placed constantly throughout the production process to counteract the effect of orders being batched. Safety stock levels also have to be properly managed if there is to be consistent ordering, which keeps the variations to a minimum.
Hedge betting will always be an issue, but if the stock demand is kept constant there is less incentive to ‘panic buy’.
Lead times will also vary, but if the other countermeasures are put into place, then there will be less of a bullwhip effect and more of a stable supply chain with less fluctuation or variances.
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