First coined by J Forrester in his seminal paper Industrial Dynamics back in 1961, the phrase ‘bullwhip effect’ is used to describe the knock on effects of a single product and its demand on the wider supply chain. Forrester found that in forecast-driven distribution channels, a change in demand had an ever increasing effect the further back into the supply chain he went. When graphed, these oscillating changes in demand appear as a series of waves which get greater in size, reminiscent in appearance of a cracking whip. Because Forrester is credited with documenting the bullwhip phenomenon, it is also known as the Forrester effect by some.
The effect is created by statistical demand by suppliers attempting to forecast customer demand to properly position stock and raw materials at the correct points for timely delivery. Forecasting provides some degree of statistical accuracy, but the vendor must carry an inventory buffer to cover unforeseen fluctuations. Moving further up the supply chain, manufacturers and suppliers of raw materials must also maintain an inventory buffer to satisfy the demands of their own customers; because these demands can shift to even greater degrees, the “safety stock” levels must also be greater. Should downstream demand fall, the supplier is left carrying inventory which they are unable to shift, creating the “bullwhip effect”.
Forrester also observed that the bullwhip effect can be caused by a number of factors relating to human error or operational problems. Misapplication of statistical forecasting techniques or internal and external communication issues all play a part in oversized inventory buffers. So too do perceptions regarding supplier’s ability to meet demand and fulfil orders for a variety of reasons.
The bullwhip effect has an effect on an organisation’s bottom line, through inefficient production or stock short falls. The obvious knock-on effect is a reduction in customer service and satisfaction levels which has a definite negative, and therefore costly, impact on a brand’s reputation.