The Bullwhip Effect in Action

What is the bullwhip effect?
The ripple effect of small changes in customer demand are magnified upstream through a supply chain all the way from the customer to the retailer to distributor to manufacturer.

It is so named because of the resemblance to a bullwhip as the variability of demand increases sharply when you progress up the supply chain.

Has something like this happened to you?
The Bullwhip effect is very common as long lead times, high variability, promotions and many other factors in any complex supply chain conspire to drive inventory. However, there are practices that can help mitigate the Bullwhip effect - these are some ideas:

• Focus on the customer. Maintain an optimal network design centered on your customer and how they want to receive and consume your product. Segment your supply chain based upon this understanding and a clear picture of your unique value proposition.

• Define the right push-pull boundaries and strategy. Optimize your inventory allocation process based upon an understanding of your demand certainty. If you have stable demand for some products, a push strategy can be employed. But where demand is uncertain, a pull strategy will need to dominate your policy. Often you will be somewhere in the middle with a push-pull strategy.

• Share information. No matter where you sit in the supply chain, costs rise when there is a lack of visibility to demand shared along the supply chain. Encourage information sharing amongst your trading partners and be a catalyst and good example of information sharing. An often overlooked opportunity is working with suppliers on reducing lead times and improving on time delivery.

• Manage your product portfolio. This entails honestly and accurately evaluating the costs associated with the products in your portfolio. Most companies do not take a comprehensive approach to reducing the complexity of their portfolio. Complexity management is much more than a one-time, revenue and activity-based costing exercise. It is not only a thorough evaluation of the products in your portfolio, but also a joint agreement with product development, product management, marketing, ops and finance on the criteria and guidelines for new product introduction (NPI) and the refinement of the product management process and metrics to ensure the company adheres to these decisions. It’s certainly not an easy task, but well worth the effort.

But first, you many want to know what really drives inventory in your supply chain. In a recent videocast with Pepsico, we show how an end-to-end optimization analysis helped uncover an unexpected inventory driver that was creating the bullwhip effect - Click here to view the videocast (registration required).

Related: An Executive Guide to Supply Chain Research