supplyx-bullwhip-effekt

Bullwhip effect from a supply chain perspective: transparency and communication are crucial

SCM

The Bullwhip effect, also known as the whip effect, is a widespread phenomenon in supply chain management (SCM). This undesirable dynamic leads to inaccurate planning, full warehouses, higher costs and inefficient supply chains, which can have a negative impact not only on the company concerned, but also on its customers. In our latest blog article, we explain what`s behind the Bullwhip effect, how it is caused and how companies can protect against the consequences.

What is the Bullwhip effect and how is it caused?

The Bullwhip effect occurs primarily when demand from the end customer (the so-called whip holder) changes and these fluctuations are passed on to the suppliers and ultimately the producers. Even small changes can add up to large fluctuations in capacity in this way. The Bullwhip effect is a phenomenon of multi-level supply chains and can spread from retail stores to suppliers and manufacturers throughout the supply chain.

There are many reasons for the whip effect: these include inaccurate forecasts, communication problems between the different levels of the supply chain, delayed information transfer or order cycles that lead to large orders. Above all, if the supply chain players do not communicate with each other and only optimize their processes according to the knowledge available to them, the overview of the entire supply chain is lost – to the detriment of everyone involved. Psychological distance also plays a role here: the further away a link in the supply chain is from the point of sale, the less able it is to recognize actual demand and react accordingly.

Especially in challenging times, all parties want to ensure their ability to deliver and factor in bottlenecks. This often leads to an increased order quantity that multiplies along the supply chain. At the production level, the Bullwhip effect finally reaches its peak: quantities are produced for which there is no corresponding demand. This situation not only leads to cost disadvantages due to increased inventories or stock-outs – overproduction also proves to be unsustainable and consumes resources at all levels. Last but not least, it is also the customers who suffer from the uncertain availability of products and potentially higher prices. So how can the Bullwhip effect and its negative effects be minimized?

Transparency is key: How companies can reduce the Bullwhip effect

If data is only passed on with a delay, this has a significant impact on further decision-making processes in multi-stage supply chains. Companies are therefore well advised to optimize their information flows and ensure through as much end-to-end transparency as possible that relevant real-time data along the entire value chain is also available to other supply chain partners. Transparency plays a key role in curbing the Bullwhip effect in several respects:

  • Real-time data and information: A 360-degree view of the supply chain enables those involved to share the current status of orders, stock levels and demand with others. This facilitates more precise planning and helps to avoid uncertainties or inaccuracies in forecasts.
  • Reliable communication: The availability of relevant information enables companies to exchange information with other supply chain partners and make data-based decisions. This is accompanied by positive effects for seamless coordination of individual process steps as well as close and trusting collaboration.
  • Increased responsiveness: The faster companies are informed about changes in the market, in production or in deliveries, the sooner they can take appropriate measures. Delayed or incomplete data exchange, on the other hand, quickly leads to incorrect calculations.
  • Resource optimization and sustainability: The impact of the Bullwhip effect can cause considerable ecological and economic costs. The targeted optimization of warehouse and production capacities through transparent flows of goods helps companies to minimize their ecological footprint, as less energy, raw materials and means of transport are required. By forecasting order quantities more accurately and adapting them better to demand, overstocking can be avoided and resources are used responsibly.

SCM and order management for improved information flows

It is therefore the combination of transparency and a sound communication between supply chain partners that helps to prevent negative developments along the value chain. To improve these two aspects, the implementation of supply chain management is helpful. A strategic SCM system increases the visibility of the individual process steps and offers steering options: For example, companies can use advanced analysis tools and technologies to calculate an estimate of future requirements and determine whether certain goods are needed immediately or whether it makes sense to store them temporarily in a buffer warehouse. To do this, historical sales data and current market information are taken into account. After all, the more accurate the forecast is, the more the likelihood of overstocking or understocking is reduced – which in turn mitigates the impact of the Bullwhip effect. Using cloud systems or collaborative platforms, managers can access the relevant data from any location and are therefore always informed in the event of changes.

The continuous exchange of real-time data between retailers, suppliers and retailers enables a shared view of demand and stocks. This forms the basis for much more effective and transparent communication: as everyone involved has access to the same up-to-date information, production and orders can be adjusted in good time and fluctuations in the supply chain can be reduced. This is also reflected in the results of the 19th SypplyX Barometer: Medium-sized companies with 250 to 500 employees particularly appreciate the use of data for supply chain optimization (70 percent).

Another crucial aspect of SCM is the introduction of integrated order management. It enables companies to track the entire life cycle of an order from order placement to delivery.  The transparency of orders helps to minimize internal planning errors and realistically adjust stock levels. In addition, close cooperation between supply chain partners can be used to identify alternative sources of supply and remain capable of acting even in the event of disruptions. Ultimately, all parties involved in the supply chain benefit from increased transparency and improved communication, as the latter create planning security and save costs in the long term.

Conclusion: Control the Bullwhip effect and actively manage your own supply chain

In a global business world where responsiveness and efficient supply chains are critical, controlling the Bullwhip effect is an important step for companies to remain agile and maintain competitiveness. This requires a holistic approach, for which supply chain visibility is essential. It should be a company’s key objective to gain comprehensive control over its own supply chain in order to be able to actively manage it. If all parties involved work together transparently – for example by using a shared information architecture such as cloud-based SCM software – this will lead to an improved flow of goods in the long term. Although it is not always possible to completely prevent the Bullwhip effect, those responsible can significantly reduce the impact, increase their own responsiveness and save resources.

Related Posts