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What Is the Bullwhip Effect?

By Whitney Leigh White
Updated May 17, 2024
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Demand factors are the number one contribution fueling the bullwhip effect. These factors relate to consumer, retail, and wholesaler demand levels. When consumers demand more of a certain product, the retailers of the product demand more of it from their wholesalers, which causes an increase in demand from manufacturers as well. As the bullwhip effect occurs, which is usually due to unmanaged entities within supply chains misreading or miscalculating actual needed product levels, increased cost and dissatisfied customers become present. Ineffective communication, order batching, and recessions often lead to the bullwhip effect as well.

When entities within supply chains do not communicate in effective manners, the bullwhip effect takes place more often. This lack of communication causes a lack of coordination, which causes retail stores, wholesalers, and manufacturers to have too much or not enough of a product. Sometimes entities involved within a supply chain maintain communication, but this communication endures delays, which also leads to a lack of coordination and a lack of meeting consumer demand levels.

Many times, wholesale and retail stores endure the bullwhip effect by taking part in order batching, also known as buying in bulk. While order batching does allow retail and wholesale stores to offer a product accompanied with a lower-than-normal prices, there are times the stores over-meet consumer demands. When a store over-meets consumer demands, it is left with too much of a good. This causes the stores to endure additional expenses that could have been avoided had they not ordered too much of the product.

One of the best ways for stores to address the bullwhip effect is by implementing and utilizing some type of point of sale (POS) system. This type of system allows stores to avoid forecasted inaccuracies, as well as single control replenishment of products. POS systems enable stores to conduct thorough and necessary inventory and product sale analyses. These analyses, if read correctly, can help retail and wholesale stores meet consumer demand levels in the best manner possible, which leads to a stable and well-maintained supply chain.

Companies that operate within a recession will usually endure the bullwhip effect to some extent. In addition to utilizing POS systems, many of these companies have found that they can correctly adjust their inventory levels by looking at macro-level marketing trends, which allows for their supply chains to become stable once again. When the bullwhip effect is ignored, companies tend to fail, making it very important for all stores to know how to appropriately address the problem.

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Discussion Comments
By nony — On Feb 04, 2012

@Mammmood - When you have too many variables, you have to rely on software if you want to avoid the bullwhip effect in supply chain management.

Software is better able to sift through POS reports and reams of historical data to determine what you need in stock and when. Of course nothing can prepare you for a recession. But if you’re stocked at reasonable levels, I think you can weather any storm.

By Mammmood — On Feb 04, 2012

@miriam98 - It’s always cheaper not to stock a lot of stuff, in my opinion. That way you avoid the costs that come with maintaining goods in inventory.

However, you run the risk of making customers unhappy. I worked for one company where customers were complaining that from the time they placed orders to the time they received shipments of their goods it took about six weeks. They were not happy.

Of course these were products that were not in stock and so had to be ordered. Eventually what the company did was reorganize its distribution centers around a “hub and spoke” model, similar to what Federal Express does, to keep more stuff in stock and improve its shipment times. It helped in the end, I think.

By miriam98 — On Feb 03, 2012

I recently started a new job working for a wholesale distributor, so I’ve had some exposure to the concept of the bullwhip effect in supply chain. As a practice we try to stock a lot of inventory so that we can get products out to distributors in the shortest time possible, as opposed to having to buy them from manufacturers when orders are placed.

The reality, however, is that we cannot stock every single product in our warehouses. So we have to conduct analyses based on prior sales to determine what products need to be kept in stock, and in what quantity.

It’s a delicate balancing act, really, ensuring that you don’t over stock or under stock your warehouse. Stuff that is rarely ordered is not stocked at all. In these instances we can just order from the manufacturer on an as needed basis.

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