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The inventory advisor

Jan 7, 2020


Cracking the Bullwhip effect on your supply chain

When you crack a bullwhip, the whip handle moves 60 degrees, but the tip of the whip moves at 360 degrees. In supply chain operations, the amplification and distortion of demand fluctuations is a common phenomenon. Demand fluctuations start relatively small at the shopfront level and amplify further up the chain. Just like a bullwhip, the impact lower down at the retail level is low and escalates further up with the manufacturer suffering the most. This is referred to as the bullwhip effect.

A case study with Volvo exemplifies this perfectly. Volvo had a surplus of green cars. To assist the dealers in getting rid of these, they ran a special offer, and the green cars started to sell. The manufacturer, unaware of the sales promotion, saw an increase in green car sales, so they ramped up production. The result left Volvo with a large inventory of unsold green cars.

Retailers, distributors, and manufacturers make their forecasts and adjust them to cover spikes in demand and to take into account economies of scale. As an example, if customers bought 50 products, the retailer would order 60 products from their distributor and would place the additional 10 in safety stock. The distributor would in turn order 90 items from their manufacturer so they could take advantage of bulk discounts. The manufacturer would increase the order to 150 as it costs less per item to manufacture more. 

Despite the cash that is tied up in excess stock, having an oversupply of inventory, one may argue, is not the end of the world. Companies, after all, can run promotions to get rid of their excess stock. But, consider for a moment the immense loss that your business would incur if the inventory items had a shelf life – these items could end up as expired or obsolete stock. 

Lack of communication and misunderstanding are the main contributors to the bullwhip effect. Assumptions are made by players in the supply chain, which results in the over or under compensating of forecasts. Additionally, companies that use legacy or manual business processes in their organizations are more susceptible to the bullwhip effect as they have no data intelligence to help them to forecast and plan. 

Retailers and distributors adjust their forecasts to plan for uncertainties and to take advantage of bulk buying prices. Manufacturers generally don’t have the information available to see customer sales at the retail level so that they can’t make informed production forecasting decisions.

A vendor managed inventory system in the supply chain is a solution that Manufacturers could consider. They will have full visibility and control, and with IoT technology, it is even easier to automate and track inventory levels in-store. They can then take the responsibility for maintaining inventory as they will have access to up to date information and can plan their raw materials purchases and production schedules accordingly. Manufacturers can also ensure better communication throughout the entire supply chain by being closer to the source of the demand. The Volvo fiasco would have been a lot different if the manufacturer had sight of the promotion and sales data.

If you have the right technology and communication strategies in place, there is no reason why your business should suffer the effects of the bullwhip phenomenon.