One of the most dreaded factors that create panic for supply chain managers is the bullwhip effect. As the name suggests, a little movement of the wrist holding a whip leads to a larger movement towards the whip’s end. Whenever a user creates demand, it reverberates along the supply chain causing fluctuations.
The result is a much larger demand at the manufacturer’s end than was originally required. All the players in the supply chain are unable to control the process but their actions are interconnected with each other and have an influence on each other.
How Does the Bullwhip Effect Affect the Supply Chain?
Whenever a demand is created, each party in the supply chain adds additional products that act as a buffer. It causes overstocking and hoarding that result in price inflation. In the recent COVID-19 pandemic, supply chain managers have responded to the global demand by stocking supplies. Economists have blamed product shortages on this phenomenon.
Undue pressure at the retailer and manufacturer’s end has wreaked havoc on global supply chains. Before we figure out how to minimize the negative impact of the bullwhip, we should first learn the reasons behind this phenomenon. Different factors affect the supply chain. Let us discuss them one by one.
Supply Chain Mismanagement
One thing that can disrupt a supply chain is miscommunication. It usually occurs when the supply chain is complex. With the rising trend of e-commerce and digital marketing, consumer demands have increased. Orders have become more complex, and the supply chain is more competitive.
Vendors and partners within the supply chain open up avenues for miscommunication. When more people are involved, it can cause miscommunication at all levels. It puts a lot of pressure on meeting supply demands.
Inaccurate Prediction
Another reason for creating false demands is a lack of forecasting and planning. Wrong predictions lead to stocking up on products that are not needed. Running out of products can make you lose your customers.
On the other hand, stocking up the inventory can harm revenue generation. Unmet customer demands or hoarding up raw materials causes inaccurate predictions and forecasts.
Labor and Storage Costs
The cost of maintaining an overstocked inventory is not cheap. You not only have to pay for the storage space, but you must manage to keep the stock ready at all times. The extra labor force is needed to keep your inventory up and running. Similarly, more salespeople are re-selling products that you have hoarded. It harms the overall supply chain.
Effective Ways to Control the Bullwhip Effect
Businesses that have faced the backlash of the bullwhip effect must adopt the following strategies:
Clear Communication Strategy
A clear and effective communication strategy across all the stakeholders in the supply chain reduces costs, and lead time and maximizes profits. With the price hike owing to the COVID-19 pandemic, businesses are finding it difficult to make profits.
One of the reasons is the lack of communication across the supply chain. Instead of overstocking and hoarding supplies, the supply chain manager should clearly communicate the demand and meet the customer’s expectations. It will create a less complex supply chain system.
Creating Transparency
The bullwhip gets out of hand when the supplier doesn’t know the origin of the demand. Sometimes, when you create a demand, there are discounts and seasonal offers. Transparency between supplier and customer can cause overreactions.
There are various tools that can ensure transparency to avoid the bullwhip getting out of control. For instance, Electronic Data Interchange (EDI) connects all the vendors in the supply chain on one platform. It streamlines the processes of placing an order, providing shipping notice, and creating an invoice.
Predicting the Right Way
Just like you have various tools to maintain transparency between the supplier and customer, you can find out data about every business element and create valuable insights to avoid the bullwhip effect.
There is software that makes accurate predictions using advanced algorithms and calculations to interpret trends and create forecasts for the future. The Internet of Things is the new rage in supply chain management. There are sensors that gather real-time information about how much stock is in the inventory. It helps keep every member of the supply chain on one page. When you know the exact stock count, you are able to predict in the best possible way.
In the post-pandemic period, controlling the bullwhip effect has become more pertinent. All these crucial factors, combined with the right solutions can play a significant role in supply chain management.