The Bullwhip Effect and How to Prevent It

What is the bullwhip effect?

Let’s describe a scenario you may be all too familiar with. Let’s say you typically order 100 units of an item for your warehouse. One day, you suddenly have a higher number of orders than normal for that item and you sell 150 units. This unusual event leads you to believe that you should communicate with the manufacturer and increase the number of that item on your typical order (You think you are predicting future inventory demand).

Well, fast forward and order numbers settle back to normal. Because this sudden spike in orders was not actually the start of a new trend, you are left with an excess amount. You’re now stuck with an excess of inventory you are forced to use valuable space for. This is called the Bullwhip Effect.

Predicting trends and determining inventory levels is one of the hardest tasks for the warehouse management team. The bullwhip effect can lead to excess inventory levels, unhappy customers, supply chain issues, and long fulfillment times. All of these are unfortunate consequences that almost every company needs to avoid.‍

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Why is it called the bullwhip effect?

The bullwhip effect is essentially the overage and shortage that occurs when companies inaccurately predict supply chain and future orders. The reason it is called bullwhip is because of the multiple points along the supply chain that all affect each other.

For example, think of a trail mix manufacturer. The company may have to import chocolate candies from one source, almonds from another source, packaging from another source, etc. Essentially, the trail mix company’s product is affected by several other layers or companies in the supply chain.

If you picture a bullwhip, the rope moves in many different directions before striking at the end. This is symbolic of the supply chain.

In this case, if they fail to accurately predict the demand for trail mix, they could be left with significant excess amounts of products, or they could be scrambling for more product and having to reach out to the other points in the supply chain to increase their supply. This delay could be costly, and lead to unhappy customers who experience shortages and delayed deliveries.

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Tips for Managing the Bullwhip Effect

Change the Frequency of Orders

Instead of making larger, less frequent orders, consider changing your strategy. Create a new ordering schedule by increasing frequency and decreasing size of the order. While it may seem time consuming to place additional orders, if you have an organized schedule and clear communication with the supplier, it will be worth your time.

Smaller, more frequent orders allow you the flexibility to tweak the order easily and adjust to the trends of market demand. This will help you to more accurately predict inventory and prevent excess items or a lack of inventory.

Create a Clear Channel of Communication

In order to create an efficient fulfillment and inventory system, focus on streamlining your supply chain. The more points of communication you have in your supply chain, the more opportunities there are for delays or miscommunication.

By cutting out any unnecessary points of contact and establishing better communication with the essential members of your supply chain, you will allow your inventory system the best chance at success.

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Control Purchasing

In order to keep happy customers, it’s important to manage their expectations. By limiting the number of sales to the inventory you know you will have available to ship, you prioritize your customer service.

Customers that place an order will know when they can reasonably expect to receive their items. Consider website functions that notify customers if an out of stock item they desire is available. This allows you to have communication with your future customers whose orders you could not take due to inventory levels.

Conclusion

The bullwhip effect can be frustrating for customers and businesses. There are steps you can take to mitigate the bullwhip effect in your supply chain.

Consider a professional service to help you streamline your warehouse and fulfillment services. WarehouseOS and Hoj Innovations offer a free consultation with professionals to help you better understand your warehouse and create a more efficient process. Reach out to us today to schedule your free consultation and help mitigate the effects of the bullwhip.