What is the bullwhip effect? Causes and effective solutions

Currently, many businesses are experiencing the Bullwhip effect, leading to incorrect forecasts of user demand and creating fluctuations in the supply chain. So what is the Bullwhip effect ? What is the cause and effective solution? In the article below, 1C Vietnam will answer the above questions in detail.

1. What is the Bullwhip effect?

The Bullwhip Effect is the phenomenon in which actual demand is distorted and amplified as it moves from the retail level to the manufacturing level. The main cause of this effect is that supply chain members tend to order more than actual needs to ensure there is no shortage of goods. This leads to excess inventory, waste, and difficulty predicting actual demand.

To illustrate the Bullwhip effect, let's consider a retailer selling personal space heaters. During the winter, the retailer's sales spiked from 5 units per day to 15 units per day. To meet this demand, the retailer doubled the order, from 20 units to 40 units. The manufacturer then increased production to 40 units.

With the above situation, the actual demand is only 15 units per day, but has been amplified to 40 units per day. This leads to excess inventory at the retail and manufacturing levels. If spring comes early, retailers will have a backlog of goods and have to reduce prices.

The Bullwhip effect can be used to explain the phenomenon of hoarding. Specifically, when demand increases, buyers can place large orders at the source level to ensure there is enough inventory. However, this can lead to excess inventory and reduced inventory lead times, making the supply chain less flexible.

2. Cause of the Bullwhip effect

Based on understanding what the Bullwhip effect is , it can be seen that there exist 7 main causes causing this problem, including:

• Time issues: Delays in production, delivery, etc., forcing stakeholders in the supply chain to place orders in advance to ensure there is enough stock. This leads to exaggerated demand and causes the Bullwhip phenomenon.
• Poor decisions: Stakeholders in the supply chain make decisions that are incorrect or inconsistent with actual customer needs. For example, retailers may over-order to take advantage of discounts, or manufacturers may increase production to meet high forecast demand.
• Lack of connection: Stakeholders in the supply chain do not exchange information and coordinate with each other effectively. This results in each side making decisions based on incomplete or inaccurate information.
• Market Overreaction: Markets can overreact to small changes in demand. For example, a sale may cause consumers to stock up, leading to a spike in demand.
• Retailers order in batches: Retailers often order in batches to reduce shipping and warehousing costs. This leads to exaggerated demand during peak periods.
• Other factors: Other factors such as price changes, policies,... can also cause the Bullwhip effect.

3. Bullwhip effect affects the supply chain

The Bullwhip effect can have negative consequences for supply chain management, including:

• Increased storage costs: The Bullwhip effect leads to the accumulation of too much inventory, which costs money in storage space, transportation and sales costs. At the same time, predicting the costs needed for storage and transportation is also more difficult.
• Increased labor costs: The Bullwhip effect requires excess inventory to be processed, sorted, and consumed, leading to the hiring of additional employees. In addition, lack of inventory also causes sales staff to have to do more work such as finding replacement products or arranging later deliveries, thereby increasing personnel costs.
• Not meeting customer expectations: Outages can make customers feel frustrated, annoyed, and even switch to competitors' products or services. This will reduce the company's reputation and profits.
• Causes waste: Too much inventory can cause waste, especially with perishable items or when products are withdrawn from the market. These situations can cause the value of goods to decrease, the resources needed to consume them to increase, and processing costs to increase.

4. Solutions to minimize the Bullwhip effect in businesses

It can be seen that the Bullwhip effect causes many difficulties in supply chain operations and management. To minimize the impact of the bullwhip effect, businesses can apply the following 4 common solutions:

4.1. Accept the existence of the Bullwhip effect

The Bullwhip effect always exists in the supply chain of any industry, because customer needs always fluctuate and change over time. Managers therefore need to accept to identify and clearly understand the effects that are occurring.

On this basis, businesses can accurately analyze actual market needs, thereby making reasonable production and inventory decisions. This will help businesses reduce excess inventory, save costs and improve supply chain efficiency.

4.2. Transparency of information between suppliers and customers

Between members of the supply chain, there still exist conflicts in goals, leading to information being kept secret. For example, points of sale do not want to share information about best-selling products with distributors for fear of increasing import prices. Distributors also do not want to share information about selling points, prices, and promotional programs with manufacturers for fear of being controlled.

However, this leads to information not updating in real time, reducing distribution efficiency. In fact, information sharing and cooperation are the right path to sustainable development. When located in a supply chain, every member has their own role, and only when they know how to coordinate smoothly can they easily and effectively achieve common goals.

4.3. Control the risk of price fluctuation issues

Frequently running discounts can disrupt consumers' normal purchasing patterns. Therefore, businesses should consider minimizing or integrating promotional programs appropriately into forecasting and forecasting plans to avoid causing unnecessary disruption.

4.4. Manage inventory in warehouse and on the market

To have appropriate production plans, businesses need to know the quantity of inventory in distributor warehouses and the current inventory of each retail point. Normally, manufacturers will update market inventory data in two ways:

• Receive reports from distributors, who directly manage goods at retail points.
• Check directly at each point of sale through the manufacturer's sales team.

Therefore, if businesses want to effectively manage the flow of goods outside the market, businesses need to build a strict management information system and regularly exchange information with distributors and sales teams.

5. 1C:Company Management software supports professional warehouse management

1C:Company Management software is an open business management solution with flexible features, meeting all needs of businesses of diverse scales and operating models. The solution has the ability to connect all departments in the business on a single software system, helping to save time, costs and improve operational efficiency.

1C:Company Management software provides a comprehensive, effective warehouse management solution that meets the needs of businesses with outstanding features including:

• Full management of warehousing transactions: The software supports all basic warehousing transactions, including: receiving goods, warehousing, inventorying, recording expenses, transferring inventory,...
• Detailed tracking of goods quality: 1C:Company Management allows detailed tracking of goods quality, including changes in goods quality, special sales conditions for poor quality goods.
• Calculate cost of materials: Solution to support the method of calculating cost of materials accurately and quickly. The popular calculation method is weighted average.
• Set maximum inventory, minimum inventory, replacement materials: 1C:Company Management software allows businesses to set maximum inventory, minimum inventory, and replacement materials when conducting production to ensure ensure smooth business operations.
• Managing material information in the warehouse: Solution 1C:Company Management helps manage material information in the warehouse in a complete and detailed way, including: characteristics, series, shipments, variety of units of measure, estimates. inventory room.
• Warehouse documents: The software provides a variety of warehouse documents, suitable to the needs of businesses, including material transfer documents, material export documents, inventory documents, warehouse receipt documents. ,…
• User authorization: System administrators can grant access rights to each specific business processing function. This contributes to effective and absolute security of warehouse information for businesses.

Above is the full answer about what the Bullwhip effect is . This is a common phenomenon in the supply chain, increasing costs, reducing production efficiency and reducing customer satisfaction. To minimize the impact of this effect, businesses need to clearly understand the causes and apply appropriate solutions. In addition, businesses can apply modern solutions such as 1C:Company Management software to support effective warehouse management, avoiding the Bullwhip effect.