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Causes of Bullwhip Effect in Supply Chain

What is Bullwhip Effect:

We can explain the bullwhip effect when there is difference in the order send to the manufacturer and the supplierWhat is Bullwhip Effect has delivered the wrong order to the end customer. Bullwhip cause due to irregular order delivered to the customer, in supply chain bullwhip can result in inflated fluctuations. There are many factors, which can cause bullwhip effect like lack of communication, disorganization, order batching etc. Poor customer service, missed production or inefficient transportation can result in loss of customers and loss of their trust.

For example in the case of HP printers there were some fluctuations from many time, when they checked it they have noticed that the problem is in the circuit division, the HP had rely on their distribution channel, big variations which were in demand also the problem of printers. There was poor customer service, poor production and inefficient capacity. The problem was in the management sector of HP. This is what happens when supply chain is plagued with a bullwhip effect.

Causes of Bullwhip Effect in Supply Chain:

Bullwhip effect is better known as “beer game”. In which the bullwhip effect is outcome of the players. The companies who want to control the bullwhip effect should try to focus on supply chain infrastructure. Four major causes of bullwhip effect are:

  • Demand Forecast Updating:

For any product there is need to forecast it, the planning should be done in the case which involve many planning is as if material requirement, inventory control etc. planning or forecasting should be done according to the order of the customer. To predict future product demand is important, when the manager forecast it, and then there will less or no chances of bullwhip effect. If the customer orders meet his requirements and there is safety stock at the back, then there are no longer fluctuations.

  • Order batching:

In supply chain, some companies place their order in stock and some companies immediately place their order. This is why there are two types of order batching, one is periodic ordering and other is pushing ordering. Periodic ordering is when company place their order on weekly, monthly or biweekly basis and push order is when company order in stock for long time investment. Some companies get benefit through push order and through periodic order. The manufacturer has to understand that what their customer want. To understand irregular pattern of order batching from their customers is more important than anything is, order batching can safe company from bullwhip effect.

  • Price Fluctuation:

Price fluctuations could be result in making profit and safe company from bullwhip effects like if company periodically has sales promotion like price discount, coupons, quantity discount etc, the companies will buy product in bigger quantity, which will help the company in making profit. This sales promotion force a customer to buy in bigger quantity then needed and he will stop buying when the price becomes normal again. Buying in advance make sense for the consumer because he can earn much more, than he can earn from the actual price.

  • Rationing and shortage gaming:

When the product demand is high then its supply, a manufacturer often share or ration its products to his customers. This is the advantage at customer’s side that when there is shortage of the product he knows that his manufacturer has ration for him. This will give benefit at the manufacturer side. Rationing can also help the company to get safe from bullwhip effect.

Solution for Bullwhip Effect:

If a manager comes to know that where they are lacking, or why they are facing bullwhip effect, then they can try to overcome it and can make new strategies for their company. They can implement new innovative programs, which can save them from bullwhip effect. The planning about transportation channel, pricing and inventory could also help managers to stay safe and sound.

Stabilize Prices:

Stabilize the prices is one of the best way to overcome from the bullwhip effect caused by forward buying. If manufacturer has stable price of his products means he don’t allow discount on sales, but has fixed price of his inventory then it can give him benefits.

To compete with the bullwhip effect, companies should know the underlying causes, decision making and implementing new initiatives could be helpful for them in future.

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