For those working in the field of logistics, there are several supply chain complications to be aware of. One such complication is the logistics bullwhip effect. Understanding what this is will give you the information you need to know in order to help remedy the problem.
What Is The Bullwhip Effect?
The bullwhip effect is an inefficiency in the logistics supply chain. Specifically, it refers to times where there is too much or too little inventory on hand to meet customer demand. Consequently, this effect is generally caused when the forecast of customer demand is incorrect. Any time there are fluctuations in the supply chain, regardless of how small, there will be a dramatic trickle-down effect. Many suppliers or dealers in the logistics industry will focus solely on meeting their orders without thinking about how the full chain functions as a whole. This also creates waste and limits the quality of service provided as a whole.
A Deeper Look at the Bullwhip Effect
In truth, every business in the chain has an influence on the whole process. When forecasting, inaccuracies play a big role in how well a chain functions. A small miscalculation can easily cause a bullwhip effect or butterfly effect that has a negative impact and the whole chain. It is critical for companies to use reputable 3PL partners and reliable distributors to help ensure the accuracy of operations and proper supply chain health.
Supply chains involve a lot of moving parts. Furthermore, when one of those parts experiences a loss or increase in demand, it causes a ripple along the rest of the chain. That ripple is akin to the cracking of a bullwhip, which is where the name of the effect was derived. A small change similar to a small wrist movement creates a large reaction at the furthest reaches of the supply chain.
The Cause of the Bullwhip Effect In Logistics
There are a number of different causes, the most common being an improper forecast. Aside from that, the change generally originates at the retail level. First, there is a drastic change in consumer demand . When end users suddenly have an increase or a decrease in the number of products they desire, it caused a massive disruption with wholesalers, distributors, raw material suppliers, and manufacturers who are working to meet the demand or absorb the losses. Most parts in the supply chain line will do as much as possible to adjust to the changes in demand, but both over- or under-reacting can lead to loss during extreme fluctuations.
The Logistics Bullwhip Effect- An Example
To better explain the effect in the logistics field, let’s create an example. Imagine that you have an electronics store that usually sells 50 of a specific type of phone each week. One week they happen to sell three times that amount. This can be due to a rise in popularity, or even due to another smaller business buying out the stock.
As a result of the increased sales, the retailer will stock twice the amount that they usually stock in order to keep up with an increase in demand. The distributor that supplies their phones will then increase their order from the manufacture in order to meet the demand of their buyer and to maintain a ready stock so they don’t run out. The manufacturer seeing the increased demand will then triple their production in order to keep up with demand and maintain market share. The end result of the one-week increase is that the maker of the product has created three to four times the usual amount based on increased forecast demand. The same can also go in reverse with lowered demand instead of increased demand.
What Happens Due to the Bullwhip Effect?
The bullwhip effect rarely has a break-even result. It will either cause too much inventory to be generated, and this wasted, or it will cause a scarcity of inventory in the market, which can result in a loss of market share. Depending on which way the whip was cracked, this can mean a loss of business deals, delays in shipping, or simply a miscommunication between partners in the supply chain. No matter which way the whip cracks, the effect is felt all along the supply chain.
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