The Bullwhip Effect in 3 minutes

Description

The Bullwhip Effect is a well known supply chain distortion, commonly described as a problem that must be avoided. At Lokad, however, we would argue that the bullwhip effect is a phenomenon that naturally occurs in supply chains, and minimizing it is not necessarily advantageous for your business.

Even thought nobody wants to heavily over- or underestimate demand, companies tend to amplify demand variations on purpose. A full container load is cheaper than a half container load, and together with price breaks from suppliers, economies of scale can significantly lower the costs. Furthermore, promotions attract customers from competitors but simultaneously disrupt consumer’s buying patterns as well as synchronizing everyone to stock up at the same time.

In conclusion, the bullwhip effect comes from rational decision making from the players in a supply chain. It is important to be aware of its causes and consequences to understand how to best leverage your options in the most profitable way for your business.