Management Guide

What is the bull-whip effect in the context of supply chains? What causes this effect and how can it be removed or alleviated?

( Bishal Shrestha says : )

The increasing variability/fluctuation in demand or order placed as one moves up the supply chain, from the customer's end to the supplier's end is called the bull-whip effect. This effect results in un-necessary inventory build-up at each stage of the supply chain. The causes for this effect are

-          Local optimization: Lack of information sharing among the various entities in the supply chain

-          Quantity Discounts/Incentives:

-          Large Lots

            Some ways to reduce the bull-whip effect would be

-          Information sharing / "Pull" data: All the players in the supply chain have access to the correct "pull" data from the customer's end

-          Discounts based on annual qty instead of for each order/lot

-          More economical ways for transportation of small lots

-          Vendor-managed inventory

-          One entity in the supply chain responsible for the control and management of inventory for all the entities in the supply chain

Lal Bahadur Karki Says :

suppose, total demand of customer is 100 quantity for a commodity then they go for the real purchase. and when customer get demand from wholesaler then s/he ask for 110 quantity for further stock too. and wholesaler thinks that the real demand is increased and ask for 120 quantity to the manufactors. and the last important thing is that the manufactors think that there is real increase in demand so that s/he produces more than 120 quantity. so, the real demand is 100 quantity but real production is more than 120 quantity which shows bull-whip effect in the merket. this effect arises due to lack of information from supply chain and unsystematic belief to the supply chain without any prior market survey. this effect shows over production and stock of the quantity so that it increases cost of the producer for holding it. to remove it, manufactures must do market survey and there must be proper structure of the supply chain so that the information can pass easily to the upward and down wards of the supply chain.