The bullwhip effect and inventory management in the supply chain

The bullwhip effect is a concept related to the supply chain. This effect explains fluctuations in sales (demand), production, and deliveries. The term refers to demand distortions that intensify as one moves up the supply chain.

This effect results mainly from inefficient information flow in the supply chain, which causes the accumulation of excessive inventory at individual partners. There are four basic cases of the bullwhip effect:

• the Forrester effect, related to lead time and demand signal processing,
• the Burbidge effect, related to order batching,
• the Houlihan effect, related to rationing and product shortages,
• the promotion effect, related to price fluctuations.

The emergence of the bullwhip effect causes an increase in the variability of demand and orders in subsequent links of the supply chain, thereby adversely affecting the stability of operations carried out by the entire chain. The causes of the bullwhip effect can be divided into two groups:

• resulting from the operational activities of entities,
• resulting from the behavior of entities.

The first group includes:

• demand forecasts,
• order batch size,
• price fluctuations,
• rationing or lack of inventory,
• order lead time,
• inventory management policy,
• inventory replenishment policy,
• inadequate control system,
• lack of transparency,
• number of tiers in the supply chain,
• multiplier effect,
• lack of synchronization of activities,
• lack of feedback,
• partial optimization (suboptimization),
• processes carried out within entities,
• limited resources.

The second group includes:

• decision-making negligence regarding delivery delays,
• deficiencies in staff education (lack of appropriate training),
• fear of stockouts.

The bullwhip effect also involves considerations regarding the physical and informational boundary point. At the physical boundary point, there is a change in the principles of controlling product flows, shaped by pull and push strategies. (…)

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