What is the bullwhip effect
The bullwhip effect can be described as a series of events that leads to supplier demand variability up the supply chain. Trigger events include the frequency of orders, varying quantities ordered, or the combination of both events by downstream partners in a supply chain. As the orders make their way upstream, the perceived demand is amplified and produces what is known as the bullwhip effect (1).
The bullwhip effect has been perceived as an unavoidable effect of demand variation. Only recently have companies begun to tackle the ripple associated with variances in demand. The key to stemming the effect is realizing who is signaling the change in demand. Is it the manufacturer, distributor, the retailer, or the customer? Knowing where the demand shifts are originating is vital to attacking this problem.
How to manage it
There are a few methods that can be utilized to minimize the bullwhip effect. These methods are:
Portfolio approach
Postponement
Information sharing between supply chain members
1. Portfolio planning
Portfolio planning places an emphasis on diversifying the supply base. Portfolio planning¡¯s goal is to involve one or two suppliers in long-term contracts to cover a majority of the expected demand. The remaining demand is fulfilled by a smaller base of suppliers with short-term contracts who can respond quickly to changes in demand. These short-term contract suppliers receive a premium, because they are bearing the risk in this situation. Yet this short-term contract relationship with these suppliers allows the manufacturer to quickly adjust to shifts in demand.
Advantages
The portfolio approach attacks procurement issues by diversifying the manufacturer¡¯s r ...