Bullwhip Effect: Information Distortions in Supply Chains

The Genesis
The ‘bullwhip effect’ refers to increasing variability of demand further upstream in a supply
chain. The term – ‘bullwhip effect’ – is said to have first been used by Procter & Gamble, when
they experienced extensive demand amplifications for their diaper product ‘Pampers’.
In the literature this effect is described as a result of information distortion in a supply chain,
where companies upstream do not have information on actual consumer demand.
Consequently, their ordering decisions are based on incoming orders from the next
downstream company. This leads to amplified order variability: demand coming in from a
downstream company has a lower variability than demand to an upstream company.
Causes of Bullwhip Effect
This effect is ascribed to a few particular causes as discussed below:
Demand Forecast Updating: Links in the supply chain base the expectations
about future demand on orders they receive from the succeeding link. An
increase in orders leads to higher demand forecasts, which is transferred to the
next link by increased order quantity. That link also sees an increase in demand,
updates its forecasts and distorts information for the subsequent link. It works in
the reverse way when end customer demand decreases.
Because amount of safety stock contributes to the bullwhip effect, when the lead-
time between resupply of items along the supply chain is longer, the fluctuation is
more significant.
Order Batching: Demand comes in, depleting inventories but the company may
not immediately place an order with its suppliers. It often accumulates demands
before issuing an order due to considerations of fixed order costs or optimum
distribution efficiency.
Consider a company that receives orders daily but places orders with its
suppliers once a week. Variability of orders placed with suppliers is higher than
the demands the company itself faces.
Price Fluctuations: Because of promotions and trade deals, the price of a product
fluctuates, which increases variability of demand. When the price of a product is
low, a customer buys larger quantities than needed. When the price returns to
normal, the customer buys less than needed to deplete her inventory.
Rationing and Shortage Gaming: When product demand exceeds supply, a
supplier may ration its product to customers. For example, a producer may
allocate only half the quantity demanded downstream, in case of a shortage. The
problem is, customers are prompted to order more than they need in the
expectation that they may finally get as much as they need. Later, when there
are no shortages, orders disappear.
Possible Remedies
Measuring the total bullwhip effect does not tell which of the different causes contributes most
and which solutions are most relevant. However, for each of the above causes, several
possible remedies are suggested in literature. Some of them are:
Data on consumer demand may be made directly available to companies further
upstream in the supply chain. However, benefits of transferring EPOS data must
be clear before a system is set up to make this possible. In many cases a
significant investment in information systems is needed to collect and process
 the data. Further more, EPOS data is very valuable marketing information, that
retailers may not want to make available to the manufacturer.
In a particular supply chain, to assess the possible benefits of exchanging
demand information, it is important to be able to measure which part of ‘bullwhip
effect’ is due to incomplete demand information. By specifying at which level of
aggregation the information is useful, the various companies may find that a
particular level of aggregation data may be exchanged to dampen the bullwhip
effect and to improve operations, while detailed EPOS data may not be
exchanged if retailers want to protect that for marketing purposes.
Further, a single source of forecasting needs to be determined for the entire
supply chain.
Common reasons for inventory systems based on order cycles, are
Companies place purchase orders with their suppliers when they
run their MRP systems. Since most MRP system runs are monthly,
it results in monthly ordering with suppliers.
Economics of transportation: Normally there are substantial
differences between Full-Truck-Load (FTL) rates and less than Full-
Truck-Load rates. Thus there’s a strong incentive to wait till full
truckloads can be ordered.
However, reducing batch sizes can be enabled by using EDI to reduce
administrative ordering costs and using third party logistics service providers to
make less than full truckloads economically viable.
Also, a company may order assortment of different products. A truckload may
contain different products from the same manufacturer instead of a full truckload
of the same product. The effect is that for each product, the order frequency is
much higher, the frequency of deliveries to the distributors remains unchanged,
and the transportation efficiency is preserved.
Owing to price deals, the consumer engages in forward buying. Here,
consumer’s buying pattern does not reflect her consumption pattern, and the
variation of the buying quantity is much bigger than the variation in the
consumption rate – the bullwhip effect. Stabilizing prices and reducing the
number of promotions is a way of reducing this effect.
Rationing methods based on past sales rather than on orders placed can take
away the incentive for customers to inflate order sizes.

Complications in Source Identification & Implementation of Remedies

Notwithstanding the efficacy of the aforesaid remedies, what makes any of these difficult to
implement, is the inherent difficulty of segregating the particular cause responsible for
observing such an effect. Any supply chain is part of a larger supply web. For instance, a
manufacturer of butter may supply grocery chain A, where a project is started to reduce the
bullwhip effect. Variation in demand at the manufacturer is however influenced by his other
customers. It is difficult, in this case, to obtain insight into a particular supply chain, namely the
chain with grocery chain A. Thus for the grocery chain A, the source of bullwhip effect may be
upstream rather than downstream.
As of date, the theory of measurement of the bullwhip effect in practical settings has received
very limited attention. However, further research is required in this field for effective Supply
Chain Management.
By Anjan Datta of IIM, Lucknow.