Bullwhip Effect: The Daily Definition
What is a bullwhip effect?
A bullwhip effect is a dramatic result that stems from a change in demand downstream in the supply chain. When a bullwhip effect occurs, inventory levels quickly move from backordered to overstocked. The cause varies, but delayed communication in both the order entry and product movement areas of the supply chain is often to blame.
Let’s say that your distribution business receives an unexpected order for 500 pallets of shampoo. You don’t have enough supply on-hand. So, that shampoo goes on backorder.
In the time that it takes for you to order more shampoo from your vendor, the customer cancels their order. This information is not communicated to your purchasing department in a timely fashion, and so the 500 pallets of shampoo are delivered to your warehouse. You now have more shampoo in stock than you need.
Our two cents:
If your distribution business struggles with accuracy and communication, you are more prone to the bullwhip effect. Demand forecasting is essential when working to avoid this effect, and visibility into your pipeline is one of the best ways of improving demand forecasting.
Beyond pipeline visibility, you need clear communication lines with the rest of your supply chain. In our illustration above, instant, accurate order updates would’ve prevented the purchasing department from ordering too much shampoo. This is where your ERP solution comes into play. When everyone in your company is accessing the same data and that data is updated in real time, you minimize the risk of over-ordering in this way.
Too much inventory on-hand can cripple a growing distribution business. It’s important to pay close attention to the warning signs that you might be overstocking, or that you’re about to run out of stock. Take a good long look at your current purchasing strategies, and make sure they’re bullwhip-proof.