Maintaining the ability to deliver and operating in a cost-sensitive manner – especially in challenging times and with current freight prices, this presents companies with an enormous challenge. If the consequences of the so-called whip effect are added to this, additional costs are pre-programmed. We explain how you can protect yourself from the consequences of the bullwhip effect and avoid additional costs.
Supply chain management in challenging times
In the volatile international trade of goods, all supply chain actors want to keep costs for procurement, warehousing, etc. as low as possible. In addition, there is a desire for independence from supply chain partners. The bullwhip effect can jeopardize these efforts and lead to supply bottlenecks or even increased inventories.
Whip effect: What is the bullwhip effect?
The bullwhip effect (or whip effect) is a phenomenon of multi-stage supply chains. It describes the process that kicks off when demand changes at the end customer (the whip holder) and these fluctuations are passed on to suppliers and ultimately producers with increasing ripple effects. That way, even small changes can add up to large capacity fluctuations.
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What are the causes of the bullwhip effect?
The bullwhip effect primarily comes into play when supply chain actors do not communicate with each other and they merely optimize their processes according to the knowledge available to them. As a result, the overview of the entire supply chain is lost – to the detriment of all stakeholders involved.
The more distant suppliers or producers are from customers, the greater the fluctuations: Retailers optimize their orders with the supplier, taking into account delivery times and costs, quantity discounts, etc. The latter waits, bundles orders received and thus tries to optimize its costs. This order delay makes it difficult for the subsequent players to calculate their requirements. As a result, forecasts become inaccurate.
Especially in demanding times, all parties want to ensure their ability to deliver and calculate bottlenecks. It is not uncommon for this to lead to increased order volumes, which are then multiplied along the supply chain. At the production level, the bullwhip effect has finally reached its maximum: quantities are produced for which there are no buyers. This not only results in cost disadvantages due to increased inventories or slow-moving items – overproduction is also unsustainable and ties up resources at all levels.
How can companies reduce the bullwhip effect?
Over- and undercapacity can only be avoided through close cooperation between the supply chain actors involved. The exchange of information between sales, planning, purchasing and logistics across the entire supply chain leads to a significantly improved interpretation of the processes and optimizes the forecasting capability. If all parties involved work together transparently – for example, by using a common information architecture such as cloud-based SCM software – this leads to an improved flow of goods.
Transparent supply chain reduces whip effect on supply chains
The basic prerequisite for collaboration with supply chain partners is an extensively transparent supply chain within one’s own company. The use of an SCM system can improve the overview of the individual process steps and offers transparent control options. For example, companies can clearly identify which goods are needed immediately or whether freight should be temporarily stored in a buffer warehouse.
Integrated order management also helps to precisely track when the ordered goods will be produced and shipped. In this way, incorrect planning can be minimized internally and inventory levels can be realistically adjusted. Ultimately, this benefits all supply chain players, creates planning reliability and saves costs.
Reducing the bullwhip effect: cooperation and transparency in the supply chain
In the context of the bullwhip effect, the dynamics of the supply chain determine the behavior of the players involved. The goal should be to gain control over one’s own supply chain and to actively shape it. The bullwhip effect cannot be prevented entirely, but companies can significantly limit its consequences and thus save costs and resources in the long term.