If you are a business-to-business, or B2B, company, your customers are other businesses rather than individual consumers. If this is the case, you may see erratic up and down ordering patterns, which is known as the bullwhip effect – that is, the unstable ordering patterns that occur in supply chains.
The further up the supply chain you are, the more pronounced the bullwhip effect is. As a supplier, you will see big demand spikes followed by long periods of low demand. As you adjust your ordering patterns to accommodate the bullwhip effect, your suppliers will experience it because of you.
It is called the bullwhip effect because the pattern along the supply chain resembles a cracking bullwhip, where the waves of the whip get larger as you go up the supply chain. For many businesses, implementing a parts inventory system that effectively deals with the bullwhip effect is a challenge.
Here is a simple example of the bullwhip effect:
Mark has friends visiting for a few weeks, so he buys five extra cases of water at his local grocery store. The store sees this demand spike and orders five cases plus five more cases as safety stock from their supplier. Their supplier sees the demand spike – ten cases for them – and orders ten cases plus ten more for safety stock from their supplier. And so forth.
When Mark’s friends leave, however, he no longer needs extra water, and the local store finds itself with too much water in its inventory. They therefore stop ordering from their supplier in order to reduce their inventory; the supplier one more tier up has an even more inflated inventory and ceases ordering water from his supplier as well. And so on.
When this happens, more and more money is tied up in unnecessary inventory, especially as you climb the supply chain. The problem is that each supplier is acting rationally based upon their own demand spikes, inventory levels, and best interests, which can make the bullwhip pattern an brutal cycle.
Our example of the bullwhip effect is simplified because it covers only the cause of overcompensation on the part of the suppliers. There are other possible causes, however: order batching, price variations, lead time changes, lack of communication/coordination along the supply chain, and time delays in the flow of information and materials.
Are you experiencing the bullwhip effect to your detriment? Let Acumen Information Systems help. Contact us for more information on getting your inventory back on track.
