WHICH PROBLEMS CAN EMERGE FROM INFORMATION DISTORTION ALONG THE SUPPLY CHAIN?
A supply chain is composed of several stages and actors. When stakeholders fail to communicate and work together properly, mistakes are likely to happen. One of the problems that can emerge from lack of communication and widespread disorganization is the Bullwhip Effect (also known as the Whiplash Effect), which we are going to explore further in this article.
The Bullwhip Effect: definition
The Bullwhip Effect can be described as a case in which the orders sent to manufacturers and suppliers create a larger variance then the sales to the end customers. This variance, which emerges in the lower part of the supply chain, can explode higher up.
In other words, the higher links in the supply chain could overestimate (or underestimate) the actual product demand, causing significant, dangerous fluctuations.
Whiplash Effect: a practical example
Let’s say that a customer asks for 7 product units (e.g. 7 umbrellas). In order to have enough units for his clientele, the retailer involved in the transaction could decide to order 10 umbrellas. The retailer’s supplier is probably going to order 15 units in order to not go out of floor stock, or because of the benefits of block purchasing.
When the manufacturer receives the order, he could decide to order in bulk from his supplier – so, let’s say that he is going to finally produce 30 umbrellas.
This whole process shows us that, in the face of a 7 umbrellas order, we are left with 30 umbrellas (23 more than the units which have been actually requested).
The final stage of the process is that, as a result of overproduction, the retailer will be forced to drop prices in order to increase demand and dispose of the products.
Factors to consider
The Bullwhip Effect is one of the most common problems in supply chain management. In order to prevent it, we have to take into account the factors which contribute to create it. Below you can find a list of the main issues you should carefully consider:
- Lack of communication
All the links composing the supply chain should be able to communicate quickly, efficiently, and smoothly in order to avoid skewed perceptions of the actual demand.
- Free return policies
Consumers might be tempted to willingly inflate their demands due to shortages or convenience (e.g. ordering two different sizes of the same dress to choose the one that fits better). This levity may lead retailers to overestimate the actual demand and end up with excess units.
- Price variations
Special discounts and clearance sales can change the regular buying patterns of a large number of consumers. Buyers aim to take full advantage of these situations and, since discounts are offered only within a short timeframe, they can inflate demand.
- Aggregate orders
Many companies accumulate their customers’ requests so that they can place fewer orders (e.g. making weekly or monthly orders). As a consequence, at certain times it might seem that the demand for a specific product is growing – but it’s just the misleading result of order batching. Moreover, this distorted information may lead to wrong estimates about demand and fluctuations.
As the Whiplash Effect is a common problem for supply chain management, we should all examine the origins of the phenomenon in order to find effective strategies to limit the damage and make our supply chains more and more efficient and cost effective.
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