The bullwhip effect is phenomenon observed in supply chains whereby unpredictable elements introduced by human behaviour in the lower part of the chain become more pronounced the higher up the chain they move. The effect is important because it is frequently the cause of serious inefficiencies that result from ordering too much or too little of a given product as links in the chain overreact to changes further downstream.
The bullwhip effect is created by several factors. One is the fact that managers perceive demand differently at different points in the chain and order based on those perceptions. Other difficulties that play a role include ordering processes, price instability due to promotions and other factors, and problems related to intentional exaggeration of demand by customers due to shortages and the resulting cancellations when supply normalises.
One example of the bullwhip effect is the beer distribution game, a hypothetical model set up for four human players that tests the manner in which participants in a supply chain behave. The 2002 Supply Chain World Europe Conference and Exposition found that when the computer substituted for all the roles, it achieved a result of 228 Euro of costs. However, the average for human players in the simulation ran 500 to 600 Euro. In one case, the costs exceeded 1,500 Euro.
Proctor & Gamble
The bullwhip effect is seen in real life as well. It originally takes its name from executives at Proctor & Gamble who began to see disturbing and often inexplicable variations in supply and ordering figures on diapers, despite a relatively stable demand from consumers. Oddly, the company even saw that variability increased further when examining its own orders to its suppliers.
Hewlett Packard observed a similar effect to the one Proctor & Gamble found. Upon investigating sales of a given HP printer by a retailer, the company found that orders from the merchant exhibited far bigger movements that what was seen by changes in actual sales of the item. Further, the same could be said of orders from HP's printer unit to another division of the company supplying it with materials.
Better cooperation and communication are seen as key elements in preventing---or at least mitigating--the consequences of the bullwhip effect. Reductions in lead time also help, as do a variety of new shipping, ordering and pricing methodologies that can introduce a greater degree of stability and prevent small fluctuations in demand from breeding excessive changes on the suppliers end of the chain.