Demand Considerations: Bullwhip Effect

Amandine Cazeaux

Part 1 of the five-part series “Designing Resilient Distribution Networks

Conventional supply chains can generally be categorized as forecast-driven (push) or demand-driven (pull). Organizations conventionally define their supply chain strategies to be either based on a manufacture-to-forecast model, which pushes the manufactured products to end consumers, or a demand-driven model, which waits for an order before manufacturing begins.

While forecast-driven supply chains run the risk of over- or understocking, demand-driven supply chains may not be able to meet demand in time. A resilient supply chain is one that, in principle, is demand-driven but includes certain push components to de-risk the challenges that come with being demand-driven. Thus, the most efficient supply chains are those that are primarily demand-driven but include some forecast-driven components.

This brings us to the bullwhip effect: amplification in the variability of demand, as the demand moves from the customer to the raw material supplier. It results in inventory buffers in the network causing high inventory-holding costs. which in turn, bring down the efficiency and profitability of the supply chain.

bullwhip effect

While controlling the bullwhip effect is traditionally the scope of forecast-driven supply chains, it is also critical for resilient supply chains. The bullwhip effect is caused by variability in demand, which is typically caused by:

  1. Every node (retailer, distributor, etc.) in the network updating demand at its own level
  1. Every node in the network rounding off the demand at its level
  1. Promotions and discounts adding to sudden increases in demand
  1. A supplier delivering only a portion of the order that a buyer has asked for (rationing), or a buyer artificially increasing the order knowing that the supplier will ration it (gaming)

A resilient supply chain aims to fix these issues to reduce variability. Supply chain software that includes trade compliance functionality and well-directed change management efforts can fix these issues by:

  1. Providing real-time access to usage patterns at the customer’s end, thus solving issues related to rounding off
  1. Unifying systems between various trade partners, ensuring clear visibility to upcoming promotions, discounts, and orders
  1. Improving agility across the supply chain by ensuring that each node has visibility into inventory levels across nodes
  1. Having well-defined push or pull strategies for different product types; for example, a forecast-driven strategy for fast-selling, less-expensive products and a demand-driven strategy for expensive and niche products

Once the factors causing the bullwhip effect are addressed, you can focus on building a balance between the organization’s decision making (planning, enabling) and execution capabilities (sourcing, making, delivering, returning). We will talk about this in the next article.

This five-part series, “Designing Resilient Distribution Networks,” focuses on five key aspects that modern distribution networks should incorporate. Bookmark the series page and watch for new installments over the next four weeks.

Amandine Cazeaux

About Amandine Cazeaux

Amandine Cazeaux is senior finance executive for a leading oil field services company and has past experience in auditing and controlling. When her company chose to implement SAP software, Amandine became the product owner in charge of intercompany transactions, which included the management of the design, testing, and deployment of transactions ranging from the procurement of goods to settling receivables and payables. She was involved in one of the largest and most successful SAP implementations.