The supply chain bullwhip effect refers to a phenomenon when there is a huge difference between the actual demand for the product and its production, thereby leading to fluctuations in inventory management.
The bullwhip effect is detrimental because even small changes at any point in the supply chain can result in significant disparities. For instance, if a retailer sees a two- or threefold increase in customer demand but does not order more products right away, they are delaying backorders and increasing the pressure on suppliers in the future.
Demand changes at the consumer level ripple up the supply chain, increasing the pressure on businesses involved in the creation and distribution of a good. This could make a supplier produce much more or much less product, which would complicate their workflow and delivery.
You can avoid the bullwhip effect in the following ways:
- Keep the prices of your products stable.
- Avoid receiving multiple demand forecast updates from several sources.