The bullwhip effect is in fine form these days. What is the bullwhip effect? In short, the bullwhip effect is when small changes in demand at the retail level can cause large changes in demand at the wholesale, distributor, and manufacturer levels. Think of how a bullwhip whistles through the air… The small motion of the whip base causes a big crack at the end of the whip, putting everything in disarray.
The result can either too much inventory (excess product) or too little inventory (unfulfilled need). Ideally, retailers want to have enough inventory to fill demand, but not too much waste storing extra inventory. It’s a fine balance. And of course, the balance was upset by the COVID pandemic when the supply chain was significantly disrupted globally. (Remember all those empty shelves for toilet paper?)
Retail spending for some categories trended upwards during the pandemic when (1) customers demanded more inventory, so (2) retailers ordered more product, followed by (3) wholesalers ordering more from (4) manufacturers, who in turn ordered more from (5) suppliers to meet demand. The cycle was exacerbated into a larger swing in orders. Excess inventory tends to be discounted so that the shelves clear. And then the cycle start again….
Bullwhips are tough to manage. It takes coordination throughout the supply chain to maintain balance. Technology can help, but it takes a continual evaluation of on-hand inventory, order timing, and pricing.
Go ahead, crack the whip and see what happens.
Group Activities and Discussion Questions:
- Poll students: What categories of items have been in short supply? What categories have more inventory than needed?
- Show video from WSJ: https://www.wsj.com/video/series/wsj-explains/why-everything-is-on-sale-the-bullwhip-effect/86086359-41FE-440C-9E66-A106E6D045A6
- How can the bullwhip effect be minimized?
- What should be done at each step of the supply chain?
- Is there a long-term effect?
Sources: Wall Street Journal (5 October 2022). Why everything is on sale: The bullwhip effect. Video.