The bullwhip effect, first coined by MIT's Jay Forrester in 1961, refers to a trend of larger and larger swings in inventory in response to changes in customer demand, as one looks at organizations further back in the supply chain for a product. As we go up the supply chain from consumer demand to raw materials, each supplier tends to see greater variation in demand and as a result there is a greater need for safety stock inventory (and as we know, variation in any process can cause waste in many forms).
One of the keys to a lean supply chain is accuracy in demand planning as unseen spikes in demand can force the upstream supply chain to respond with changes in production.
As a result, today when discussing lean supply chains, the bullwhip effect can help to explain at least some of the causes of waste found. Some of the causes, as pointed out in an article by the University of San Francisco (How to Manage the Bullwhip Effect on Your Supply Chain), include:
Delivery delays—The longer the delay, the more likely the bullwhip effect will occur, as orders will increase throughout the supply chain while everyone awaits delivery.
Order batching—An organization accumulates larger orders before processing them in an effort to reduce costs and create transportation economics, and they may also wait to place larger orders to benefit from lower prices offered during a promotion.
Sales and price discounts—Can cause a “boom-or-bust” cycle.
Shortage gaming—Customers purchase more than they need during periods of short supply.
So it is critical to have an understanding of your customers’ (and in some cases their customers’) demand planning and inventory consumption. Supply chain partners need to collaborate and have visibility to enable a lean supply chain to be truly successful.
As the article says “reducing the bullwhip effect requires a thorough evaluation of organizational policies, measurements, systems and practices,” which is quite consistent with a lean philosophy.
Once you start down this road, at least some of the pain will go away as we target the elimination of some of the kinks in the supply chain caused by effects of bullwhips.
