Understanding the bullwhip effect

- Insufficient information always invites danger. And in the logistics world, nothing could be more true. Let me give you an example. Let's say you normally buy one case of soft drinks per week. Your purchases are very steady, week in and week out, one case per week. Then you decide that you'll have a party next weekend. So this week you buy five cases of soft drinks. The grocery store sees this sudden spike in sales and is immediately worried about running out of product. So they place a rush order with the distributor for more cases of soft drink. The distributor sees this rush order come in and also worried about running out of stock, now increases its regular order with the soft drink company. The soft drink company schedules overtime as it rushes to meet this sudden surge in demand, happy that more people want to buy their product. If one distributor has increased orders, they reason more wholesalers will follow. Every member of this logistics system believes that customer demand for this product is increasing, when this is simply one isolated event. After the party, you return to your one case per week schedule. And the supply chain is wondering what to do with all this inventory. They wonder what happened to the demand? This phenomenon is known as the bullwhip effect because the further away you are from the customer, the more your information is distorted. An actual change in customer demand is like a flick of the wrist at the handle of a bullwhip, resulting in a huge movement at the end of the whip. In your logistics channel, that's where the manufacturer would be. And that huge movement at the end of the whip translates into making more products. In this case, products that are not really needed by the customer. How do we prevent the bullwhip effect? The answer lies in sharing the information and coordinating efforts throughout your logistics network and along your supply chain. An excellent practice is collaborative planning, forecasting, and replenishment, commonly known as CPFR. Applying CPFR, all members of your logistics system would work together to understand and react to changes in customer demand. The retailer, the wholesaler and the manufacturer, work together with one plan. They provide one forecast and they design one system to move inventory to the customer based on their collaborative forecast and their collaborative plan. Remember that the closer you are to the customer, the more accurate your information will be. So it usually is best to use information from the retailer who is closest to your final customer. The major obstacle to CPFR is trust. Each member must know that their information is not going to be used inappropriately by the other members. CPFR is best applied with your key partners, ones you've been doing business with for some time. Have you suffered from the bullwhip effect? You must do a good job in balancing supply with demand and the key ingredient to success is closer collaboration with the right logistics partners.