The Bullwhip Misunderstanding
Blaming irrational behaviour for the bullwhip effect is a widespread misunderstanding. That really is a pity, because simply being able to explain what the bullwhip effect is, will not be particularly effective when it comes to doing something about it. To implement successful countermeasures, you have to know what causes it.
The bullwhip effect is probably one of, if not, the most well-known phenomenon in modern logistics. Most people can give a reasonable explanation of what it is. The question of what causes it is, however, more difficult to answer. The answer people usually give is based on their personal experience playing the well-known beer distribution game and that the bullwhip effect is due to irrational behaviour or panic on the part of planners. If this is also your answer, I have to disappoint you. The bullwhip effect has also been observed when planners are acting completely rationally, so it cannot be solely due to irrational behaviour.
 The bullwhip effect - the upstream amplification of variations in demand - is an inherent consequence of stock-driven supply chains. The bad news is that it can never be eradicated completely. The good news is that it can be significantly reduced. However, this requires paying serious attention to the real causes. So what are they?
In the same way that the effect produced by a whip depends on the strength of the hand movement and the whip's length, the amplification effect in a supply chain is fundamentally caused by demand uncertainty and lead times. As a result of demand uncertainly, many companies keep a safety stock; the longer the delivery times for their raw materials, the higher the level of their safety stock. Demand uncertainty and therefore the necessity of keeping a safety stock also increases as you move back up the supply chain from end-consumers to raw materials suppliers.
This can be proven with a simple example:
On the basis of an average historical demand for your product of 100 units per week and a delivery time of 5 weeks, you decide you need to stock approximately 550 units; 500 units to meet your average demand (stock buffer) and 50 units for incidental orders (safety stock).
Suddenly, your sales increase to 150 units per week. After making a few inquiries, it appears that the increase could be structural. This means you face a shortage in your stock buffer of 250 units (5x150-5x100).
To avoid similar surprises in the future, you decide to increase your safety stock from 50 to 150 units so you order 500 units from your supplier, who was only counting on an order for 100 units. A potential structural 50-unit increase in sales therefore results in an (anticipated) one-off 400-unit increase in volume.
Imagine what would happen if your supplier also assumes that the increase is structural or that the sales increase turns out to be disappointing or, in the worst case scenario, both…
The above example shows what uncertainties can do. The bullwhip effect is not caused by irrational behaviour, but is the consequence of demand uncertainty and lead times. Two phenomena that co-exist in every supply chain.
For this reason, the bullwhip effect can never be removed entirely, but thankfully it can be significantly reduced. Because the effect is produced by demand uncertainty and lead times, it can also be reduced by decreasing demand uncertainty and shortening lead times.
To continue with the analogy - if you reduce the length of the whip, not even the most powerful hand movement will stir the bull.
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