Operations Management: An Integrated Approach, 5th Edition

THE BULLWHIP EFFECT

Bullwhip effect

Inaccurate or distorted demand information created in the supply chain.

Sharing product demand information between members of a supply chain is critical. However, inaccurate or distorted information can travel through the chain like a bullwhip uncoiling. The bullwhip effect, as this is called, causes erratic replenishment orders placed on different levels in the supply chain that have no apparent link to final product demand. The results are excessive inventory investment, poor customer service levels, ineffective transportation use, misused manufacturing capacity, and lost revenues. We will discuss the causes of the bullwhip effect, and how they send inaccurate or distorted information down the supply chain. First, however, let's look at the traditional supply chain, shown in Figure 4-3, and follow the product demand information flow from the final seller back to the manufacturer of the product:

1. The final seller periodically places replenishment orders with the next level of the supply chain, which could be a local distributor. The timing and order quantity—for example, monthly orders in varying amounts—are determined by the final seller. The timing and quantity can be fixed or variable.
2. The local distributor has many customers (final sellers) ...