Bullwhip Effect in Logistics and Supply Chain
Companies looking to improve the bullwhip effect can take steps to tighten logistics and reduce errors. Business and supply chain managers should not ignore the bullwhip effect. Most of the time, this can be a response to incorrectly responding to or predicting customer needs.
If the company tries to help keep inventory levels high for a long time, it will eventually get a higher level of safety or excess inventory.
However, there may now be a tendency to reduce supplies. This means that no orders are placed to replenish stocks. Then inventory levels begin to decline and a quick demand as the company starts replenishing its inventory as quickly as possible.
Bullwhip Effect Phenomenon in SCM and Logistics
A good and often used example is without a doubt the car manufacturer Volvo, which once had a surplus of green cars in their inventory. Many companies are unable to recognize that high buffer stocks exist in their logistics. Purchasing managers tend to buy in advance and have high buffers of raw materials to avoid disruptions.
Consolidation to a smaller supplier base from a larger supplier base, for comparable raw materials, will increase the flexibility and reliability of deliveries. There can be conflicting goals between purchasing managers, factory managers, logistics managers and purchasing managers.
Also, the provision of regular and organized interdepartmental meetings will lead to a better information exchange and decision-making process. Think of a company that orders from the supplier once a month. The supplier has to deal with a very erratic flow of orders. The phenomenon of high and low prices has even led to a flood of analyzes on how companies should optimally order to consider the advantage of the cheap opportunities. When faced with a shortage, instead of allocating products based on orders, a supplier can immediately allocate in form to previous sales records.
Finally, the generous returns policy that manufacturers offer retailers exacerbates gaming. Any product-oriented business requires the implementation of competent logistics management. In short, growing or declining customer needs directly affect the company’s inventory. In general, these errors can be expensive for businesses. To prepare for those unforeseen fluctuations sought throughout logistics, companies must build and manage safety inventory. Safety stock refers to the reserve stock that is used as a buffer by companies to support immediate changes in customer orders.
In general, there can also be secondary effects of the bullwhip effect, such as communication failure, lack of cooperation or delays in transmission. In general, it causes a sequential reaction that affects the processes of every logistics partner, which means that loss and costs are almost unavoidable. Or if this was just one buyer buying an extra amount, maybe this continued demand wouldn’t increase.
As a result, this resulted in a significant overabundance of stock production. Order batches happen when retailers delay order building before placing an entirely new request with the supplier. The logistics partners then collect or complete as required. These fluctuations can change how demand looks externally.
Return policy, especially free returns and return logistics, can also bring an enhanced bullwhip effect. If retailers don’t think carefully about these multiple purchases and returns, they can overstate demand and end up with excess inventory once it’s returned. Implementing improved forecasting is essential to ensure that one wrong order does not disrupt the entire supply chain.
Unlike waiting for orders to be available to consumers and then rounded up or down, logistics partners should consider using a reduced receipt with extra frequent deliveries. Partners should also discuss how to eliminate shipping delays, along with other transportation issues.
Often, delays during the transportation process can lead to suppliers reordering or ordering with new demands to meet the needs of their consumers, causing much more inventory friction throughout the supply chain.
Deals and discounts work effectively to manipulate inventory and gain new customers, but they can also trigger large business spikes that are difficult to control.
A good customer service team can drastically reduce returns, which amplifies the type of question. Relying on information from the past means that people don’t take deviations into account. This must be taken to heart. If there really is a lack of communication between every link in logistics, then problems automatically arise, which jeopardize proper functioning. For example, managers can estimate the demand for a good differently at different links of the supply chain. They order products accordingly. The stocks within the total network must be weighed against the regional interest in goods. You have to analyze it and take the necessary actions.
As with previous recoveries, order flows will lead to renewed confidence in banks, which will alleviate the credit crunch. Caterpillar is an important example. In fact, the company continues to drive orders to suppliers for everything from large tires and hydraulic tubing to unbreakable glass. Caterpillar believes the stock burn has ended. Bottlenecks and other problems can arise as shortages on the ground cause unexpected price increases and hamper many companies’ ability to meet demand. In addition, the further upstream companies are, the greater their demand uncertainty and thus their need for safety stock.
Accurate demand and buyer forecasting is essential to effective Supply Chain Management.
Inaccuracies can easily magnify problems further down the logistics. In the past, logistics planning relied on historical customer data to support expected interest in products. Reducing the size of your logistics network makes communication easier and reduces the chance of major logistics disruptions. Make sure stock levels are working and adjust accordingly. Due to this disruption to forecasted demand, revenues and organizational satisfaction are reduced.
Meanwhile, inventory costs are rising, which can lead to holding back obsolete inventory. With the help of the digital information flow, companies can avoid the disruption of demand. In addition, information and material delays can help the bullwhip effect.
The output of unreliable machines fluctuates; which fluctuation can lead to variability in calls for the logistics people printed upstream of the machine. Another problem that the bullwhip effect often causes is running many promotions or overusing discounts. Try to reduce logistics and streamline your ordering methods to mitigate this risk.
When trends influence purchasing decisions and shift requirements, they break the whip, affecting every organization involved. Out of fear, they may correct too much. Any organization in logistics can be influenced to do the same, multiplying the problem. Banning individuals from purchasing too much of an item allows some other customers to do their job, reducing overall dissatisfaction. This also prevents problems due to hoarding and scalping.