what is the bullwhip effect in/and supply chain?

http://www.ehow.com/about_5230010_bullwhip-effect-supply-chain.html

The bullwhip effect refers to the phenomenon in supply chain management where small changes in customer demand can result in amplified fluctuations in demand upstream in the supply chain. This effect typically occurs due to information delays, distortions, and the way each player in the supply chain manages inventory.

To understand the bullwhip effect, let's consider an example of a supply chain consisting of a manufacturer, distributor, retailer, and customer:

1. Customer Demand: The customer demand for a product is relatively stable and predictable.

2. Order Batching: The manufacturer receives orders from the distributor based on the customer demand but tends to place larger and less frequent orders to take advantage of economies of scale.

3. Inventory Management: The distributor holds larger inventories to meet the manufacturer's demand and prevent any shortage.

4. Forecasting and Order Decisions: The retailer, who interacts directly with the end customer, forecasts the demand and places orders to the distributor. However, forecasting is not always 100% accurate, and the retailer may over or underestimate the demand.

Now let's look at how the bullwhip effect occurs:

1. Demand Amplification: When the retailer receives a surge in customer demand, they tend to place larger orders with the distributor. This increase in the order quantity is often higher than the actual demand.

2. Order Variability: The distributor, seeing an increase in demand from the retailer, may further amplify the effect by increasing the order quantity placed with the manufacturer. This overestimation continues to increase as we move upstream along the supply chain.

3. Information Delay: As the orders flow upstream, there is a delay in the information about actual customer demand, resulting in a lag in adjusting production and inventory levels. Each player in the supply chain ends up making decisions based on outdated and distorted information.

4. Inventory Fluctuations: The manufacturer, receiving larger orders from the distributor, assumes it as an accurate signal of increased demand. Consequently, they ramp up production and increase inventory levels. However, when the actual customer demand doesn't match the amplified order quantities, excess inventory builds up at each stage of the supply chain.

The bullwhip effect can lead to several negative consequences such as increased costs, inefficiencies, poor customer service, and a lack of coordination among supply chain partners.

To mitigate the bullwhip effect, companies can implement various practices such as sharing accurate demand information across the supply chain, improving communication, reducing batch sizes, and implementing collaborative forecasting and planning.