Bad in logistics
If consumer demand is lower than you expect, resulting in excess
inventory, the bullwhip effect dictates that the psychological
response is to lower supply on future inventory orders. This can
lead to stockouts when you overcompensate or if customer
demand jumps. This is one of the worst consequences of a
bullwhip effect because you miss out on sales and potentially
damage your company relationships with customers.
On the flip side, buyers may overcompensate when they
undersupply market demand and stockouts occur. The
tendency following this event is to order extra inventory
to protect against future occurrences of product
shortages. This can lead to excess inventory on hand if
you order too much or if customer demand falls. Excess
inventory often must be marked down over time or
thrown out when the products are perishable.
CHANGES IN BUYING PATTERNS
When companies experience the bullwhip effect consistently
and in extremes, they may consider changing buying or
ordering processes. Batch ordering, where you buy large
amounts of product infrequently, contributes to the bullwhip
effect. One strategy to alleviate this is to go to more frequent,
smaller orders. This costs more in shipping, but it helps you
avoid wasted inventory while putting you in a position to
constantly have new product arriving in stores.
TENSE SUPPLIER RELATIONSHIPS
The bullwhip effect can cause company buyers to put
pressure on suppliers, which may lead to tense
relationships. Unexpectedly high demand, for instance,
could mean asking suppliers to quickly produce or ship high
levels of inventory right away. In other cases, buyers
negotiate buyback arrangements that force suppliers to
take back excess inventory. If you constantly have faulty
demand forecasting, suppliers can become frustrated with
constant shifting and urgent demands.
The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain.
Suppliers of raw materials see the greatest demand variation in response to changing customer orders or demand. As a result of the effect, supply-chain participants have learned to build and maintain a buffer of inventory or "safety stock" to allow for such swings in orders.Despite knowledge of the effect, the bullwhip still gives business fits.