The "bullwhip effect" in the supply chain

The bullwhip effect is a well-known phenomenon in logistics and refers to the large imbalances that can occur between the consumers’ real demand and the demand of the intermediaries who take part in the supply chain, affecting both the stock on the metal racks at the points of sale and the storage in the large palletised warehouses at the distribution centres.

What is the "bullwhip effect" in logistics?

The bullwhip effect starts when there is an increase in demand for a product by consumers. The point of sale then generates a demand on its supplier which will be greater then the consumers’ real demand so as to have safety stock or to take advantage of discounts for bulk buying. As you go up the supply chain, the demand grows again because at each level of the chain extra units are added on for their own safety stock and to benefit from better prices. There will also be delays in supply through waiting to accumulate larger orders and so reduce transport costs, which, in turn, will encourage the demand for more safety stock. This goes on as you continue going up the supply chain until you reach the manufacturer, who will notice an artificially increased demand which could lead him to increase production as a response to a demand which is much greater than the real one.

The origin of the term "bullwhip effect"

The name "bullwhip" given to this phenomenon is due to its similarity to a bullwhip where a small arm movement can generate a much larger movement at the tip. So, a small fluctuation in demand by consumers can provoke much greater fluctuations in the supply chain. In 1961, through the Massachusetts Institute of Technology (MIT) publishing house, Jay Forrester published his book "Industrial Dynamics" in which he coined the term "bullwhip effect".

Warehouses and the bullwhip effect

One of the techniques to alleviate the consequences of the bullwhip effect is to maintain more transparent information between the different players in the supply chain, so that links in the higher positions of the chain have access to the information at points of sale and therefore knowledge of the real demand.

The optimisation of predictive supply techniques would be benefitted by more efficient storage systems and metal racking, which would enable greater rotation levels and better use of storage space, such as dynamic pallet racking, dynamic picking as well as warehouse automation with stacker cranes and miniload.

At the present time, there are added complexities such as market globalisation and e-commerce, although this introduces at the same time both additional complications and new models which mitigate the bullwhip effect. For example, business models where the manufacturer himself, through online sales, supplies consumers directly, eliminating intermediaries in the supply chain, synchronising directly the consumers’ real demands with the production levels.

On the other hand, more flexible returns policies and business models aimed at the Long Tail can make the demand predictions and the calculations for supplies in warehouses more complicated.

Moreover, e-commerce enables access to a wider range of consumers, both geographically and by profiles, which means needing more warehouse space as opposed to less shop space and contributes to the need for safety stock to confront sales which can be triggered off at any moment 365 days a year, 24 hours a day.

ATOX Storage Systems, recognised for the high quality of its metal racks, designs and manufactures customised storage solutions. The choice and adaptation of the most appropriate type of metal racking for each type of warehouse contributes to optimising the management of the supply chain, from self-supporting warehouses and pallet racking to picking racking and solutions to increase space such as mezzanines.