The Bull-whip effect

Khaburina Alena, marketing-1

The essay № 1. The Bull-whip effect.

Bullwhip effect is the situation when quite little fluctuations in demand cause very significant deviations in inventories.

There a lots of reasons of this event. Firstly the main reason is inadequate, wrong planning process. This reason in turn can be explained by different situations and mistakes.

For describing the bullwhip effect we can consider two companies. The first is - United Colors of Benetton.  It’s quite famous company. The most significant point for our example is that company works with the clothes. The demand on clothes is changing very fast, so the planning system is crucial for such business.

Another example can be famous Wal-Mart. This company has very big and complicated supply chain. So the planning system again is very important every day.

The reasons causing the bullwhip effect can be very different. For instance the managers can get wrong information and it will make all their forecasting wrong. The fluctuations of the prices also play important role.

It’s quite wide-spread situation when the number of order is increasing (so the demand is increasing), the managers increase the orders to their suppliers (and usually they do it with some surplus), but unexpectedly the demand falls, the stocks and warehouses are overloaded. So managers should be orientated not only on some past and current events, but think about future demand too.

Sometimes the reasons of bullwhip-effect can cause the suppliers. For instance they can increase the minimum of supply.

The pricing policy of the company can be also one of the reasons of this effect. When the managers provide too frequent sales, discounts and promo-actions they get a little bit wrong understanding or view of demand. In reality it can be lower.

And for sure the more system is complicated the more mistakes can exist. The system where hundreds of suppliers and distributors operate is much more complicated than system with several players.

The Bull-whip effect can cause significant negative consequences.

The first bad consequence is greater safety stocks, but eventually the effect can also cause the lack of needed resources. Both situations aren’t very good by themselves and they take quite big amount of time to balance the system again and to get the right proportions.

Also when the company has problems with production it spends less time on other actions so the customer service and the public image of company can suffer.

For sure the financial situation of the companies can be damaged.

Now let’s turn to our examples in order to illustrate how two companies (Wal-Mart and United Colors of Benetton) manage with the reasons that can cause the Bull-whip effect.

The most appropriate way to decrease the power of Bull-whip effect is to decrease the uncertainty of information. The Wal-Mart uses the system the main principles of which are: