How to Reduce the Bullwhip Effect
The bullwhip effect results when company buyers fluctuate between overbuying and underbuying in an effort to moderate volatility in consumer demand. This effect often leads to excessive and costly inventory supplies or the reverse -- an exhaustion of inventory, or stockout, which angers customers. Reducing the bullwhip effect is an important concern for companies facing unpredictable customer demand.
Minimizing the bullwhip effect begins with better forecasting of customer demand to enable more accurate ordering. This may require an upgrade in inventory management. Inventory software often allows companies to monitor the evolution of buying over time and provides for real-time updates on buying expectations based on current trends and recent patterns. Market research before product launches or seasonal offerings may also improve demand expectations.
One reason apparel retailer JC Penney adopted an everyday low pricing model in late 2011 was inconsistent customer demand resulting from constant price changes. When businesses move prices up and down from regular points to discount prices, they manipulate customer demand. By maintaining a consistent price structure, a business can see customer demand become more constant, steady and predictable, and this can help them buy appropriate quantities of products for resale.
Batch orders are a common contributor to the bullwhip effect. This is when businesses buy larger quantities of product less frequently. This can lead to excess if they overshoot customer demand. It can also cause delays in responding to quick, dramatic upshoots in demand. Using a more regular ordering system of smaller orders makes it easier to keep up with buying patterns. Close relationships and electronic data interchange with suppliers can help a business quickly place orders and receive shipments before stockouts occur.
Delays in receiving orders can lead to shortages of inventory initially and excess inventory down the road. While a business can't control weather or transportation problems that impede supplier shipments, they can make some adjustments. Backup supplies of key products can mitigate problems resulting from obstructed supply lines. If a business operates its own distribution centers, a review of organization and operating procedures may lead to reductions in time from order placement to delivery and receipt at retail outlets.