The Bullwhip Effect

The senior manager at Procter and Gamble observed the demand pattern of pampers which is their greatest selling product. They discovered that its sales at the vending stores were not constant though it did not have many variabilities. The distributors orders, however, had a lot of variability’s and so did the Procter and Gamble’s order to their suppliers. The constant consumption of the product increased the demand order variability’s in the supply chain. Procter and Gamble named this event the Bullwhip Effect. However, other industries call it the whiplash or whipsaw effect. Great variability of the orders along the supply chain can better companies by aiming to minimize their excess stock and predict product demand making their supply chain resourceful (Lee, Padmanabhan, & Seungjin, 93).

The cause of the bullwhip effect that causes distortion of information passed through the chain is the demand projection updating. Each unit along the chain gives an order; it exhausts stock and some of the safety stock. The safety stocks may be unavailable for some time making the demand fluctuation greater. Order batching also causes the bullwhip effect. Companies make orders in batches to evade the processing cost that accrues from frequent processing or to avoid the high transportation cost. The suppliers, in turn, experience a continuous stream of orders causing the bullwhip effect. In situations where the order phases overlap, there occurs a greater bullwhip effect (Lee, Padmanabhan, & Seungjin, 95).

The third cause is the price fluctuations. Offering discounts to customers encourages them to buy in bulk and stocking the products. However, when the offer ends, the customers stop the bulk purchases. Their purchase patterns end up different compared to their consumption patterns. Finally, the rationing and the shortage gaming cause of bullwhip effect. When there is a high demand of a product than its supply, the manufacturer regulates the supply of the product. This will cause the demand increase to be high. Eventually, the many orders will reduce, and the manufacturers will not be able to determine their real product demand (Lee, Padmanabhan, & Seungjin, 96).

There are ways of dealing with the bullwhip effect. A company can limit its demand forecast updates. Companies can do this by avoiding the downstream site and sell their products to the consumers directly. They can also advance operational competence to minimize high, variable demand. They can break the order batches. This can achieve this by implementing electronic data interchange. This will minimize the cost of orders enabling them to place orders regularly. They will be able to transport products in a truckload to minimize the transportation cost (Lee, Padmanabhan, & Seungjin, 97).

Finally, they can make their prices stable by minimizing the discounts they offer to customers. This will reduce the number of stocks the customers keep. The companies can also employ activity-based costing system. This will alert them when the company is buying in large volume. It can also eradicate the gaming in shortage situation. During shortages, the manufacturers can supply the product with reference to previous sale records and not on orders. This will prevent overstatement of orders by the customers. The companies can also eliminate their charitable return rules. This will prevent the canceling of orders by the retailers. The companies will only be able to control the bullwhip effect when they understand its main causes (Lee, Padmanabhan, & Seungjin, 98)

Work cited

Lee, Hau L, V Padmanabhan, and Seungjin Whang. “The Bullwhip Effect in Supply Chains.” Sloan Management Review. 38.3 (1997): 93. Print.