Bullwhip Effect

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Managing the volatility of demand is known to be one of the biggest challenges faced by supply chain managers. According to Gerard Cachon, Taylor Randall, and Glen Schmidt, the bullwhip effect is when “the variance of the flow of material to the industry (what macroeconomists often refer to as the variance of an industry’s “production”) is greater than the variance of the industry’s sales” (457). Chen, Drezner, Ryan and Simchi-Levi state that,
…the increased variability in the order process (i) requires each facility to increase the safety stock in order to maintain a given service level, (ii) leads to increased costs due to overstocking throughout the system, and (iii) can lead to an inefficient use of resources, such as labor and transportation… …show more content…

Cachon, Randall, and Schmidt gave various examples, including Proctor and Gamble, which is a very large, established firm that many would assume have complete control of demand forecasting; Proctor and Gamble experienced the bullwhip effect through high demand volatility despite having a relatively constant consumer demand for its products (457). The bullwhip effect can be attributed to a number of causes, divided among two major categories: behavior causes and operational causes (Bhattacharya and Bandyopadhyay 1245). Studies on the causes of the bullwhip effect have shown at least 19 causes, which includes both the operational and behavioral effects: demand forecasting, ordering policy and batching, price fluctuation, rationing and shortage gaming, lead time, inventory policy, replenishment policies, an improper control system, lack of transparency, neglecting time delays, lack of learning/training, fear of empty stock, capacity limits, company processes, local optimization without global vision, misperception of feedback, lack of synchronization, and the multiplier effect (Bhattacharya and Bandyopadhyay

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