Blog Post
Bullwhip Effect

What is bullwhip effect in supply chain management ? 4 simple ways to crack it

Tuesday, June 22, 2021

The bullwhip effect problem is one of the most important issues in supply chain management. 

It describes a phenomenon in which fluctuations in the order sequence grow larger as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers (upstream supply chain). 

Many supply chains are plagued with distorted information about demand from downstream to upstream. This often implies that companies have to rely on the sales orders from retailers to make product forecasts and schedule production since they don’t have an overview of where their products are within the supply chain. 

As a result, big variations in demand often lead to tremendous inefficiencies, including excessive inventory and shortages, poor customer service due to unavailable products or long backlogs, and poor product forecasts. The bullwhip effect can also be felt in terms of lost revenues, ineffective logistics, and missed production schedules.

Chip Shortages: Bullwhip Effect In The Electronic Components Industry

The ongoing global electronic components shortage has placed a massive strain on global supply chains and brought the bullwhip effect into action. 

The shortage, which was exacerbated by surging demand for TVs, phones, and gaming consoles as people are stuck at home and do not use their car due to the pandemic, has caused a serious imbalance in the supply chain of semiconductor chips. 

It all started when car manufacturers, suffering poor sales due to the pandemic, cut their orders from the Chinese factories making semiconductor chips. 

This forced the factories to shift supply to other sectors that had high demands, like the technology industry where there is an increased demand for the latest models of smartphones, Xbox, and PlayStation consoles.

Unable to retrieve canceled orders when demand grew in all verticals, many firms have seen production delayed, factories shut down and new product launches postponed, resulting in suppliers having to proactively forecast and customers experiencing extreme frustration.

Apple, for instance, has been forced to delay the launch of its latest iPhone due to the shortage, while Samsung said it might skip the launch of a new Galaxy Note smartphone until 2022. 

The bullwhip effect is most precarious for the automotive sector, which relies on computer chips for everything from the computer management of engines to driver assistance systems. Carmakers like Ford, Volkswagen and Jaguar Land Rover have shut down factories, laid-off workers and slashed vehicle production.

The semiconductor shortage illustrates the complexity of global supply chains and shows just what happens when well-oiled supply chains seize-up.

Zoomed printed circuit board

How To Crack The Bullwhip Effect

What has been done so far?

Understanding the causes of the bullwhip effect can help managers find strategies to mitigate it. 

With better information sharing and collaboration between the upstream and downstream chains, it is possible to reduce the bullwhip effect. 

Some of the most common ways of counteracting the effects include the following:

Use better forecasting and visibility tools

One remedy to the misguided demand forecasts is to make use of software solutions and tools that help companies exert control on their supply chains. 

There are :

- Solutions for demand forecasting and inventory

- Management software

- Tools that leverage artificial intelligence, predictive analytics

- Blockchain technology to enhance supply chain efficiency

- Market research and studies that provide better insights on market trends

Enhance supply chain communication and collaboration

Streamlining the supply chain by ensuring better communication and exchange of information among suppliers and other partners is crucial. 

In particular, it is necessary to reduce the number of suppliers and the number of tiers in your supply chain to facilitate better communication and help reduce the bullwhip effect. Supply chain automation through EDI (Electronic Data Interchange) and other supply chain management software can help reduce order batches and improve collaboration.

Minimize sales and discounts

While offering discounts may help attract more customers, it results in increased inventory levels and waste. 

The most straightforward way to control the effects of disrupted purchasing patterns is to reduce both the frequency and the level of price discounting. 

Encouraging customers to order according to their needs and maintaining a steady price point even during market fluctuations can help.

Adopt a demand-driven approach to supply chain management

Under the push-pull strategy, a push approach is used for stable products, and a pull approach is applied for those with more erratic demand. 

Implementing a demand-driven approach means designing your supply chain in order to capture market demand almost in real-time, using latest technologies like Internet Of Things, and sharing those information (see above) with all parties involved. For example, just-in-time delivery, where parts are brought in when needed, rather than being stockpiled illustrates this approach.

This demand-driven approach allows companies to respond more effectively to evolving consumer demands by leveraging coordinated technologies and processes to align supply. 

Increase inventories to limit shortages

Some businesses implement cost-driven strategies instead of cash flow management ones. This means they prefer to purchase a high volume of components in order to benefit from lower prices with high levels of stocks, which reduce the risk of shortages. On the other hand, a lot of cash is invested with a higher risk of waste.

Enthusiastic man having an idea

Take More Control Of Your Supply Chain

What can we do more ?

The bullwhip effect means that relatively small changes at the demand end of the chain can increasingly amplify into large disturbances as they move upstream. While the semiconductor shortage could be a long-term issue (some analysts forecast the shortages could last into next year), it may not be the last. 

The demand for semiconductors is expected to explode in the coming years due to the increased popularity of electric vehicles and autonomous driving features, which are more reliant on computer chips.

OEMs (Original Equipment Manufacturer) and EMSs (Electronic Manufacturing Services) can solve the current bottleneck problem in three ways:

- Increase collaboration between stakeholders to improve visibility into the supply chain network

- Build a community of vendors to gain more control over inventory and move products closer to consumers

- Create a sustainable and circular economy involving collaboration with strategic raw material suppliers and external service partners to ensure supply chain resilience.

At AIRENC, we help OEMs and EMSs to mitigate their supply chain risk, reduce shortages and overstock situations and limit the bullwhip effect (for more information, look The Bullwhip Effect : History and Solutions article). We have created the first global collaborative supply chain transaction platform dedicated to electronic components, allowing manufacturers to maximize sales and optimize distribution strategy. AIRENC empowers OEMs and EMS to build a seamless supply chain with a unique platform for direct buying and selling of electronic components at a fair price. The platform also provides real-time insights into consumer demand to help organizations better tailor their production based on local and regional supply and demand.

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