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The Bullwhip Effect

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The Bullwhip Effect

Market demand helps determine at what level to set production output for one particular good. When consumers demand more of a certain product, the retailers in turn will demand more of it from the wholesalers, which in turn causes an increase in demand from manufacturers as well. The market may have moved a little bit, but as the demand information travels up the supply chain, the upstream supplier may be seeing a much bigger swing. The lack of supply chain coordination leads to a phenomenon known as bullwhip effect (BWE), in which fluctuation increases as we move up the supply chain from the retailers to wholesalers to manufacturers to suppliers. The bullwhip effect distorts demand information within the supply chain, with each stage having a different estimate of what demand looks like (Sangwan & Sharma 2015:387).

With distortions happening in bigger magnitude a negative impact on business performance will take place such as inventory disruption, quality control problems, cost of transportation, diminished customer service and increase cost of material and manpower.
There are numerous factors which contribute to the bullwhip effect. Four major causes we could mention are price fluctuations and sales promotions, order batching, shortage gaming and forecast inaccuracies. Sales promotion and price discount result in customers buying in large quantities and stocking up and as a result the buying pattern doesn’t reflect the actual consumption. With order batching, companies orders in batches often to avoid placing orders more frequently or to avoid the high transportation cost. If products demand exceeds supply, manufacturers ration products and customers exaggerate their orders to counteract the rationing. Eventually, orders will disappear and cancellations will pour in making it impossible for the manufacturer to determine the real

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