Question

1.   What does the term “bullwhip effect” mean?
2.   What role does the “bullwhip effect” have on the effective management of the supply chain?

Answer 1

1.

Bullwhip effect refers to the situation that occur due to variance of the orders that is sent from the manufacturer and supplier to that sent to the customers. This large variance is identified in supply chain.

There are many factors that contribute to this effect. They are:-

• Supply chain not organized properly
• Lack of communication
• Cutomers' returning the products often due to free return policy.
• Discounts and promotions may increase the demand for short period of time.
• Relying more on past demand information.

2.

The role that bullwhip effect has on the effective management of supply chain is that it may result in inefficient production or excess production in order to fulfill the demand. The situation of stock-out leads to poor customer service and lost sales. There is also a low utilization of distribution channel. It also damage the reputation of the organization. The cost incurred by the organization due to bullwhip effect include contractual penalties for coping up with the consequences of failed fulfillment. In order to meet the demand variability, the organization is required to hire or dismiss employees that adds training cost, hiring cost and lay-offs cost.