The bullwhip effect in supply chains has been around for some time now. The term "bullwhip effect" originated at Procter & Gamble, and is defined as: demand amplification across echelons within a supply chain. This describes the effect that end customer demand may be very static (as for "Pampers" by Procter & Gamble), but the demand experienced by the manufacturer or supplier shows amplified demand variations. (Fransoo and Wouters (2000))
Causes of the Bullwhip Effect
Lee et al. (1997) first analyzed the causes of the bullwhip effect:
- Demand forecast updating
Demand forecast usually are based on the orders of the preceding echelon and not on the actual customer demand - Order batching
Orders are usually aggregated to batches to save cost. - Price fluctuations
Promotions and other effects can lead to price fluctuations of the product. When the price is perceived to be lower, orders go up and vis-versa. - Rationing and shortage gaming
For some products (eg. new iPhone) which may be short in supply, game theory suggests that it might be rational to order more than actually needed, since the number of delivered products usually is a percentage of the number of products ordered.