bullwhip effect

It should have taken me 3 hours to get home. It took 5 1/2, and yet nothing major went wrong with my journey, there were no strikes, no severe weather conditions, no accidents. Just a tiny delay leaving Mechelen.

That 7 minute delay meant the train I was on had to give way to Intercity trains that were running on time so we were slow leaving Antwerp, that meant that I missed the opportunity at Rotterdam to cross the platform to the highspeed train to Schiphol, that meant I was late arriving at Schiphol and missed a connection. All for 7 minutes.

This is an example of the bullwhip effect, where a small event at the beginning becomes magnified along a process until the impact is big. In this case 7 minutes became 2 1/2 hours. It gets its name from the increasing amplitude along a bullwhip.

In business it’s usually used to describe an effect in supply chain management.

Demand is unpredictable, so a retailer trying to predict how much stock is needed will include a buffer of safety stock, to avoid running out. Their wholesaler reads the demand to all their retailers and sees a greater potential variation when they predict demand, so in planning their stock also include a buffer. The manufacturer sees the variation in the wholesaler’s orders and builds up their stock, which the component suppliers see and and make their planning for stock including a buffer.

So at each step in the supply chain there is a buffer stock.

If demand drops then that stock becomes excess inventory and suddenly each step in the chain has to solve the issue of excess. The impact of a small change in demand goes up the supply chain with increasing impact, just like the cracking bullwhip.



Images; lost source for first one – sorry

bullwhip graphic is from wikipedia issued under creative comments. 

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