The bullwhip effect occurs when small changes in demand at the retail level, like a shift in overall consumer buying habits, lead to larger-scale changes as it moves up the supply chain to manufacturing.

The tone of the conversation has recently shifted among StockIQ clients. Once heard, “We can’t get product and lead times are terrible” is now “We are overstocked.”

What is Causing the Bullwhip Effect?

• Miscommunication throughout the supply chain
• Miscalculated inventory needs
• Rapid changes in consumer spending habits
• Inability to align with volatility.

This leads to overproduction which causes excess inventory.

The bullwhip effect may amplify inefficiencies across the supply chain because it takes a long time for manufacturers to respond to a shift in demand at the consumer level.  Those changes can slow down production significantly or lead to unexpected inventory excesses.

There are several strategies your business can use to avoid excess inventory and increase your ability to manage inventory successfully and minimize the bullwhip effect.

1. Look at long-term trends in purchasing.

Many things can lead to a small or temporary shift in consumer purchasing patterns. At every stage of the supply chain, it’s important to keep an eye on those trends so that you can plan to adjust purchasing or production habits.

A good inventory management system can make it easier to keep up with those changes in consumer buying behavior and predict patterns so that you can move forward with your plans. Demand forecasting can take long-term trends as well as short-term needs into consideration.

2. Keep an eye on supplier inventory.

The bullwhip effect means that there is often a delay between how retailers deal with orders and how suppliers manage those similar fluctuations in inventory. You may need to know what inventory your suppliers have on hand. In some cases, your suppliers may start selling off excess inventory just as you need to increase orders again, or they may have excess inventory on hand, which means you might be able to work out a deal for your own purchases. Your inventory management system and clear communication through the supply chain can make it easier to keep up with that changing demand.

3. Keep an eye on safety inventory.

Early warning systems can give you an idea of when your safety inventory might be dipping below comfortable levels, especially if you’ve noticed a recent increase in buying behavior. Too much safety inventory can be a problem when buying slows, but too little can be an equally serious problem as buying increases again.

4. Know your suppliers’ minimums.

Often, suppliers will set specific minimums that you must reach to place an order. As your customers’ buying behavior changes, you may find it more difficult to reach those minimums. Make sure you know what all your suppliers’ minimums are.

If supplier minimums allow, you may want to place smaller orders more frequently to keep up with changes in consumer demand. Smaller, more frequent orders allow you to adapt to smaller changes in what your consumers really need, which can make it easier for you to avoid excess inventory or inventory shortages.

5. Look for ways to reduce the length of your supply chain.

The longer your supply chain, the more the bullwhip effect can resonate. If you can shorten your supply chain, including removing unnecessary steps between the manufacturer and the retailer. You may be able to buy directly from the manufacturer, or you may be able to have your manufacturer ship directly to end consumers. By taking those steps to reduce the size of your supply chain, you may find that it’s easier to keep that bullwhip effect from having a larger-scale impact on your business.

6. Pay attention to your pricing.

Sometimes, shifts in demand may come about because of your overall pricing. Consumers may be more likely to buy when you put an item on sale. By offering regular low prices, rather than extensive sales, you may increase the odds that consumers will buy that product regularly instead of seeing periods of fluctuating demand.

7. Implement the right backorder metrics.

Backorders can have a substantial impact on consumer purchasing. When those backorders clear, it can impact their future purchases. Having lengthy delays on backorders, including inaccurately predicted shipping times, can cause changes in consumer buying behavior. By paying attention to your backorders and those associated metrics, you can keep an eye on your inventory needs.

Demand forecasting is critical to successfully managing your supply chain and avoiding the risks associated with the bullwhip effect. At StockIQ, we aim to help our customers manage their supply chains and keep a closer eye on inventory. Contact us today to learn more about what we can do for your business.

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