It can be difficult to know what your customer will want from you. Bullwhip effect is the term used to describe the customer demand distortion along the supply chain. Imagine a customer wielding a giant whip, and slapping it. The ripples from the whip will continue to spread further along the supply chain (i.e.). This shows the impact of distortions in customer demand on the entire supply chain, from the customer all the way to the origins of the product.
Understand the impact of the bullwhip effect
Understanding the bullwhip effects and accepting their existence is the first step to dealing with them. Demand fluctuates in distribution centers around the world. While the bullwhip effect is different in each industry, the goal of preventing inventory shortages applies to them all. It is important to know what factors contribute to fluctuations in demand before implementing resolutions.
According to the forecast, customer demand is 10 pieces. Just to be on the safe side, the retailer ordered 20 units. The warehouse has 30 units on hand in case demand for the product unexpectedly spikes. For the producer to have enough stock even if the demand fluctuates. 40 units are produced.
Only 5 units were ordered by customers at the end of this month. 40 had been produced.
5 ways to deal with the bullwhip effect
1. Improve inventory planning
Inventory planning begins with a reliable and thorough plan with solid communication between all parties in the supply chain. Warehouse Management Solutions can assist with inventory synchronization among your WMS and other systems used by supply chain partners.
2. Re-evaluate safety stock levels
Keeping safety stock is a common way to mitigate the risk that you will have insufficient stock. Safety stock levels can be adjusted as customer demand changes over time. A WMS that performs regular cycle counting provides all the information needed to complete this exercise.
- Distribution Order Lead Times
- Order Batching
- Lack of communication in the supply chain
- Inaccurate Forecasting
Also read: 6 Best Supply Chain Management Tips
3. Evaluate order batching.
Before the WMS receives the order, it can be divided into smaller pieces. If the demand of the customer changes, the batches may result in excess order quantities further down the supply chain. OMNI’s channel solutions and supply chain intelligence can streamline the order inflow for optimal order batching.
4. Stabilize the price fluctuations.
Recent trends indicate that price is still the primary driver of customer behavior. Stabilizing prices can stabilize demand. This method has a positive impact on the bullwhip at its beginning, but due to financial concerns is not always a viable option.
5. Improve forecast accuracy.
A forecast that is accurate can help to reduce customer demand distortions and therefore contribute to keeping fewer safety stocks. Forecast accuracy improvement depends on two main factors: the choice of the forecast technique that best fits your business, and accurate historical order data.