STUDENTS' CORNER - 177
One move be it negative or positive gives birth to a series of moves down the line, beginning from the nearest part of the whip to the hand to the end of the whip: Bullwhip effect
Bullwhip Effect happens when a wrong demand assessment is made by a retailer and places the order and the demand-mismatch order affects every stage in the supply chain. For example, a retailer, the out-let that takes the product to the consumer, anticipating greater demand for the product places a bigger order than usual. For a demand of 10, he places an order for 15 expecting demand to go up and he does not like to miss the opportunity by running out of the stock if he just for 10 only. The distributor on his part orders for 20 from the manufacturer for the same reason. So, for a demand of 10, the manufacturer produces 20; that is, production is in excess to the demand; this will have a big inventory based on not the factual demand for the demand assumed. Beginning from the retailer to the manufacturer, at every stage the order is placed in excess to the demand; this is called Bullwhip effect. When you strike your whip, the string begins to make wave of movement and this wave of movement goes on to the next part of the whip producing the wavy movement of the whip ; and, this movement continues to the very tip of the whip lash.
This mistake happens when one fails to understand the supply chain in its proper perspective. Any impulsive reaction to the supply chain in dissociation with the market demand may lead to this bullwhip effect. The recovery from the consequences of this effect depends on the level of variation between actual demand and the order placed.
.It also indicates that there is lack of exact communication between the links in the supply chain. Sometimes, the company has adopted in right spirit the Free Return Policy and this facility can be misused by anyone not necessarily the end-user. Apart from market unpredictability, price variations due to discount may also influence the customers into wrong order.
This Bullwhip effect can be avoided by giving focused attention to the customer. Next, be mindful of the inventory; let it not pile up without reference to the actual demand pattern; you can also inform your distributors and retailers to schedule ordering. That is, they can be informed that their orders be it small or big must be placed on certain stipulated timings so that waiting for orders or demand to accumulate.
In our next session, we shall look into Customer Relationship Management.