The bullwhip effect is most often applied in a manufacturing context – each level of the supply chain requiring sufficient amount of slack inventory in order to meet fluctuating demand. For companies purchasing locally, nationally or even internationally, this process requires a lot of management. In a cost leadership industry, the better you manage the fluctuation, the better your competitive position will be.
There are two primary drivers of the bullwhip effect:
1. Lead times
2. Predictability of demand
Lead Times
Most converters and distributors typically operate in an environment of medium to long lead times and somewhat predictable demand. Because of this, the supply chain must be lean, carefully planned and well executed. The best approach to reducing the bullwhip effect is total alignment throughout your supply chain. This involves close communications with your supplier partners as well as your customers to produce the most precise and up to date information. Relevant information allows you to accurately frame the full scope of your buying needs. Include everything from your supplier’s production time through to the sales of your customers. It’s important to remember the flow of information needs to be ongoing. Rolling forecasts should be put into place to track past performance so future purchases can be perfected.
Predictability of Demand
When it comes time to fill orders, the end goal is simple: low forecast error. When forecasts are made too far in advance, as is the case when purchasing internationally, the typical error rate makes meeting demand very difficult. The estimated error rate within one month of order placement is relatively manageable at 5-10%. However, this rate grows to 10-20% within two months, and quickly escalates to 20-50% within three months. Therefore, if your company is purchasing internationally it’s highly recommended you put in place a 12-15 month rolling forecast. This will help you learn your demand cycles and make any necessary adjustments. A similar model should also be practiced for companies purchasing locally and nationally, but on a smaller scale.
Lastly, don’t let the task of implementing a forecast intimidate you, it may be hard work to start but it’s worth the effort and will pay off in the end.
