Bullwhip effect refers to a trend of larger and larger swings in inventory in response to changes in the demand forecasting. Forecasts are based on statistics, they never be accurate. Companies often carry an inventory buffer called "safety stock". Moving up the supply chain from end-consumer to raw materials and products supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. Variations are amplified as one moves upstream in the supply chain from customers to distributors and to manufactures.
How to mitigate the Bullwhip effect? Here are some recommandations:
- Extend the customer demand visibility to the upper stream all the way to the producers.
- Reduce variability and lead time
- Smooth the flow of products by reducing the production batch size and increasing frequency of the replenishments
- Try to avoid forecasting errors caused by promotional sales