This variable and unpredictable demand leads to significant supply chain inefficiencies: buying and storing excessive inventory, lost revenues, ineffective transportation, missed production schedules, out-of-stock products, poor customer service and higher costs for consumers.
Until recently, the causes of the bullwhip effect have only been theorized, with little empirical evidence of their origin. Groundbreaking research by Oliver Yao, the George N. Beckwith ’32 Professor, with Robert Bray of Northwestern University and Yongrui Duan and Jiazhen Huo of Tongji University, shows for the first time one of the real causes and effects of the bullwhip effect based on data, interviews and observations collected along the supply chain.
The researchers gained access to the first comprehensive data set of supply chain samples available, from a large supermarket chain in China, with 73 stores, spanning 3,251 products, over 1,370 days. In addition to examining the data, they interviewed store and warehouse managers and visited retail and distribution sites, seeing firsthand both empty shelves and stacks of pallets loaded with products. The researchers deduced from the data what the results of the bullwhip effect would be, and then were able to see the out-of-stock inventory as evidence.
“Our findings provide empirical evidence that the bullwhip effect is prevalent and very intensive at the product level,” Yao says.
The team found that the average bullwhip effect ratio was also much higher than ratios theorized in literature.
“We estimate that on average, a decrease in the bullwhip effect ratio by 1 can translate to inventory cost savings of $26 and stockout reduction of 0.15 days for a product during a year,” says Yao. “Our findings suggest that mitigating the bullwhip effect can improve supply chain performance and generate sizable benefits in terms of inventory cost savings and service-level improvement.”
The researchers also found empirical evidence of ration gaming, which is when stores anticipate a low supply, so they rush to order more inventory in larger quantities at once—the equivalent of a “bank run”—which leads to an even larger bullwhip effect.
“That has been the consensus for some time, but we used the data empirically to show that it is the case. We’ve seen it,” says Yao, who estimates these inventory runs account for about a tenth of the bullwhip effect.
To minimize the bullwhip effect, retailers should educate store managers—whose income is often tied to store profits and products sold—about the impact of their orders beyond the store, and incentivize behaviors that help manage and reduce the bullwhip effect at their level, Yao says.
Greater transparency along all steps of the supply chain would also mitigate the bullwhip effect, he adds. “Manufacturers, wholesalers, distributors, suppliers and retailers all need to work together for information sharing and to collaborate on forecasting.”
For consumers, a lower bullwhip effect means they will see less out-of-stock merchandise and will be more likely to fulfill every item on their shopping list when they go to the store.
This story originally appeared as "Cracking the (Bull)Whip" in the 2019 Lehigh Research Review.