Guest Post: The Rise, Fall, and Rise Again of the Bullwhip Effect

Today’s guest Post comes from Kelly Thomas, who is a supply chain management professional and executive at JDA Software.

Demand variability is among the most important challenges facing supply chain managers today. Demand variability that is not properly managed manifests itself in terms of the well-known bullwhip effect, which results in large inefficiencies. Jay Forrester first described the bullwhip effect in his seminal work Industrial Dynamics, published in 1961. This effect says that a change in independent demand at the consumer level leads to increasing swings in dependent demand at each point upstream in the supply chain. This effect held sway over supply chains since the beginning of the industrial revolution.

However, during the mid 2000s, it appeared that the bullwhip effect had been reduced; studies by the Federal Reserve show the bullwhip effect attenuating dramatically from the beginning of the 1990s through the middle 2000s. These studies attributed this to the widespread adoption of improved supply chain management practices and supporting information technologies. These same studies postulated the overall economy had entered a new era of lower variability.

As we know by now, the Great Recession of 2008-2009 and its lingering effects have changed a lot of this thinking. It appears the bullwhip effect has come back with a vengeance. Increasing variability caused by demand uncertainty, globalization, new product introduction, and escalating customer expectations have outstripped companies’ abilities to effectively manage their supply chains. This has led to increased interest in supply chain segmentation, driving the supply chain from independent demand, visibility and synchronization, and optimizing the use of production and inventory resources.

To support these needs, companies are now going through a technology refresh phase to support higher levels of sophistication in such areas as S&OP, demand management, order promising, inventory optimization, and customer collaboration. For example, companies such as Dell and Sony are transforming their supply chains to stay ahead of the variability curve.