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4 Ways Supply Chain Management Can Reduce the Bullwhip Effect

Posted by Angie Walters, CPA, CITP on Jul 30, 2015 1:21:40 PM

According to APICS, the definition of supply chain is: the flow of information, services and materials from raw materials suppliers through factories and storage locations such as warehouses, to the end customer.

That covers a lot of ground, and given the time span from raw material to the end customer, there are an almost infinite number of ways that the supply chain can derail.

One of the most common issues supply chain managers face is known as the “bullwhip effect” in which small fluctuations in demand at the downstream end of the supply chain may cause out sized variations at upstream suppliers. The effect is a bloated and ineffective supply chain with too much inventory. An effective supply chain manager will want to use strategies to reduce the bullwhip effect to improve the overall efficiency of the supply chain.  Some proven strategies are:

1. Collaborate with customers and suppliers

Another strategy to improve supply chain effectivity is through better collaboration with customers and suppliers. When companies work with customers to understand their plans and forecasts, they can build promotions and seasonality into the forecast and then provide more insight to their suppliers to help prevent the buildup of unnecessary inventory due to the bullwhip effect.

Supply chain management software often has capabilities to aid in collaboration. Supplier portals, EDI transactions, event alerts and project portals are some of the most common ways to increase visibility and collaboration.

2. Improve forecast accuracy

Even if a company tries to become more demand driven, it still need a forecast to plan long lead time items or to cover demand from new customers, new products or in-house promotions. While it’s a given that a forecast will be inaccurate, there are steps that can improve accuracy. Ensuring that you use the right algorithm to project demand is one way to increase accuracy; taking input from sales and customers is another.

3. Enable fast decisions with visibility and insight

The most important benefit of supply chain management applications is the visibility and insight they provide. Without the right degree of insight, a supply chain manager must rely on guesswork or rules of thumb to make decisions. The result will nearly always be sub-optimization of the supply chain that results in higher costs, excess inventory, and slow deliveries.

4. Adopt a demand driven supply chain management approach

Demand driven supply chain management is one of the most effective ways to reduce the bullwhip effect. It is a known fact that most forecasts are inaccurate, so when actual demand materializes it is almost certain to differ from forecast quantities. This causes companies to place emergency orders on suppliers. Without effective communication, those suppliers’ supply chain management systems will overreact, setting off a chain reaction of excess inventory that increases cost and slows velocity. In contrast, a demand driven supply network will have less overall inventory and be more responsive.

Related Blog: Understanding Supply Chain Risks

The keys to effective supply chain management are visibility, open communication, and fast access to information and insight. With these five attributes, your supply chain will be more effective, and you will have minimized the risk of excess inventory as well as inventory shortages. Without them, you will feel the sting of the bullwhip effect.

For more information about our Manufacturing and Distribution Services Group,  or other business advisory services, contact us at 214-635-2498 or fill out the form below. 

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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Topics: Manufacturing