Understanding the ‘Bullwhip’ Effect in Supply Chains

Today’s Wall Street Journal  has a noteworthy front-page article about the “bullwhip” effect, as it is starting to play out in businesses as the economy recuperates. What’s the bullwhip effect? The WSJ article explains:

“This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.”

For more details about “the bullwhip effect” — and what causes it — see the classic 1997 MIT Sloan Management Review article on the topic, “The Bullwhip Effect in Supply Chains.”

In that article, Hau L. Lee, V. Padmanabhan and Seungjin Whang argue that the bullwhip effect results from rational behavior by companies within the existing structure of supply chains.  As a result, companies that want to mitigate the impact of the bullwhip effect need to think about modifying structures and processes within the supply chain — in order to change incentives. The authors explain four major causes of the bullwhip effect — as well as ways to counteract it.