How to Minimize the Bullwhip Effect in Retail

Especially during the holiday season Retailers will either have 2 issues to work out. They have ordered too many products and are left with an overstock and will eventually need to sell those products with a big discount. Or they have ordered too little, can’t respond in time to a bigger demand of the customer and have to sell ‘no’ to their customers. 

In both scenario’s we are dealing with the Bullwhip Effect. The bullwhip effect is a supply chain phenomenon describing how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels.

What Does the Bullwhip Effect Look Like?

Let’s say you are a Retailer that sells Coca-Cola as a main product and normally you sell 20 six-packs a day, you tend to have around 100 six-packs in stock so you don’t run out. But if one day you sell 75 six-packs you might think your sales are increasing and more and more customers are coming in to buy Coca-Cola at your store. You respond by raising your stock to 100 six-packs a day and therefore having a lot more stock in-house. 

The distributor will respond in the same matter and will increase their order even more and will go from 100 to 200 six-packs a day so they will always be on the safe side. In turn Coca-Cola will produce even more than that and will raise their production to 250 six-packs a day so that the distributor is not being told ‘no’. In the end all parties in the Supply-Chain are stuck with an overstock.

Although this example is highly simplified it explains the sense of exponentially increasing misalignment as actions and reactions continue up and down the chain. The bullwhip effect also occurs as a result of lowered demand at the customer level (which causes shortages when inaccurate) and can be caused at other places along the chain.

How Can You Minimize the Bullwhip Effect as a Retailer?

Although you are just part of the complete Supply-Chain, you are a very important part! Better information is necessary to reduce the Bullwhip Effect, but more importantly better and smarter communication is needed between yourself and your Supply-Chain partners. Some commonly recommended actions include the following:

• Automate your supply chain communication and collaboration: Better alignment between yourself and your suppliers, distributors and other partners is needed. Supplier and project portals, Electronic Data Interchange (EDI) transactions, Managed File Transfer and Integration Platforms can you help you completely automate the needed communication and reduce mistakes to minimum.
• Use better forecasting and visibility tools: Your data is worth gold if you have the tools to process that data into information. The correct solution will provide you with great dashboards which will gather, consolidate and transform your raw data into visible information. With this information you can make more accurate forecasts and reduce the risk of over or understocking throughout the year (and especially during the holidays!). Modern solutions can even use predictive analytics, artificial intelligence (AI) and Internet of Things (IoT) to increase this process. 

We're Here to Help!

There's nothing more annoying than having to say 'no' in the world of Retail, but stores also don't want to be stuck with way too much stock when the holidays are over. By using the available data correctly, you can automate and streamline these processes, reduce the Bullwhip effect and gain more control to close the holidays with a bang! Contact us today to see how we can help you with these challenges.