Demand factors are the number one contribution fueling the bullwhip effect. These factors relate to consumer, retail, and wholesaler demand levels. When consumers demand more of a certain product, the retailers of the product demand more of it from their wholesalers, which causes an increase in demand from manufacturers as well. As the bullwhip effect occurs, which is usually due to unmanaged entities within supply chains misreading or miscalculating actual needed product levels, increased cost and dissatisfied customers become present. Ineffective communication, order batching, and recessions often lead to the bullwhip effect as well.
When entities within supply chains do not communicate in effective manners, the bullwhip effect takes place more often. This lack of communication causes a lack of coordination, which causes retail stores, wholesalers, and manufacturers to have too much or not enough of a product. Sometimes entities involved within a supply chain maintain communication, but this communication endures delays, which also leads to a lack of coordination and a lack of meeting consumer demand levels.
Many times, wholesale and retail stores endure the bullwhip effect by taking part in order batching, also known as buying in bulk. While order batching does allow retail and wholesale stores to offer a product accompanied with a lower-than-normal prices, there are times the stores over-meet consumer demands. When a store over-meets consumer demands, it is left with too much of a good. This causes the stores to endure additional expenses that could have been avoided had they not ordered too much of the product.
One of the best ways for stores to address the bullwhip effect is by implementing and utilizing some type of point of sale (POS) system. This type of system allows stores to avoid forecasted inaccuracies, as well as single control replenishment of products. POS systems enable stores to conduct thorough and necessary inventory and product sale analyses. These analyses, if read correctly, can help retail and wholesale stores meet consumer demand levels in the best manner possible, which leads to a stable and well-maintained supply chain.
Companies that operate within a recession will usually endure the bullwhip effect to some extent. In addition to utilizing POS systems, many of these companies have found that they can correctly adjust their inventory levels by looking at macro-level marketing trends, which allows for their supply chains to become stable once again. When the bullwhip effect is ignored, companies tend to fail, making it very important for all stores to know how to appropriately address the problem.