The theoretical background of the bullwhip effect was first studied by Jay Forrester in the 1960s in the US. His work looked at the behavior of supply chains, with different demands and the resulting fluctuations. In the 1990s, Procter & Gamble was the first company to study this effect in more detail using Pampers diapers as an example.

This effect manifests itself in the fact that retail end-customer demand is constant, however, order volumes become more and more irregular the farther back we move in the supply chain. In this way, orders at the lowest levels bear no relation to consumer orders.

The consequences of such an effect are matched inventories adjusted to different order quantities, and consequently increased warehouse inventories. This leads to increased warehousing costs and capital freeze costs, which lead to increased final prices and worsened competitiveness. The company's goal is to reduce the bullwhip effect.

This effect can be created by the following actions:

Due to the fixed costs of ordering, companies combine their orders (by Andler's formula) and thus optimize the quantity. Because of this, orders become more and more irregular and there are fluctuations in suppliers - a bull whip effect is created.

Thanks to advertising campaigns (discounts, rebates), the prices of products are reduced in a short time and customers then fill their warehouses. With price increases, they cancel their orders and take products out of stock. This also puts up a bull whip effect.

If there are bottlenecks customers order more to cover at least their needs. As soon as they have enough goods in stock, they cancel orders. This in turn leads to more inventory in the supply chain. By improving communication and cooperation between companies, the bullwhip effect can be minimized so that logistics costs are reduced and customer satisfaction is increased.

RELATED TERMS

• Andler's formula

• ECR - Efficient Consumer Response