Retailers are expected to know how much of which product they had placed in their stores/e-commerce websites would be sold at a given time frame. Would we be able to take on such an impossible task?
We need to anticipate the demand, especially in fast fashion industry, before the designs are even launched. High volume items that are sold consistently, often go out of stock. So even a small change in the demand at the final touch point would create ripples across the supply chain and we end up ordering excess quantity.
The idea is called as ‘bull whip effect’ as it resembles the way a whip oscillates when flexed – a small perturbation at the handle causes huge movements at the tip. Similarly, small changes at the customer side with respect to demand can cause huge swings with the upstream suppliers.
The same is observed in the oil markets. Disturbances in supply and demand of oil can transmit huge impact through the price of crude to the entire chain of related industries.
The effect is amplified at each stage. Longer the supply chain, higher the impact of bullwhip effect. Say in a retail industry, the timing of order placement, refusal of back orders, order quantities, lot sizes, cancellation policies, penalties, and even holiday discounts can have a huge impact on the inventory management.
At a macro economic level, bull whip effect is attributed to the human propensity for delayed response and overreaction. When any product is well received, we see an increased demand and overstock it; driving the prices downwards. Stock outs need to be taken seriously not just for the economics; even for the customer relationship management as well.
