Beer Game

What is the Bullwhip Effect?

The bullwhip effect is a supply chain phenomenon in which order volatility increases as you move upstream in the supply chain. The effect was given its name in the 1990s by executives at Proctor and Gamble. They noticed that orders for diapers placed by retailers to wholesalers fluctuated quite a bit, even though parents bought (and babies used) diapers at a pretty steady rate. Wholesalers’ orders to distributors were even more volatile, and so on up the supply chain:

The volatility pattern increases from downstream to upstream (right to left above), much as the amplitude of a wave increases as it travels along a whip—hence the name “bullwhip effect”.

The bullwhip effect was first formally identified by Jay Forrester in his book Industrial Dynamics, though it didn’t get its name until a few decades later. Forrester’s insights were motivated by observations by managers at General Electric, who noted huge swings in production at a factory in Kentucky. Forrester also developed the initial idea for the beer game, which evolved into its current form over the next decade or so, eventually being formalized as “the beer game” in 1973. (What is the beer game?)

The bullwhip effect has a number of causes. Some of them result from irrational behavior by managers, such as over-ordering when on-hand inventories get too low, even if replenishment inventories are already in the pipeline. (See Sterman 1989.) Others are the result of perfectly rational, optimizing behavior by managers. For example, economies of scale often encourage consolidation of orders, which means orders will be large one week and then zero the next, thereby increasing order variability. (See Lee, Padmanabhan, and Whang 1997.)

Because volatility and unpredictability make production and supply chain planning difficult, the bullwhip effect is generally regarded as an undesirable phenomenon. Researchers have proposed a range of countermeasures to mitigate the bullwhip effect, including information sharing, reduced lead times, smaller batch sizes, and changes to discount structures.

No matter the countermeasures selected, the bullwhip effect is still a very common phenomenon businesses must strategize against even today. Think about what drives the use of sensors on machines and products, the push by large retailers for faster deliveries from their suppliers, the many efforts to make the entire supply chain more agile, and so on. These efforts are all focused, among other things, on reducing the opportunity for panic and therefore irrational reactions that increase the potential for the bullwhip effect.