Bullwhip effect

What does Bullwhip effect mean?

The bullwhip effect is the pattern where swings in orders get bigger at each step back from the consumer: retailer, wholesaler, manufacturer, raw material supplier. Each party reacts to the orders it sees, adds safety buffers, orders in batches and sometimes overreacts to shortages, so a small wobble at the shelf becomes a big one at the factory. Example: shopper demand rises 5 percent. The retailer orders 10 percent more to rebuild stock, the distributor orders 20 percent more, and the factory adds a shift, only to face a slump when orders settle. Jay Forrester described the pattern around 1960, and Hau Lee, V. Padmanabhan and Seungjin Whang explained its causes in a well-known 1997 paper. Sharing point-of-sale data and placing smaller, more frequent orders reduce it.