Baking, cooking, decorating and buying presents in overcrowded department stores – who doesn’t know it? In times of e-commerce, it is now easy to avoid the stress of Christmas in shopping malls. Doesn’t everyone prefer to relax at the most beautiful time of the year and simply order gifts from the couch?
Online shops are available 24/07 and have all kinds of products in various price ranges. For many of us, Christmas is not only the best time of the year but also makes many fall into the familiar “shopping frenzy”. According to a statistic, most online order quantities are delivered at Christmas time. Germany’s largest parcel supplier, DHL, delivers up to eleven million parcels a day at peak times. A further eight million parcel deliveries are made by Hermes, GLS and DPD.
As every year, the Christmas shopping frenzy causes an increase in demand, which is why the seller orders a larger amount of products from the retailer. What starts with the retailer eventually spreads to the entire supply chain. The phenomenon of the bullwhip effect occurs.
What exactly is the bullwhip effect?
The bullwhip effect describes the phenomenon that orders from the supplier are larger than sales to the customer. This fluctuation in demand affects the entire supply chain so that the fluctuation increases right back to the source.
This is triggered by the retailer. This is because they are the first to notice the fluctuation in demand. The effect of additional orders is felt throughout the entire value chain. This means that at the end of the supply chain there are large orders that far exceed the level of fluctuations in demand than they should.
Here is a small example to illustrate this:
A retailer receives ten orders for Christmas sweaters in one day. The retailer assumes that he will receive an order for another twenty sweaters by next week.
By forecasting future sales, the retailer orders more Christmas sweaters from his wholesaler.
The wholesaler, in turn, increases his order to the producing company. However, he does not only order an additional demand. In most cases, wholesalers expect demand to increase in the longer term, which is why they order additional safety quantities from the manufacturer. In this way, he wants to protect himself against future fluctuations in demand.
How is the bullwhip effect created?
Various causes contribute to the increasing fluctuation in the supply chain:
- Wrong forecasts
false interpretations of demand, e.g. triggered by volume discounts and bundle orders, are in most cases the reason why all players abound with goods.
- Communication problems within the supply chain
Information exchange takes place in the supply chain with a delay, which increases to the point of origin.
What logisticians must be prepared for:
Probably the biggest problem lies in incorrect forecasts regarding expected demand.
The bullwhip effect is increasing downwards towards the supplier, leading to an ever stronger stop-and-go effect. The sudden increase in demand must be sustained by more transport capacities. Production interruptions and supply bottlenecks are no longer uncommon here. Due to the high demand, more stocks are delivered. This is also associated with a larger storage capacity, which causes storage costs to rise.
The expansion of inventory buffers and production capacities is not only inefficient but also cost-intensive and can have a negative impact on business partner relationships due to a lack of coordination.
With the rapid increase in order volumes, suppliers are getting into difficulties with their production. Fluctuations in demand are ultimately highly likely to lead to delivery delays, bottlenecks and shortfalls. Companies, therefore, need larger inventories and safety buffers. Both transport and production capacities must be aligned to the fluctuation range in order to guarantee the ability to deliver.
Would you like to offer your customers a good service in the future, especially at Christmas?
In order to avoid costs and delays in delivery, retailers should increase their stocks with smaller, uniform amounts over several months. Better communication can ultimately help minimise the bullwhip effect.
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