The Bullwhip Effect: A Supply Chain Nightmare! - Essay Sample

Introduction

The bullwhip effect is caused by having misleading information flow from the customer to the producer through middlemen in the supply chain. The uncertainty of information in a supply chain can not only result in lost revenues for the affected company but also lead to excessive inventory investment. A company may also offer poor customer service to its consumers as a result of a bullwhip effect. A bullwhip effect leads to a mismatch between the demand and supply curves, and as a result, inventory may exceed the required one or, in other cases, lead to shortages of consumer products (Herlyn, 2014). Therefore, suppliers may overreact to a small disturbance in the supply chain in an attempt to avoid deficiencies. A change in the demand for a product is assumed to be a significant change, and as a result, the producers increase their production to make up for the shortages. Companies need to come up with innovative ways in which they can make sure that there is proper coordination in the flow of information from the consumers to the producers.

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A beer game effect is an excellent example of how the bullwhip effect takes place. The players in the industry make orders without distorted information flow. The impact of such communication is that as we go up the supply chain, the orders are seen to amplify. The tendency of acting rationally on the players’ part is the reason why a bullwhip effect occurs.

Electronic Industry

Generally, the electronic and appliances industry plays a significant role in the lives of every human being. The electric sector has numerous products like televisions, air-conditioning, refrigerators, washing machines, dishwasher, blender, microwave, and many more, all which people use in their daily lives. The supplier in this industry is very few because the sector needs significant investment capital. Raw materials required for these industries are also not readily available, thus the presence of fewer industries compared to other industries. On the other hand, the industries’ downstream supply chain has very many players. The more players present in a downstream has, the more complex the supply chain is (Peng & Xiao, 2014). For example, high service providers, specialized distributors, and household appliances store, among others. Some of the products in the electrical and appliances industry, like refrigerators and air conditioners, are affected by the different seasons available. Electronic appliances companies suffer from high manufacturing and transaction costs, which therefore reduces the profits of these companies. On top of these costs, the industries suffer from the bullwhip effect, which also plays a massive part in lowering the total benefits of the firms. The electrical sector also suffers from inefficiencies that are usually caused by information distortion in the supply chain.

Supply Chain in The Electronic Industry

The supply chain in the electrical appliances is not only composed of the traditional supply channel but also distributors who make use of the internet for their sales. Recently the e-commerce sector has witnessed tremendous growth and has taken a reasonable amount of sales from the traditional channels of distribution. The two main supply channels have to compete in order to maximize their profits. As a result, they employ various methods of retaining consumers like price variability.

The manufacturers of home appliances can either sell their products directly to their consumers using the e-commerce method, or they can first sell to retailers. The retailers then have the option of using the internet to sell directly to their consumers, or they can use the standard physical methods of trading their electronic appliances to their consumers. An excellent example of a company that uses the internet to sell its products directly to the consumers is the Haier Group company, which is based in China. In this case, the retailers could be high service providers, specialized distributors, or household appliances. Every distribution channel used by the manufacturer only gets partial information on the demand for the goods needed. All the players also use an accelerating inventory policy. Retailers like chain stores are also using online platforms to sell their products besides using the traditional ways of selling. The use of online platforms has the effect of increasing the profits of the company and also helps the company take a market share by competing with the manufactures. Besides the fact that each distribution channel sells the same product, their prices are differentiated on the basis of their utilities.

Bullwhip Effect in the Electrical Industry

A bullwhip effect is expected in the early stages of the production of a new product. The main reason behind this is because the management of the company will have to estimate the demand for the product since it’s new to the consumers. Consumers will take time before fully understanding the product’s tastes and preferences and having the actual demand. Therefore, the orders from the forecasted consumption of the product may be higher than the real market demand leading to the bullwhip effect.

Price competition between the manufacturer who decides to sell their products directly to their consumers and those who are needed to use retailers who later sell their products to their consumers physically or through the use of the internet can lead to bullwhip effect in the industry (Ma & Lou, 2017). They also have to offer their customer discounts, which usually leads to price variation. The players in the supply of electronic goods need to compete for market share and profit margins. Thus they are required to lower their prices as much as possible in order to retain their customers. Retail distributors cannot afford to make significant changes in their prices as they are needed to avoid losses. Therefore, unlike the manufacturer who sells directly to their consumers, retailers of electrical appliances need to be very cautious with the changes they make in their prices. The more players the industry has, the higher the effect of a bullwhip in the industry. The difference in rates leads to demand variability, which results in a bullwhip effect.

Changes That Could Reduce Bullwhip Effect in the Electronics Industry

In order to manage the prices, the manufacturers need to establish a standard wholesale pricing policy. Such an approach takes away the role of price competition from the distributors to the manufacturers. It would also be beneficial to a manufacturer to reduce promotions as this will reduce the price variations that arise as a result of promotions. Companies could also adopt activity-based costing, which could help in reducing costs for the manufacturer in case the retailers divert. The activity-based costing will assist the manufacturer in keeping all the required records for the costs of inventory and transportation, which exceed the promotion cost.

Manufacturers should manage the role of demand and inventory management instead of being handled by the downstream site; that way, the suppliers will be able to avoid cases of excess ordering. When the suppliers know the exact figure needed by the consumers, forecasting will be made easier. That way, the manufacturer will be able to avoid excessive inventories. Electronic appliances companies could also try as much as possible to sell directly to consumers. Such an approach removes the need for the extended supply chain, which is usually the reason why information does not flow properly in a supply chain. Adopting the direct approach will enable the company’s management to have a precise figure of the market demand, and it will no longer have to rely on the middlemen for information about the market.

Conclusion

A bullwhip effect is caused by a distortion in information in a supply chain. As a result of misleading information, companies may suffer losses due to overproduction. A bullwhip effect rises due to price variations, demand forecasting updating, and it may also be experienced when a new product is introduced in the market. Companies’ management could avoid bullwhip effects by selling directly to consumers. To do, they can sell their products through the internet. They can also adopt a common wholesale pricing policy to avoid price variations.

References

Herlyn, Wilmjakob. (2014). The Bullwhip Effect in Expanded Supply Chains and the Concept of Cumulative Quantities

Ma, Junhai & Lou, Wandong. (2017). Complex Characteristics of Multichannel Household Appliance Supply Chain with the Price Competition. Complexity. 2017. 1-12. 10.1155/2017/4327069.

Peng, R., & Xiao, Y.M. (2014). How to manage the bullwhip effect in the supply chain: A case study on Chinese Haier Group. http://www.diva-portal.org/smash/get/diva2:694861/FULLTEXT01