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What is the bullwhip effect in supply chains?

A curled up bullwhip sits atop a wood table as a metaphor for article

Picture a whip cracking, and how it ripples like a snake from one end to the other, ending by inflicting pain. While similar peaks and valleys in a company's supply chain are more likely to result in financial pain rather than physical harm, they can be just as devastating - especially for a small business.

While delivery delays and order batching contribute to the problem, inaccurate demand forecasting is the most common cause for the bullwhip effect. The result: excess inventory investment, poor customer service and lost revenue.

One example: a major desktop printer manufacturer found that retailers were estimating sales and including safety stock in their projections. When distributors upstream padded their own forecasts, that amplified distortion even more. The manufacturer and its suppliers responded with changes in production, which ripple down the chain.

"When the UPS Customer Solutions team addresses problems like this, about 80 percent of the improvement we see comes from focusing on the process," says Mark Modesti of the UPS Customer Solutions group. "And you need to have more sophistication when it comes to inventory planning, especially when a company is growing quickly." If you have products that require coordinating shipments from overseas, timing becomes critical and end-to-end visibility on the entire chain is essential as well, he says.

Modesti shares this success story: "We recently conducted an on-site project for a manufacturer of musical instruments that faced inventory challenges. The company wanted to figure out the best mix of SKUs, because they have a real seasonal business."

Partnering with Baxter Planning Systems, UPS conducted an inventory analysis and developed an optimum inventory investment in dollars, along with a detailed snapshot of both the costs and the customer service payoffs that would result.

"Of course each situation is different, but typical improvements in inventory investment range from a 10 to 30 percent reduction, a 10 to 50 percent reduction of In Stock/Fill Rate misses, and a dramatic reduction in expedited shipping/delivery fees upwards of 50 percent," Modesti says.

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