What is the Bullwhip Effect? How Pricing Software can help combat it

The bullwhip effect is a phenomenon that occurs when retailers or distributors receive orders from customers that are much larger than what was ordered from the supplier.

At the end of October, it was announced that many warehouses are becoming increasingly full of unsold products because consumers are losing their money due to sky-high inflation.

The COVID pandemic has wreaked havoc on businesses worldwide, causing many to close their doors for good. The Bullwhip Effect is when demand for a product or service fluctuates more than the supply. This can cause businesses to over-order inventory, leading to higher prices and shortages.

It can also work in reverse. With less demand, suppliers may even cut production, leading to layoffs and factory closures. The Bullwhip Effect is worsening the post-COVID period for businesses and the economy.

What is the Bullwhip Effect?

In supply chain management, the bullwhip effect is a phenomenon that occurs when retailers or distributors receive orders from customers that are much larger than what was ordered from the supplier. This can be a major problem for businesses, as it can lead to disruptions in the supply chain and ultimately result in lost sales. So, what is the bullwhip effect, and how can businesses avoid it?

Analyst Albert Jan Swart of ABN Amro talks about this well-known phenomenon within logistics “Companies have started stockpiling more during the strong increase in demand during the corona period. Now there are large stocks, but the demand is falling.”

The effect gets its name from the way a whip is able to generate a much larger force at its tip than what was applied at the base. Similarly, small changes in consumer demand can have a disproportionately large impact on production and inventory levels further upstream in the supply chain.

There are a number of factors that can contribute to the Bullwhip Effect, including: order batching, information asymmetry, price variability, and lead time variability. When any of these factors are present, it can create ripple effects that amplify small changes in demand into larger swings in production and inventory.

Managing the Bullwhip Effect is essential for any company that wants to maintain efficient operations and avoid costly disruptions further down the line. There are a number of strategies that can be employed to help mitigate the effect, including: cross-functional collaboration, data sharing, and forecasting tools.

Handling the Bullwhip Effect internally with the right Pricing

When it comes to the bullwhip effect, many businesses make the mistake of thinking that the only way to combat it is by raising prices. However, this isn't the only solution, and in many cases, it can actually make the problem worse.

Instead, businesses need to focus on handling the bullwhip effect internally. This means taking a close look at your own processes and procedures to see where you can make changes that will reduce the impact of this phenomenon.

One of the most important things you can do is to improve communication between all levels of your organisation. Everyone needs to be on the same page when it comes to demand planning and forecasting.

You should also consider implementing just-in-time inventory management practices. This will help ensure that you always have the necessary inventory on hand without holding onto too much excess inventory.

Finally, be sure to review your pricing strategy regularly. If you find that your prices are fluctuating too much in response to changes in demand, then you may need to adjust your pricing structure accordingly.

By taking these steps, you can help minimize the effects of the bullwhip effect on your business and keep your operations running smoothly.

According to bullwhip-effect guru Prof. Hau Lee (Standford School of Business), the problem is unsolvable, “because there are always new developments and products that companies have to respond to. We will never solve the bullwhip effect.' Professor Hau Lee's tip, however, is to focus on the internal bullwhip effect, which can be solved with smart marketing and sales.

When to use Software in your Business

Understand Supply & Demand or 'Price Elasticity'

Higher consumer prices cause customers to become more averse to buying products, reducing demand. Therefore, it is essential to know the degree of price elasticity of demand for each product in order to reduce the likelihood of excess inventory.

Additionally, in the current case of overproduction, measuring price elasticity is a way to control the bullwhip effect for lowering the prices of items. This helps to generate more interest among retailers and consumers.

Smart technology can help

For companies with thousands of products, determining price elasticity at the product level and determining an optimal price reduction is a lot of work. Smart software, such as SYMSON, can help with this.

SYMSON can help determine the willingness to pay or the optimal price to sell the desired quantity. We can explain the concept of price elasticity and refer to this page:

“At SYMSON, we see a number of customers struggling with this challenge. It is advisable to standardise the pricing strategy, whereby the elasticity can be mapped at the product level and the entire pricing strategy for all products can be better aligned with customer demand. In addition, companies can take critical inventory levels into account; if a product reaches a certain stock level, an automated price change can take place to stimulate or discourage customer demand. In this way you maintain a good balance between profitability and the current logistical challenges.” ….. spokesperson SYMSON

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!


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