Bullwhip effect: A customer’s order creates many demands

Reylito A.H. Elbo

Reylito A.H. Elbo

THREE lay ministers were talking about prayer and its most effective positions based on their respective experience. As they were talking inside the parish office, a cable TV repairman was working on the system in the background.

One minister said that he felt the key was in the hand positioning. He always held his hands together and pointed them upward as a form of symbolic worship. The second suggested that real prayer was conducted on one’s knees. The third suggested that they both had it wrong—the only position worth its salt was to pray while stretched out flat on your face.

By this time, the cable guy couldn’t stay out of the conversation any longer. He interjected: “I found that the most powerful prayer I ever made was while I was dangling upside down by my heels from a power pole, suspended forty feet above the ground.”

At times, we’ve seen how some people think and react to things based on experience. If you’ve no experience, you will never understand it even by reading voluminous articles, including this piece. In any situation one thing is certain: Learned people will prescribe many different remedies. If the national budget is not balanced, administration officials will propose to raise taxes while the opposition will call for a reduction in taxes.

If foreign investment has been reduced, employers will urge the government to give them tax incentives, while the poor request for subsidy. And if the cost of energy has gone up, the power sector will seek more concessions from the government, while consumers will urge the government to rein in the rates.

Why the confusion? The simple answer, of course, is that we’re in a democracy. Many people have varied opinions depending on where they come from. Since time immemorial, the communists have been proven wrong, in as much as the capitalists have paralyzed us—mainly through a vast series of interlocking bureaucracies, riddled through and through with corruption and incompetence.

If a leader is corrupt and ineffective, it is also manifested down the ranks, even to the lowest level of the organizational hierarchy. Even a messenger at the Bureau of Customers may become a favored worker in an envelope or drawer-stuffing team. Even if his job is not really necessary in this high-tech environment where documents can be transmitted much faster electronically, as long as he remains loyal to his corrupt bosses, he will stay needed and desirable in business.

Imagine this happening in all government agencies. If graft and corruption is allowed or it takes time to prosecute criminals because the justice system is equally corrupt, then you can imagine its adverse ripple effect in a country like ours. In business, this is called the bullwhip effect, or the dynamic and progressive multiplication of activities caused by a market demand. If a customer buys a product, the same action creates several larger swings in supplier activities in the supply chain.

The concept was credited to Jay Forrester, who introduced it in his book “Industrial Dynamics” (1961) to explain the magnification of market demand and compared it to cracking a whip.

The bullwhip effect is the most common challenge in doing lean management, particularly in heijunka, or production leveling. It is the curse of market demand. Suppliers’ work schedules are often thrown in disarray as they spend to solve a “happy” problem. They hire temps, who typically move much faster and are more productive than regular employees, or buy raw materials in bulk without the assurance of repeat orders.

Of course, some factories have safety stocks of their raw materials just in case a customer calls in his order. But as you can imagine, safety stocks are usually negligible in quantity and usually not enough to cover the actual order of customers.

That’s why many companies with deep pockets tolerate big inventory (which is a wasteful practice under the lean context), as they fail to realize that their current abundance with resources actually hinders their ability to find more profit. How long they could hold on to their inventory is a risk itself, given the many alternative options for the consumers.

Therefore, the simple question that we could ask is this—“How could we better serve customer’s order at the highest quality, lowest cost, and faster delivery?” The answer is better and more strategic supplier partnering where trustworthy data are shared in advance between the supplier and its customer.

Rey Elbo is a business consultant specializing in human resources and total quality management as a fused interest. Send feedback to elbonomics@gmail.com or follow him on Facebook, LinkedIn, or Twitter for his random management thoughts.


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