Bullwhip Effect – Do you really know your consumer?
I remember when I was first introduced to this term during a Supply Chain/Operations class at the University of Wisconsin - Madison. It sounded unusual. It makes you think - "What could be the relationship between bull whips and Ford car sales?".
Wikipedia defines it as follows:"The Bullwhip Effect (or Whiplash Effect) is an observed phenomenon in forecast-driven distribution channels. The concept has its roots in J Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester Effect. Since the oscillating demand magnification upstream a supply chain reminds someone of a cracking whip it became famous as the Bullwhip Effect."
Feel free to read the full article on Bullwhip Effect at this link. The article is well written and provides a good high level overview.
In layman terms consider the following example. You are thinking about buying a Ford Mustang - more specifically you are looking for a "Red" Ford Mustang. You go to the only Ford dealer in town. To your dismay, the dealer only has "Black" Ford Mustangs. You are ready to walk out on the dealer, when the dealer throws in another $1000 discount. To you that sounds like a great deal and you decide to take it.
Think about what that does in an integrated Supply Chain. In the example above, Ford's manufacturing operations see that as:"more people want Black Ford Mustangs" and they continue to produce more of them. But is that really a true representation of what the actual demand is?
I don't think so. These cases are further magnified in situations where you have a highly promotional situation. If you are constantly advertising a particular product, that's probably the only reason why it's selling. The only way to gauge its true demand is to leave it alone and see what it does.
This concept should be applicable to most industries. Now let's move on to the second point I want to make in this blog.
For the sake of argument let us classify demand into the following 2 categories:
(1) Everyday essentials - Needs
(2) Would like to have - Wants
Any slowness in demand (caused due to a recession/depression/etc...) will make the concept of "Bullwhip Effect" apply to both demand types.
My contention is that the "Bullwhip Effect" is more ubiquitous with relation to "Wants" in a normal/regular demand cycle.
Think about buying a new car OR a new Living Room Set OR a new Television. If you had an option wouldn't you want to save on these high ticket products? You may even be willing to settle for an alternative because you are offered a better deal OR because the option you wanted is not really available. If you are like me - instead of running around looking at 5 different retailers you will probably decide to settle for something that "you may be OK with".
When you do decide to "settle for something" think about what that did in the supply chain. It sent a wrong signal about the true demand for a product!
How can this be prevented? Several options are outlined in the Wikipedia article referenced above. For me, one "key" point missing is "Customer Surveys". These are crucial to understanding what the customer is really looking for. I know it's difficult to get the customer to fill a survey out - knowing myself. Offer them an incentive - offer to knock off another 1-2% off the sales price if they take 5 minutes to fill out the survey.
The point is - Try your best to understand what the Customer really wants! The company that can do this successfully will be "the last one standing".
Feel free to post comments below. I look forward to hearing from you.
Until my next post!
Best regards,
-AS
Wikipedia defines it as follows:"The Bullwhip Effect (or Whiplash Effect) is an observed phenomenon in forecast-driven distribution channels. The concept has its roots in J Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester Effect. Since the oscillating demand magnification upstream a supply chain reminds someone of a cracking whip it became famous as the Bullwhip Effect."
Feel free to read the full article on Bullwhip Effect at this link. The article is well written and provides a good high level overview.
In layman terms consider the following example. You are thinking about buying a Ford Mustang - more specifically you are looking for a "Red" Ford Mustang. You go to the only Ford dealer in town. To your dismay, the dealer only has "Black" Ford Mustangs. You are ready to walk out on the dealer, when the dealer throws in another $1000 discount. To you that sounds like a great deal and you decide to take it.
Think about what that does in an integrated Supply Chain. In the example above, Ford's manufacturing operations see that as:"more people want Black Ford Mustangs" and they continue to produce more of them. But is that really a true representation of what the actual demand is?
I don't think so. These cases are further magnified in situations where you have a highly promotional situation. If you are constantly advertising a particular product, that's probably the only reason why it's selling. The only way to gauge its true demand is to leave it alone and see what it does.
This concept should be applicable to most industries. Now let's move on to the second point I want to make in this blog.
For the sake of argument let us classify demand into the following 2 categories:
(1) Everyday essentials - Needs
(2) Would like to have - Wants
Any slowness in demand (caused due to a recession/depression/etc...) will make the concept of "Bullwhip Effect" apply to both demand types.
My contention is that the "Bullwhip Effect" is more ubiquitous with relation to "Wants" in a normal/regular demand cycle.
Think about buying a new car OR a new Living Room Set OR a new Television. If you had an option wouldn't you want to save on these high ticket products? You may even be willing to settle for an alternative because you are offered a better deal OR because the option you wanted is not really available. If you are like me - instead of running around looking at 5 different retailers you will probably decide to settle for something that "you may be OK with".
When you do decide to "settle for something" think about what that did in the supply chain. It sent a wrong signal about the true demand for a product!
How can this be prevented? Several options are outlined in the Wikipedia article referenced above. For me, one "key" point missing is "Customer Surveys". These are crucial to understanding what the customer is really looking for. I know it's difficult to get the customer to fill a survey out - knowing myself. Offer them an incentive - offer to knock off another 1-2% off the sales price if they take 5 minutes to fill out the survey.
The point is - Try your best to understand what the Customer really wants! The company that can do this successfully will be "the last one standing".
Feel free to post comments below. I look forward to hearing from you.
Until my next post!
Best regards,
-AS
Great article! I agree customers are our business driven. " Knowing customers' wants" is extremely important especially in such an economic downturn, which will in turn generate high inventory turnovers, consequently high cash flows.
ReplyDeleteI like the idea of "offering 1-2% off discount to fill out surveys". Another way of getting surveys is through on line purchase feedback.
Question we should think about afterwards is " How do we use the information?"
JG