By Akulaeva Ekaterina
Bullwhip effect – example of Inc. and its suppliers
According to Wall Street Journal’s article “'Bullwhip' Hits Firms As Growth Snaps Back” Caterpillar Inc. - the world's leader in manufacturing of heavy-equipment - due to the company’s expectations of economy’s recovery and need for replenishment of inventories after crisis inventory burn-off regime at the beginning of 2010 was about to place huge orders to suppliers for “everything from hydraulic tubes to shatterproof glass”1. Thus, demand growth from suppliers’ side was planned to be 30 to 40% even though Caterpillar’s demand would have barely changed (the company’s worst case scenario was 10 to 15% increase in output mainly to restock warehouses).
This is a bright example of such phenomenon as “Bullwhip effect” – when as a result of small increase in demand huge rise in the need for goods further down the supply chain may occur.
Companies usually face the effect when communication along supply chain is poor. In the example Caterpillar was trying to deal with the issue by notifying its suppliers of oncoming increase in quantities ordered, but the question is whether these suppliers notified their suppliers?
One more reason for appearance of Bullwhip effect in this case is an absence of reliance on suppliers and long production cycle of the company’s product - vivid example is Caterpillar’s decision to have inventories replenished at pre-crisis level.
What was making the matter even worse was the fact that not all company’s suppliers survived during downturn. It meant possibly more sharp increase in demand for everyone who was left.
But why the company was so concerned about the effect? Answer is simple - it could affect Caterpillar’s end users’ satisfaction and company’s reputation and sales as a result. 'Bullwhip' could result in lower product quality, increase in its costs and