Bullwhip Effect in Supply Chains at HP company

Bullwhip effect (or whip effect) is a condition that occurs in the supply chain where demand from customers experiencing change (distortion). These changes resulted in a series of effects that would disrupt the supply chain. The uncertainty of customer demand which is the major cause of bullwhip effect.

Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, and missed production schedules

A classic example of the effect is baby nappies or diapers. Babies are fairly regular in their use of nappies - they have a new nappy (almost) every time they feed. Sure, there is seasonal variation in the birth rates as more babies are conceived in spring (when male sperm count is significantly higher than in any other season; however this is not globally consistent and the there is some debate over the role of both temperature and the day length. Neither-the-less, this seasonal variation is small compared to the widely fluctuating and erratic production rates experienced by the diaper manufacturer after the orders have passed through the supermarkets and distribution centres.

Else example is at Hewlett-Packard (HP) company. When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders from the printer division to the company’s integrated circuit division had even greater fluctuations.

What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distribution channel stage, HP had to rely on the sales orders from the resellers to make product forecasts, plan capacity, control inventory, and schedule production. Big variations in demand were a major problem for HP’s management. The common symptoms of such variations could be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain production planning (i.e., excessive revisions), and high costs for corrections, such as for expedited shipments and overtime. HP’s product division was a victim of order swings that were exaggerated by the resellers relative to their sales; it, in turn, created additional exaggerations of order swings to suppliers.