Not long ago, logistics executives at Procter & Gamble (P&G) examined the order patterns for one of their
best-selling products, Pampers. Its sales at retail stores were fluctuating, but the variabilities were
certainly not excessive. However, as they examined the distributors' orders, the executives were
surprised by the degree of variability. When they looked at P&G's orders of materials to their suppliers,
such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not
make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the
demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G
called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the
"whipsaw" effect.)
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.
In the past few years, the Efficient Consumer Response (ECR) initiative has tried to redefine how the
grocery supply chain should work.[1] One motivation for the initiative was the excessive amount of
inventory in the supply chain. Various industry studies found that the total supply chain, from when