Meaning
Description of the amplification of demand variability as one moves upstream in a supply chain from the end consumer to the raw material supplier. It represents a disconnect between actual consumption and the production orders placed by various intermediaries.
Demand Oscillation
Variations in customer buying patterns create ripples that gain intensity as they travel through the distribution network. A minor five percent increase in retail sales might trigger a ten percent increase in wholesale orders and a twenty percent surge in factory production. This occurs because each tier adds a safety buffer to ensure they can meet the perceived rise in demand.
Information Distortion
Lack of communication between supply chain partners causes managers to rely on distorted signals rather than real-time consumption figures. Batch ordering and price fluctuations further complicate the data by encouraging buyers to purchase in larger quantities during promotion periods. Lead time delays also contribute to the bullwhip effect because firms react to past demand rather than future requirements.
Stock Consequence
Surplus stock accumulates at various points in the system, tying up working capital and increasing the risk of product obsolescence. High storage costs and the need for frequent clearance sales reduce the overall profitability of the supply chain. Stabilizing the flow of goods requires synchronized data sharing and a reduction in the time between a consumer purchase and a factory order.
