• Pradyumna Nag

Ever heard of the bull-whip effect?

Ever heard of the bull-whip effect?

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Post opening up, if there is something economically we need to fear, this is it.

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This supply chain anomaly is going to lead to massive wastages.


Bull-whip effect/ Forrester Effect’, first appeared in Jay Forrester's Industrial Dynamics (1961).

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It explains how interconnected supply chains can get confused by due to signal confusion.


Let me simplify -


A small spike in consumer demand post lockdown is going to send a signal of a sudden consumption increase.

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Retailers read this new spike as a signal of recovery and place backward orders.

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Distributors, sensing surging interest place orders on the manufacturers to cover stocking lead times.

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Manufacturers increase production output to be able to meet manufacturing lead-times.


Suddenly, consumption drops.

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The customer is unwilling to wait to consume.


Like a bull-whip, there ends up being excesses everywhere leading to:

> wastages

> unwarranted discounting

> sale at a loss simply to clear working capital


Who gained?

No one.


> The consumer did not get what he wanted.

> Distributors & retailers locked up capital for a while.

> Manufacturers end up taking the brunt of lower pricing.


How to get through?

Eliminate the signal from the noise.


#cfo #supplychain


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