Not long ago, supply chain executives at P&G examined the order patterns for one of their best- selling products, Pampers. Its sales at retail stores were fluctuating, but the variability was 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 variability did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variability 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 “Whipsaw effect”).

The bullwhip effect describes the phenomenon that the variation of demand increases up the supply chain from customer to supplier. The further away a company from the end customer (in terms of lead time), the larger is this variation. Considering a supply chain that consists of an OEM (Original Equipment Manufacturer) and a 1st-, 2nd- and 3rd-tier supplier, the OEM faces the lowest and the 3rd-tier supplier the largest variation of demand (see the following figure)