Demand Forecast Accuracy - A Better Way to Fight the Bullwhip Effect

Supply chain disruptions are nothing new. As 2020 continues to demonstrate, some disruptions can have a greater, catastrophic impact. But even small fluctuations can cause what is known as the “Bullwhip Effect”.

This phenomenon occurs when demand signals are amplified as they make their way through the supply chain. When forecasts are affected by disruptions, accuracy decreases. This ripple of chaos moves backward in the supply chain with each successive supply chain partner amplifying the effects of the disruption to try and mitigate its impact. Cumulatively, the results to forecast accuracy and the subsequent backlash on inventory, supply and manufacturing can be off by a factor greater than 50%.

Causes of the Bullwhip Effect

The bullwhip effect is caused by 4 factors, all related to demand:

1. Demand Forecast Updating – This occurs when all parties in the supply chain make adjustments to compensate for negative data received from downstream members. If the chain is very long, the rate of inaccuracy increases.
2. Order Batching – Here, companies consolidate smaller orders for materials into larger ones to compensate for perceived shortages or to lock in prices or lead times. This can create much variability in demand when disruption occurs.
3. Price Fluctuation – Buyers within the supply chain may anticipate a future increase in price based on a current low-price option. This creates fluctuations that aren’t reflective of demand or to real variations in final consumption.
4. Rationing and Gaming – This is a Catch-22 situation where sellers ration or short deliver items they know will soon be in low supply while buyers up their positions in order to receive what they need, only to cancel at a later date.

Demand Forecast Accuracy

The single most powerful way to fight the bullwhip effect is through better demand forecast accuracy. As demand signals are amplified by successive levels within the supply chain, distortions can echo through the system. The use of robust demand software with advanced analytics and data-driven, real-time insights and visualization can create better demand forecast accuracy and reduce the impact of disruptions. This in turn allows companies to stabilize supply.

This software can help minimize the bullwhip effect by: 

• Improving communication – Traditional demand management lacks visibility across the entire supply chain. With demand software, companies serve up data that is accessible to everyone. This leads to better communication and fosters collaboration among supply chain partners.
• Enabling appropriate strategy – Inventory is best optimized when demand is certain. If the demand is stable, companies can adopt a “push” strategy. If demand is uncertain it may opt for a “pull” strategy instead. This helps stabilize and control inventory levels. Demand planning software can spot demand patterns, trends and seasonality. It can also predict and create “what-if” scenarios for contingency planning which allows for the anticipation of outcomes.
• Helping manage product portfolios – Not all products perform the same way and each has a different profitability potential. Demand planning software enables ABC analysis to prioritize inventory and finished goods by value rather than volume. It also creates and manages projection of revenue, cost of goods sold and margin at the item level to help managers determine which projects to prioritize and what trade-offs should be considered.
• Break order batching – Because demand software can collect inputs from across the organization and ERP systems, forecasts are more accurate. This means that order quantities can be more strategic and aimed at meeting demand rather than extrapolated using siloed data and intuition.
• Stabilizing pricing – Demand software uses demand sensing and demand shaping data to forecast at any level of aggregation. This allows companies to control prices with confidence, which reduces frequency of wholesale pricing and stockpiling by customers.
• Eliminate gaming – Demand planning software uses historical data coupled with real-time data and supply chain transparency to create accurate true demand forecasts, rather than guesswork or hedging bets on outcome.

Data-driven demand planning is possible by installing demand planning software by DemandCaster. With real-time data, insights from across the organization and through transparent communication that enables collaboration, demand forecast accuracy can be vastly improved to tame the bullwhip effect and empower accurate forecasting and visualization.

S&OP and capacity planning capabilities of DemandCaster have enabled ASK Power — a manufacturer of electrical power connectors — to improve on-time delivery, increase inventory turns, reduce order lead time, and increase profit margin from 2 to over 10%.