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What is The Bullwhip Effect?

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Published on Nov 8, 2015

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Bullwhip Effect”
The bullwhip effect refers to a frustrating phenomenon that frequently starts with falling customer demand although it could start with the reverse...a previously unanticipated rapid rise in customer demand. This fall in customer demand prompts retailers to under-order so as to reduce their inventories. The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain. This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.
Through the numerous stages of a supply chain; key factors such as time and supply of order decisions, demand for the supply, lack of communication and disorganization can result in one of the most common problems in supply chain management. This common problem is known as the bullwhip effect; also sometimes the whiplash effect. In this blog post we will explain this concept and outline some of the contributing factors to this issue.

By Barry Norman, Investors Trading Academy

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