What does "Bullwhip Effect" mean in production and operation management?

Bullwhip effect, commonly known as "bullwhip effect" in management. Usually called the butterfly effect in dynamic system, it refers to a very small change in initial conditions, which will have a great impact on its future state after continuous amplification. Some small things can be confused, and some small things are very important to an organization and a country if they are amplified by the system, so we can't confuse them.

Bullwhip effect is a common high-risk phenomenon in marketing, which is the result of the game between sellers and suppliers in terms of demand forecast correction, order batch decision, price fluctuation, shortage game, inventory responsibility imbalance and coping with environmental variation, which increases the instability of suppliers' production, supply, inventory management and marketing.

This theory was first put forward by J Forrester in Industrial Dynamics of 196 1. In general business activities, customers' demand is always unstable, and enterprises always need to optimize the allocation of resources such as inventory by forecasting customers' demand. Forecasting is based on statistics, and it is generally impossible to be completely accurate, so enterprises often keep some extra inventory as safety inventory in their operations. In the supply chain, from downstream to upstream, from the end customer to the original supplier, each component will need more and more safety stocks. In the period of rising demand, downstream enterprises will increase the number of orders from upstream, and in the period of falling demand, downstream enterprises will reduce or stop ordering. And this change in demand will be amplified with the backtracking of the supply chain. This amplification effect of information distortion is very similar to a whip thrown upward in graphic display, so it is called whip effect vividly. Downstream customers are equivalent to the root of the whip, and upstream suppliers are equivalent to the tip of the whip. As long as there is a slight jitter at one end of the root, it will fluctuate greatly when it is transmitted to the far end. In the supply chain, the more upstream, the greater the change, and the farther away from the end customers, the greater the impact.