If you’ve never experienced the whiplash effect, consider yourself lucky.
This can lead to problems with customer satisfaction, lost profits, and damage to supplier relationships. Most problems stem from a lack of understanding of how supply and demand affect your inventory management process.
Read on to learn more about the impact of whiplash in the supply chain, some of the reasons, and how to avoid or limit it.
What is the whip effect?
The whiplash effect is a phenomenon in which changes in demand at the end of the supply chain cause fluctuations in supply throughout the chain. Usually, small fluctuations in demand at the level of buyers or sellers are reflected in the chain and cause large differences.
This, in turn, leads to over-or under-purchase of consumables at each stage of the chain. These items often become dead, delayed, or require significant discounts to avoid a total loss.
Example of whip effect
If all of this sounds a little confusing, let’s break it down with some examples.
Let’s say you’re a wholesale wholesaler who regularly sells 1,000 boxes of sprats per customer each week. This customer then ordered twice as many canned sprats as usual. Expecting demand to increase, you buy 2000 boxes to make sure you don’t run out of this item. As your purchases increase, your supplier may also increase their supply of canned sprats, further complicating matters.
At the other end of the spectrum, problems can arise due to a missing product. In the scenario above, assume that you don’t increase the number of canned sprats you buy. However, buyer demand continues to grow. You will soon face the problem of meeting the demand. You then place a larger order with your supplier, who is also unable to keep up with demand, resulting in a shortage of canned sprats.
While this is an oversimplified example, you can see how overreacting to variable demand can cause problems throughout the supply chain.
Causes of the whiplash effect
There are several reasons for the whiplash effect in the supply chain. Failure to adequately forecast changes in customer demand, delivery times, and inventory tracking are often critical factors.
Here are the most common causes of the whiplash effect:
Lead time is one of the most important aspects of inventory management and has a direct impact on your ability to meet customer demands. Evaluating appointments and planning ensures that you avoid waste and can carry out orders. However, if the problem occurs anywhere in the supply chain, the execution time for each remaining step increases. This makes it difficult to meet consumer demand and causes major changes in inventory levels.
Lack of information exchange
One of the most common reasons for the whiplash effect is a lack of communication both within the company and across the supply chain. Sharing information about changes in demand, upcoming production issues, and sales is the key to avoiding problems. This is especially important if you are interested in what 3PL is or drop shipping for eCommerce. There, your ability to execute commands depends entirely on maintaining a good flow of information.
Incorrect search forecast
Demand forecasting is complex and requires defining and analyzing many inventory KPIs and eCommerce KPIs. Errors can lead to inaccurate estimates. This in turn leads to an inability to fulfill requests or too many delays. Many external factors could make your predictions wrong. The key is to check your inventory regularly, analyze and update your forecasts.
Too many discounts and promotions
Another problem that usually causes a whiplash effect is too much promotion or excessive use of discounts. This is because they distort broader demand trends and make forecasting difficult. Suppliers have become accustomed to filling orders at high speed and this can quickly become a problem when sales are over and seasonal trends return.
If you’re having frequent overstock issues, try grouping items. This allows you to sell products at a lower efficiency by combining them with better products. Additional costs are higher and do not affect the supply chain.
How to avoid the whiplash effect
Since the whiplash effect can cause so many inventory management problems, the key is to minimize the whiplash effect. While some causes cannot be controlled, you can limit the possibility that your company is the cause.
Here are five steps you can take to minimize the whipping effect:
Use inventory management software
Proper inventory and order management go a long way in avoiding whiplash problems. This is best done with software that can track stock levels, product flow, and orders in real-time, such as B.OMS. It provides you with useful data and a detailed picture of your ability to meet demand. Plus, it can help you set nominal rates, calculate optimal reorder points, and avoid wasting money on overloads.
Limit your promotions and sales
Many businesses believe they need frequent promotions to drive demand. This method of selling is dangerous in many ways and can easily result in losses for both the company and every step of the supply chain. Try to use sales time only when necessary to meet customer expectations. Instead, rely on incremental selling and cross-selling to increase your average order value and increase your sales in the long run.
Supply chain optimization
When your supply chain is overloaded with too many suppliers and moving parts, it becomes easier to make mistakes. Try to shorten your supply chain and streamline your procurement process to limit this risk. It also makes it easy to keep in touch and share information quickly.
Improve order planning
The undisputed hero of inventory management is order scheduling. Collect as much data as possible about stock levels and demand trends to order the optimal quantity of each product. You should also consider the safety stock needed and upcoming sales or seasonal changes in demand. Using search scheduling software is a great way to streamline your job scheduling.
Optimize your minimum order quantity (MOQ)
Setting a minimum order quantity is a good way to avoid losing items during shipping. However, try to avoid adding bulk discounts to the MOQ as this can attract customers who order more than you can handle. This can cause significant difficulties for your team to fulfill orders and can lead to drastic changes to your inventory levels.
Prepare your inventory
The whiplash effect is an unfortunate result of poor supply chain management and demand forecasting. By following our tips above and keeping up with the latest trends, you can protect yourself from trouble.