Bullwhip Effect is a phenomenon observed in forcast driven distribution channels. In order to have the fitting amount of inventory, forecasts are done to estimate the future customer demand.
Companies have to invest in extra capacity to meet the high variable demand. It is called “safety stock”. If we look at the whole supply chain, we observe that, starting with end-consumer up to raw materials supplier, each participant has a greater need for safety stock as they have greater observed variations in demand.
In periods of rising demand the participants close to the end-user increase their orders. If the opposite happens, Participants inventory does not get reduced enough, anymore.
Lee, Padmanabhan and Whang defined the following four causes of the bullwhip effect. Batching, shortage gaming, lead-times and demand signal processing. However, they say there are other other existing causes.