The Bullwhip Effect -

Wikipedia describes the Bullwhip Effect (or Whiplash Effect) as ... " an observed phenomenon in forecast-driven distribution channels". However what does this actually mean and how does it play out?

Hopefully I can explain it in simple terms.

The Bullwhip Effect sees each level of the supply chain multiplying demand by a factor over 1. IE 1+x%.

Lets say I sell microwaves to the public. In the past 18-months microwave demand declined so much I actually ran down my inventory of microwaves.

However in recent months demand picked up slightly and i am now selling 60 microwaves a week versus 30 six months ago (in the middle of the bear market).

Thus instead of order 40 microwaves a week (I was running down my very large inventory) I order 60. My supplier, seeing that I and my competitors are buying more microwaves orders more from their supplier - who then orders more from the manufacturer.

If in the above case there are 15 microwave shops in Auckland and one Auckland supplier, with similar distributors around the country, then you can see how the demand gets multipled by (1+x)% for each level of the distribution chain.

If consumer demand has only grown slightly, then their will be a comensurate drop off in factory purchasing at some time in the future.

If this occurs, then the W type recession might emerge. Hopefully (and fingers crossed) this will not happen.

Regards