The bullwhip effect occurs when the demand is amplified in the supply chain as they move up in the channels of the supply chain of a firm. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies. Companies can effectively counteract the bullwhip effect by thoroughly understanding its underlying causes.
Procter & Gamble (P&G) introduce this term. Logistics executives at Procter & Gamble (P&G) examined the order patterns for one of their best-selling products, Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' ...view middle of the document...
This amplified order variability may be attributed to the players' irrational decision making. Indeed, Sterman's experiments showed that human behavior, such as misconceptions about inventory and demand information, may cause the bullwhip effect. 
In contrast, the bullwhip effect is a consequence of the players' rational behavior within the supply chain's infrastructure. This important distinction implies that companies wanting to control the bullwhip effect have to focus on modifying the supply chain's infrastructure and related processes. Research has identified four major causes of the bullwhip effect:
Demand Forecasting Update
Every company in a supply chain usually does product forecasting for its production scheduling, capacity planning, inventory control, and material requirements planning. Forecasting is often based on the order history from the company's immediate customers. But sometimes the lead time can cause bullwhip effect no matter the forecasted demand is accurate or not.
In a supply chain, each company places orders with an upstream organization using some inventory monitoring or control. Demands come in, reduce inventory, but the company may not immediately place an order with its supplier. It often batches or accumulates demands before issuing an order so instead of ordering frequently, companies may order weekly, biweekly, or even monthly. What happens is that there is a spike in demand at one time during the month, followed by no demands for the rest of the month. So this variability is higher than the demands the company itself faces. Periodic ordering amplifies variability and contributes to the bullwhip effect.
Estimates indicate that 80 percent of the transactions between manufacturers and distributors in the grocery industry were made in a "forward buy" arrangement in which items were bought in advance of requirements, usually because of a manufacturer's attractive price offer. 
Forward buying results from price fluctuations in the marketplace. Manufacturers and distributors periodically have special promotions like price discounts, quantity discounts, coupons, rebates, and so on. All these promotions result in price fluctuations. Additionally, manufacturers offer trade deals (e.g., special discounts, price terms, and payment terms) to the distributors and wholesalers, which are...