Question

Discuss, in detail, any two factors responsible for the “Bullwhip Effect” in typical agricultural supply chains.

Answer 1

The bullwhip effect describes a phenomenon that involves the increasing amplification of demand variability along a supply chain.

Bullwhip effect will lead to a series of supply chain problems, such as the increase of inventory level, the decrease in the service level, low efficiency and high cost, and so on. This will have a devastating impact on the overall competitiveness of the supply chain and profits. What's more, it will also produce a serious of influences on the effectiveness of the enterprises or even the entire country's economy

It is the phenomenon where a small demand variation causes large fluctuations across the complete supply chain.

The major reasons for this occurring in agriculture are:

• Inaccurate forecasts of demand or supply which is called demand signal processing, farmers aren’t able to clearly predict what will be the prices, and how much supply will be there for the crop they are growing. More often than not farmers find all of themselves growing the same crop, leading to price crashes and inventory of crops getting stuck across the supply chain. This inventory has nowhere to go, except get rotten.
• Rationing of the products by the producer due to limitations in production. Farmers aren’t growing sufficient produce due to a dip in prices. Or they may be trying to create artificial scarcity to drive up prices. In such cases, the Bullwhip Effect is visible as excess inventory piled up in warehouses resulting in crops getting spoiled.
• Seasonality and variation in demand, there is very little that can be done about seasonality specifically other than forecasting accurately.

The Bullwhip Effect phenomenon is a large threat for the stability of supply chains worldwide and in particular the food sector.The bottom line is that information distortion is the main cause of bullwhip effect in agriculture.