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The Bullwhip Effect

I read about the Bullwhip effect in my Logistics & Supply Chain Management class. Its a fairly simple principle that defines the effect of individual actions on the entire supply chain. Say, a supply chain involves 5 entities from manufacturer to the final retailer (with warehouses and distributors in between). The retailer is the one who is in contact with the end consumer. So, in order to stock up items, the retailer forecasts the demand he expects from the consumer and places the order with his distributor. The distributor has no contact with the end consumer, so in order to stock up items, he needs to forecast the demand he expects from the retailer. This chain goes on till the manufacturer who decided how much to produce.

The retailer includes some extra items in his order so that he doesn't run out of items to sell if the demand is more than his forecast. The distributors, warehouses and the manufacturer all do the same. The error in forecast that leads to excess or lower ordering (as compared to demand) multiplies as we move along the supply chain as each entity's forecast has its own error along with the errors of all other entities before it. This is called the bullwhip effect.

Now, let's map this situation on to any workplace, or any locality or any society. In fact, this applies to any place where a group of people have some or the other dependency among them. A good majority of the people, especially at the workplace, follow the CYA (Cover Your Ass) principle. Each one does enough to ensure that he does not draw the blame for any unfavourable outcome. But a person's estimate of what needs to be done to cover his ass completely is similar to the retailer's forecast of demand from end customers. There is reasonable accuracy, but its rarely 100% accurate. And when one person's actions depends on the actions of another, there is a bullwhip effect.

This is one of the reasons why start-ups, small localities, etc are a lot more efficient than bigger companies and bigger localities. The smaller the number of dependencies, the lower the bullwhip effect, and higher the efficiency.

In the supply chain, the bullwhip effect is greatly reduced by following a centralised forecasting system. If all 5 entities were to use the same forecast, then the multiplying effect vanishes.

Similarly, every workplace should look to imbibe a culture where every employee understands the big picture about the company, reducing the error in his estimates for CYA. The employees too must embrace this as following the CYA principle will always keep them stressed and worried as nobody gets around to covering his ass from all angles, and if one succeeds in doing so, he'll hardly get any work done and will end up being sacked anyway.

The best way to avoid the bullwhip effect in a workplace is to ensure all employees understand the big picture (the strategy of the company). 

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