What is the Bullwhip Effect?
The bullwhip effect is the increase in variability as you move from retailer to supplier. For example, all things being equal, retail demand for a product will be consistent with minimal variability. However, when the retailer places an order with a distributor, the distributor may capture a higher degree of variability as a result of forecasting, and this will be "passed on" to the factory. The factory will in turn see a higher degree in variability, and then pass it on to the supplier. By the time the supplier receives the order, it is much larger than necessary due to the adjustments being made to account for the variability that was passed down.
In this basic example each activity (distributor and factory) includes additive safety stock to provide a cushion to mitigate the risk of a stock-out due to the variability that occurs from lead time throughout the supply chain. The safety stock is required to maintain customer service levels for the retailer; to ensure the retailer doesn't experience an out-of-stock. Because the distributor and factory don't have access to the actual demand of the retailer, they forecast based on the retail orders, and must factor in safety stock.