It refers to the effect that the amount of periodical orders amplifies as one moves upstream in the supply chain towards the production end. Even in the face of stable customer demand small variations in demand at the retail end tend to dramatically amplify upstream the supply chain with the effect that order amounts are very erratic, and can be very high in one week and almost zero in the next week.
The term was first coined around 1990 when Procter & Gamble perceived erratic and amplified order patterns in its supply chain for baby diapers. The effect is also known by the names whiplash or whipsaw effect.
As a consequence of the bullwhip effect a range of inefficiencies occur throughout the supply chain:
1. High (safety) stock levels
2. Poor customer service levels
3. Poor capacity utilization
4. Aggravated problems with demand forecasting
5. Ultimately high cost and low levels of inter-firm trust