The "bullwhip effect" is a high-risk phenomenon prevalent in marketing, and is the result of the game between sellers and suppliers in terms of demand forecast revisions, order lot size decisions, price fluctuations, shortage games, inventory liability imbalances, and coping with environmental variability, which increases suppliers' production, supply, inventory management, and marketing instability.
This theory was first proposed in 1961 by J Forrester in Industrial Dynamics. In general business activities, customer demand is always unstable, companies always need to predict customer demand to optimize the allocation of inventory and other resources. Forecasting is based on statistics, and generally speaking, it is impossible to be completely accurate, so enterprises often keep some extra inventory as safety stock in their operations. In the supply chain, from downstream to upstream, from end customers to original suppliers, each component will require more and more safety stock. During periods of high demand, downstream companies will increase the amount of orders from upstream, and during periods of low demand, downstream companies will reduce or stop ordering. This change in demand is amplified as it travels up the supply chain. This amplification of information distortion is graphically displayed like a long whip, and is therefore figuratively known as the whip effect. The downstream client side is equivalent to the root of the whip, while the upstream supplier side is equivalent to the tip of the whip, and a slight jiggle at the root end will be transmitted to the tip end with a large fluctuation. In the supply chain, the further upstream this effect is, the greater the change, and the farther away from the end customer, the greater the impact.