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To see how the bullwhip effect works, think about how a whip cracks. A jerk of the handle sends a wave down the length of the whip. Because momentum is conserved and the mass of the part of the whip as you get toward the tip approaches zero, the velocity at the tip becomes extreme, exceeding the speed of sound.
The same thing occurs in supply chains. An auto manufacturer gets nervous about Covid-19, so it preorders computer chips. The distributor interprets the order as a sign of increasing demand, so it orders more from the factory, with a safety cushion of extra orders. And so it continues, going all the way back to the chip fabricator and its suppliers at the far end of the whip, which are suddenly overwhelmed by a cascade of orders. And when products aren’t delivered on time, purchasing managers panic and place fresh orders, making the problem even worse.
To see how the bullwhip effect works, think about how a whip cracks. A jerk of the handle sends a wave down the length of the whip. Because momentum is conserved and the mass of the part of the whip as you get toward the tip approaches zero, the velocity at the tip becomes extreme, exceeding the speed of sound.
The same thing occurs in supply chains. An auto manufacturer gets nervous about Covid-19, so it preorders computer chips. The distributor interprets the order as a sign of increasing demand, so it orders more from the factory, with a safety cushion of extra orders. And so it continues, going all the way back to the chip fabricator and its suppliers at the far end of the whip, which are suddenly overwhelmed by a cascade of orders. And when products aren’t delivered on time, purchasing managers panic and place fresh orders, making the problem even worse.