Starting the last month of summer, let’s reflect on what this season has brought us in 2025. Did you experience any sharp fluctuations in inventory due to waves of new tariffs, unexpected delays, air logistics configurations, and fluctuations in freight indices?
Due to the summer rush in response to tariffs and the seasonal peak in logistics, production orders often do not match demand, which increases the volatility of the latter. As a result, no one understands what to expect from market prices and customer demand "pulsate" in the market at a pace that does not match the pace of producers.
Let's figure out what drives up the cost of the bullwhip effect in the supply chain and how to reduce it with 8 strategies.
What is the bullwhip effect in the supply chain?
The main explanation of the bullwhip effect is a scenario in which small fluctuations in retail demand cause further increasing disturbances that spread to distributors, manufacturers, and then suppliers.
The bullwhip effect demonstrates how small fluctuations in demand become larger and larger in the future. Last year's Netstock Inventory Management 2024 Benchmark Report already shows a trend of excess inventory growing to 38% of the value of small and medium-sized businesses' inventory, and in large businesses, the tendency to overstock is even higher — up to 44%. However, it is not the fact of overstocking that causes significant disruptions, but rather the increased inventory costs, shortages, and inefficient use of production capacity.
Following this scenario, we get distortions. For example, fluctuations of only 5% at points of sale can be interpreted by other parties in the supply chain as a change of almost 45%!
How do small demand changes cause upstream movement?
Why does this happen even with the smallest changes in demand? Imagine a whiplash: a small movement (local shortage or new customs tariffs) — increase in consumer demand — overstocking as producers respond to demand.
For example, a retailer may perceive sales to marginally increase and order more units to maintain buffer stocks in warehouses. The wholesaler, estimating the bigger order as an even larger increase in demand, would therefore order even more from the manufacturer. The manufacturer, far away from the consumption demand, is then able to increase production drastically.
Break the example out:
- Increase in demand
- Retailer perceives this as an increase in sales and orders more products and maintains buffer stocks
- Wholesaler perceives this as an increase in demand and orders more from the manufacturer
- The manufacturer increases production, as it is far from consumer demand and relies on direct orders
This is not only a distortion, but also a cascading exaggerated reaction.
The problem with the bullwhip effect is that logistics can't be changed overnight. When the wave of increased production peaks, demand may disappear due to seasons, trends, or new news about customs tariffs. In the meantime, excess inventory is gathered throughout the supply chain.
8 proven strategies to mitigate the bullwhip effect
A stable supply chain is not subject to demand spikes. Below are 8 techniques that need to be systematically applied to reduce the carrot effect:
1. Vendor-managed inventory practice
Suppliers replenish inventory according to an agreed-upon demand schedule.
How does it work?
- You agree that the supplier has online access to inventory and sales data
- The supplier knows how much product is left in your warehouses and sends the required quantity when it runs out
- You do not regularly order from the supplier, but they plan inventory for you and approve it
Advantages of the practice:
- You don't panic and don't order +300 units of a product because of an unexpected increase in sales. The supplier sees that it's temporary and sends only 50 units to avoid overloading the warehouse
- The supplier does not rely on your orders, but on real demand
- Avoiding unjustified "stock" orders
- Fewer jumps in logistics and production
- Steady, not spur-of-the-moment replenishment
How does the supplier know that it is temporary?
The supplier sees daily or even hourly data from the ERP, filtered by region, not just your orders. You can understand that if there was no upward trend, it was a temporary spike. This is how to distinguish between a strong trend and the "noise" of corrections.
2. AI-powered and predictive demand management
Delegate the processing of massive data from multiple sources to artificial intelligence for logistics to adjust for market indexes, industry trends, and more to make accurate predictions tailored to your business.
3. Real-time data tracking and sharing
Real-time monitoring of cargo and logistics processes allows you to immediately detect and prevent failures in operations. Facilitating processes and ensuring transparency between nodes are priorities of SeaRates' digital products. Try to get constant, accurate information about stock levels, cargo movements, and demand signals to finally take the bullwhip under your control.
4. "Geographic optimization"
You can save production time thanks to geographically close suppliers instead of waiting for longer predictions. In addition, if you adjust the volume of supply, then receive goods from closer enterprises, reducing the time for delivery instead of weeks to international deliveries. Choose manufacturers, transportation providers, and warehouse owners by geography.
5. Standardize pricing
There is no need to artificially increase or dump the market with excessive discounts, because in the conditions of a bullwhip, this only worsens uncertainty, instability of demand, and sharp fluctuations in logistics. Usually, such speculations indicate the problem of the non-transparency of prices for freight rates.
6. JIT inventory practices
JIT (just-in-time) is a good logistics method to minimize waste by producing goods only as needed. Instead of keeping material deliveries for some prearranged date, you match the deliveries with actual demand, thus giving lower storage costs with sufficient efficiency. Apart from efficiency, JIT fosters cooperation within the supply chain in that the businesses are encouraged to work with suppliers closely to ensure deliveries are made on time and in exact quantities.
7. Fewer orders, but more often
Why does it work?
- Smooth changes in orders without sharp shifts
- Not deformed real statistics — supplier still has a real picture of demand
- Faster response to the next changes
- You are not left with a bunch of goods, but you already know the following customer requirements
As a result, you just “less whip” and don't rock the supply chain while maintaining stability.
Why do you save?
- Optimized logistics and a fixed price per flight benefit from large batches with storage risks
- Smaller orders require lower inventory management costs and warehouse service fees
- No risk of the product failing due to expiration or loss of quality
- Reliably “frozen” capital does not lie as an extra load in the warehouse, but works for the business
- Even higher administrative costs are offset by long-term contracts with suppliers
8. Targeted cost prediction for stable logistics
Without the visibility into market prices, the unpredictability of the bullwhip is only increasing. However, it is difficult to monitor every change in freight rates and also to see the general trend yourself. And any news about international trade will cause a shortage of containers, chaotic pricing…
Trying to book in time before another price jump can only cause panic in the entire supply chain. Choose real-time freight rate calculation instead.
A real forecast of demand and logistics costs comes to the rescue, including the possibility of comparing market offers from real carriers. Try the online freight calculator, which allows you to stay updated on tariff shifts in real time:
- Find real-time & market-transparent tariffs for affordable shipping by sea, air, road, and rail
- Compare carriers and rate options to find the most appropriate and flexible terms for your shipments
- Instantly booking to guarantee the prices and cargo space
- Plan logistics with confidence and proper calculations
Find out more about Logistics Explorer web integration and API to adapt your trading for profit
Conclusion
Costly inventory imbalance, uncontrolled demand streams, and non-transparent logistics are a true nightmare for supply chain managers. Such factors are a pretty good environment for bullwhip loops. Fortunately, such issues aren’t the final point of your journey, as you can work with AI-powered forecasting, shipment visibility, manage transportation budget, control fleet, and much more with digital logistics.
You are always welcome to let SeaRates know about your logistics needs and get a customized solution at [email protected]. Enjoy a simple and transparent supply chain in a few clicks!
FAQs
Q1. What is the bullwhip effect in supply chain management?
The bullwhip effect basically describes the phenomenon where small changes to consumer demand produce greater and greater fluctuations in inventory as you move upward in the supply chain. This can then cause issues such as overstocking, stock shortage, and inefficient capacity utilization.
Q2. How could companies reduce the bullwhip effect?
Companies may curb the bullwhip effect by implementing vendor-managed inventory, using AI-driven demand forecasting tools, sharing data in real time across the board, reducing lead time with local sourcing, and using just-in-time inventory.
Q3. What causes the bullwhip effect?
The main causes of the bullwhip effect may be demand misforecasting, batch ordering and infrequent replenishment cycles, price promotions with discounts leading to unexpected demands, and/or a wide lack of real-time communication concerning inventory levels among supply chain partners.
Q4. What are the financial implications of the bullwhip effect for businesses?
Inventory costs increase by 25 to 40% due to the bullwhip effect throughout the supply chain. The bullwhip effect may also result in overproduction and lost revenues, as well as unintended layoffs.
Q5. Provide an example of this phenomenon
A classic example would be the shortage of sanitizers during the initial COVID-19 outbreak. Demand for spray disinfectants and wipes surged around 500% early in the pandemic as compared to the peroxide year, which led to retailers inflating their orders and manufacturers rationing supply, thus causing significant disruptions to the supply chain.
