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In addition, the promotion of product resulted in retailers placing orders higher than the required demand to ensure availability of the product to meet the surging customer demand. When retailers were assured of availability of product, they cancelled the future orders.
These false orders not only lead to demand oscillations throughout the supply chain, but also lead to piling up of inventory in the entire supply chain. The inventory pile up in the supplier network leads to lengthening of lead times.

The supplier is likely to witness shortage of material to meet the sudden spurt in demand which results in higher delivery lead time to the manufacturer, thereby, leading to demand oscillations and forecasting problem in the upstream part of the supply chain (supplier - manufacturer). In the downstream, the promotion may lead to stock out in retailers due to lengthening of delivery lead-time. To summarize, promotion results in lengthening of cycle time, build up of inventory, higher cost, decrease in customer service and decline in profit. Furthermore, promotion results in inaccurate demand forecasting that causes disruptions in the supply chain system of the company.

Resorting to ERPs & CRMs to Reduce the 'Bullwhip Effect'

Then the question arises, how to minimize the error in forecast caused on account of mindless promotions and services. The companies in order to minimize the error in forecasting reduce bullwhip effect resulting on account of activities such as promotion; have made huge investment in high-end Enterprise Resource Planning (ERP) system, customer relationship tools and data mining software. Nonetheless, various studies had indicated the fact that investment in information technology had not produced the desired results in terms of improving the forecasting accuracy.

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* Contributed by: -
Uppili. R,
Alumnus of Great Lakes Institute of Management & M.A. (Economics) from Madras University,
Currently working as Research Analyst at Vistasoft India Private Limited.