Which of the following statements about the bullwhip effect in supply chains is correct?

• A. The bullwhip effect causes increasing fluctuations in inventory levels and costs as orders move up the supply chain.
• B. The bullwhip effect eliminates externalities associated with supply chain management.
• C. The bullwhip effect results in perfectly synchronized production and demand throughout the supply chain.
• D. The bullwhip effect leads to declining inventory costs across the entire supply chain.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the bullwhip effect conceptually. The bullwhip effect refers to the phenomenon where small fluctuations in consumer demand cause progressively larger fluctuations in orders and inventory levels as you move upstream in the supply chain (from retailers to wholesalers to manufacturers).
2. Step 2: Analyze the impact of the bullwhip effect on inventory and costs. Because demand variability is amplified, companies higher up the supply chain tend to hold more inventory to buffer against uncertainty, which increases inventory holding costs.
3. Step 3: Evaluate each statement in the problem based on the bullwhip effect definition: - It does not eliminate externalities; rather, it can create inefficiencies. - It does not synchronize production and demand perfectly; it causes misalignment. - It does not lead to declining inventory costs; it typically increases them due to amplified demand variability.
4. Step 4: Identify the correct statement as the one that describes increasing fluctuations in inventory levels and costs as orders move up the supply chain, which aligns with the bullwhip effect's core characteristic.
5. Step 5: Summarize that the bullwhip effect causes inefficiencies by amplifying demand variability, leading to higher inventory levels and costs upstream in the supply chain.