The Bullwhip Effect: Supply Chain Lessons from Industry and the Near Beer Simulation

Supply and demand isn’t rocket science, as The Economist once suggested. The basic concept behind supply chain management is actually rather simple.

• Customers order products from you
• You keep track of what you’re selling
• You order enough raw materials from suppliers to meet customer demand.

What turns simplicity into chaos isn’t the model, it’s the challenge of aligning decisions, timing, and coordination across all the actors in the chain. And in a world where the COVID‑19 pandemic exposed global supply networks’ fragility – with factories shuttered, ports jammed, and shortages everywhere – that coordination breakdown became impossible to ignore. And that's the real crux of it all. 

The problem turns out to be one of coordination. Suppliers, manufacturers, sales people, retailers, and customers each have their own, often incomplete, understanding of what real demand looks like. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. Furthermore, each group is influenced by decisions that others are making.

This lack of coordination coupled with the ability to influence while being influenced by others leads to what Stanford’s Hau Lee refers to as the bullwhip effect. In this dynamic, decisions made by groups along the supply chain actually worsen shortages and overstocks.

Real-World Examples of the Bullwhip Effect in Action

1. Volvo. The bullwhip effect is illustrated by a story Professor Lee tells about how Volvo found itself with extra inventories of green-colored cars. To get them off the dealers’ lots, Volvo’s sales department offered special deals, so demand for green cars increased. Production, unaware of the promotion, saw the increase in sales and ramped up production of green cars.

2. Cisco. The tech company once faced a similar bullwhip effect problem that resulted in a $2.2 billion inventory write-down (the equivalent of $3.4 billion in 2025). Only a few months before the write-down, Cisco was unable to get its products to customers quickly enough. Quoting a supplier to Cisco interviewed in CIO Magazine, “People see a shortage and intuitively they forecast higher. Salespeople don’t want to be caught without supply, so they make sure they have supply by forecasting more sales than they expect. Procurement needs 100 of a part, but they know if they ask for 100, they’ll get 80. So they ask for 120 to get 100.”

3. Kimberly-Clark. A more recent example came during the early days of the COVID-19 pandemic, when Kimberly-Clark faced the Great Toilet Paper Panic of 2020. In a single day, U.S. sales of toilet paper spiked more than 700%, wiping store shelves bare across the country. Consumers, anticipating shortages, bought far more than they needed (hoarding, in some cases), prompting retailers to place inflated orders with suppliers. That surge cascaded up the chain, creating temporary production bottlenecks and the illusion of sustained high demand, only for sales to plunge once pantries were full.

How Delays Amplify the Bullwhip Effect

Even in supply chains where communication is perfect, manufacturing and procurement delays can wreak havoc on overall coordination. That’s because, while customers are asking for increased orders, backlogs are building and it is oh-so-easy to confuse backlogged orders with increased demand.

Thousands have felt the frustration of supply chain management and the bullwhip effect in a simulation developed at MIT’s Sloan School of Management called The Beer Game. The simulation is run as a board game in teams playing the roles of retailers, wholesalers, distributors, and beer brewers. As the backlog for orders increases, players order too much inventory, forcing their teammates into severe backlogs further down the supply chain. The beer game can be emotionally intense.

“During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out,” says John Sterman, Director of MIT’s System Dynamics Group.

Understanding the Near Beer Game Simulation and the Bullwhip Effect in Supply Chain Management

You can try a version of MIT’s beer game called the Near Beer Game. The simulation isn’t identical to the original beer game, but it teaches many of the same lessons.

It also teaches one extra lesson not in the original game: even with perfect information, even when there are no breakdowns in communication, you’ll still feel the bullwhip effect due to procurement and manufacturing delays.

Here’s how the Near Beer Game works:

• At the beginning of the simulation your supply chain is in perfect equilibrium. Customers are ordering 10 cases of beer each week, you have 10 cases in inventory, 10 cases are brewing, and 10 cases worth of raw materials are arriving from your vendors.
• In week two, demand increases to 15 cases per week and remains at 15 cases for the remainder of the simulation. The game ends when you manage to get your supply chain back in equilibrium for fifteen cases of beer.

Sounds easy enough, right? Play the Near Beer Game and see for yourself how many weeks it takes you to bring the supply chain back into equilibrium without the bullwhip oscillations of stockouts followed by oversupply.

How to Reduce the Bullwhip Effect in Modern Supply Chains

One way to reduce the bullwhip effect is through better information, either in the form of improved communication along the supply chain or (presumably) better forecasts. Because managers realize that end-user demand is more predictable than the demand experienced by factories, they attempt to ignore signals being sent through the supply chain and instead focus on the end-user demand. This approach ignores day-to-day fluctuations in favor of running level.

Another solution is to reduce or eliminate the delays along the supply chain. In both real supply chains and simulations of supply chains, cutting order-to-delivery time by half can cut supply chain fluctuations by 80%. In addition to savings from reduced inventory carry costs, operating costs also decline because less capacity is needed to handle extreme demand fluctuations.

In addition to cycle time reductions throughout the supply chain, Hau Lee, V. Padmanabhan, and Seungjin Whang recommend the following actions to reduce the supply chain management bullwhip effect:

• Focus on end-user demand through point-of-sale (POS) data collection, electronic data interchange (EDI), and vendor-managed inventories (VMI) to reduce distortions in downstream communication.
• Work with vendors to create smaller order increments and reduce order batching. Order batching exacerbates demand fluctuations.
• Maintain stable prices for products. Price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations.
• Allocate demand among customers based on past orders, not present orders, to reduce hoarding behavior when shortages occur.

Since its release in 2006, Forio’s Near Beer Game has been played by more than 1 million learners worldwide.

The Near Beer Game continues to be one of Forio’s most popular simulations, helping students and professionals experience the bullwhip effect firsthand, while the original MIT Beer Game simulation takes a deeper approach to teaching how to manage supply chains even more effectively.

Preview This Simulation