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Management Application Exercise Caterpillar Inc. recently told its steel suppliers that it will more than double its purchases of the metal this year even if the company’s own sales don’t rise one bit. In fact, the heavy-equipment maker has been boosting orders to distributors for everything from big tires and hydraulic tubes to shatterproof glass without a sales increase.
1. Explain how that is possible.
2. Within the context of Caterpillar’s supply chain, explain why the “bullwhip effect” occurs and what problems it is likely to cause to its Tier 1 and Tier 2 suppliers if sales do not rise in the future.
Expert Answer
Answer: (1) This case is possible because of the phenomenon called the “bullwhip effect”. This phenomenon takes place when there is a large variance between the orders sent to suppliers by the manufacturer and the actual sales which are taking place to the end customers.
(2) In this case despite an expectation of no increase in sales, the double orders are being sent to the suppliers which indicate a bullwhip effect. This effect can take place because of several reasons like disorganization, order batching, lack of communication, price variations and demand information and so on. In this case order batching may be a reason for this effect. In order batching, the companies do not immediately place orders to the suppliers and because of this they may accumulate demand. It may be possible that the company may have accumulated past orders and for fulfilling them they need to increase purchases despite no further expectation of sale increase. If the sales does not increase in future the tier 1 and tier 2 suppliers may also suffer from a bullwhip effect where in anticipation of more orders from Caterpillar Inc they may keep on adding inventories.
