What does the term 'bullwhip effect' refer to in supply chains?

The term 'bullwhip effect' refers to a phenomenon in supply chains where small changes in consumer demand at the retail level lead to larger and larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. This occurs due to the way that companies manage their orders and inventory in response to perceived changes in demand.

When retailers see a slight increase in demand for a product, they may increase their orders from wholesalers to stock up. This increase can prompt wholesalers to order even more from manufacturers to meet the anticipated future demand, resulting in an exaggerated response throughout the supply chain. Each participant in the chain may further amplify these changes as they react to the information received from their suppliers. This amplification can lead to inefficiencies, excess inventory, and significant cost increases across the supply chain.

The other options pertain to different concepts. Over-forecasting demand and increasing supplier lead times are related to forecasting and supply chain management practices, while consolidating inventory refers to a strategy for managing stock rather than a result of demand fluctuations. These concepts, although important to supply chain management, do not capture the specific dynamics described by the bullwhip effect.