Bullwhip Effect

The bullwhip effect is a concept for explaining inventory fluctuations or inefficient asset allocation as a result of demand changes as you move further up the supply chain. It often occurs when retailers become highly reactive to demand, and in turn, amplify expectations around it, which causes a domino effect along the supply chain. The bullwhip effect tends to result in price crushing for the first suppliers in the supply chain—those who can't adjust production quickly. Also notable in the oil industry: Demand can change far faster than demand can.


1) Frontend consumer demand for shoes slows

2) Shoe producer reduces production and reduces the order of leather hides

3) Leather Producer (Farmer) is unable to adjust supply quickly:  Therefore prices for leather hides collapse