Bullwhip Effect is a well studied and documented supply chain phenomenon dealing with supply and demand related uncertainties. In my view, it is what is at the root of our current currency problem.
Try to understand this: You wake up in the morning and find your neighbours going to the bank to withdraw money. Though you have 2 thousand rupees in cash with you that will last you a while but you come under peer pressure and head for the bank too. You go to the bank with an intent to withdraw Rs 2000 just to build your comfort level. Once at the Bank, you see more people than normal and become more apprehensive and up the planned withdrawal to Rs 4000. Just then the bank runs out of cash and asks you to wait for supplies which will come within an hour. You sign a new cheque for Rs 8K because you are seeing supply-side uncertainty. More people follow your pattern and bank runs out of cash again.
Try to understand this: You wake up in the morning and find your neighbours going to the bank to withdraw money. Though you have 2 thousand rupees in cash with you that will last you a while but you come under peer pressure and head for the bank too. You go to the bank with an intent to withdraw Rs 2000 just to build your comfort level. Once at the Bank, you see more people than normal and become more apprehensive and up the planned withdrawal to Rs 4000. Just then the bank runs out of cash and asks you to wait for supplies which will come within an hour. You sign a new cheque for Rs 8K because you are seeing supply-side uncertainty. More people follow your pattern and bank runs out of cash again.
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| Picture Courtesy: Wikipedia article titled Bullwhip |
On the other side, the bank sends urgent SOS for cash replenishment. The folks Incharge at the city level notice this pattern across branches and increase their aggregate cash requisition to the regional office by adding a significant buffer. The regional office totals the demand, then adds some more buffer and sends it to the HO. The head office looks at the region level demand data, adds more buffer, sends their demand to the supplier in this case, the RBI. There is an interstage latency and that causes more amplified repeat of this phenomenon in the supply chain. But what is the reality? The reality is that very soon the supply chain will be full of excess inventory at different stages and incur huge inventory cost in production, shipment, security, and storage. There will be very indifferent demand because, the end point in the channel, me and you, have no further appetite.
Our economy is currently in grip of a massive bullwhip phenomenon. Me and you can help it come out of it by withdrawing cash only if genuinely required, and only to the extent that is required. Remember, there is another supply chain phenomenon called Stock Pressure, which means if we have more of anything (cash, in this case), you will tend to spend more!
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