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...The Bullwhip Effect is a major cause of higher costs and inefficiencies in supply chains. It describes how small fluctuations in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturers, and suppliers. As an example, consider disposable diapers. Babies generally consume diapers at a more or less consistent rate when aggregated over a large group of customers. Nevertheless, order fluctuations invariably become considerably larger as one moves upstream in this supply chain. The animation below illustrates how this can happen:

Consequences of the Bullwhip Effect include excess/fluctuating inventories, shortages/stockouts, longer lead times, higher transportation and manufacturing costs, and mistrust between supply chain partners.

Common causes for the bullwhip include:

...If your products are functional, with long life cycles and stable demand, you will gain the most from making your supply chain more efficient and implementing strategies that substitute information for inventory, keeping product flow steady to minimize manufacturing and transportation costs. Functional products often have lower contribution (or profit) margins but more stable demand. More predictable demand reduces the likelihood that you will need to rapidly shift production or move inventory from one place to another. On the other hand, if your products are innovative, with shorter life cycles, higher contribution/profit margins, and unstable or unpredictable demand, the costs of having leftover products or a stockout are high enough to warrant strategies that will enhance responsiveness, enabling you to move product to the markets in which it will sell quickly or change production parameters with short notice as product features change. The following matrix helps illustrate the possibilities: