Explain why the bullwhip effect occurs

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Reference no: EM131691746

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.

Reference no: EM131691746

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