The bullwhip effect phenomenon refers to increasing inventory swings in response to shifts in customer demand as we go up the supply chain. The concept first appeared in Jay Forrester’s Industrial Dynamics (1961) and thus it is also known as the Forrester effect. … The bullwhip effect was named for the way the amplitude of a whip increases down its length. The further from the originating signal, the greater the distortion of the wave pattern.
The unprecedented COVID-19 pandemic only served to highlight a business reality that often goes underappreciated – companies in just about any industry need the agility and flexibility to quickly onboard new suppliers to remain competitive and meet customer demand. They also need the option to open ancillary sales channels when needed. Countries that are heavily impacted by the virus, including China, Spain, and Brazil have either closed their borders or restricted trade, this caused tremendous disruption in both commerce and supply chains.
The supply chain is not the only area that is undergoing major disruptions though. The ripple effect caused by the COVID-19 pandemic can be seen across unpredictable buyer behaviour. There has been an increase in panic buying, ranging from toilet paper to food products. For an unprepared supply chain, the combination of panic buying and a disrupted global supply chain spells disaster. Businesses across the globe are reaching out to several manufacturers to meet the increasing demand. This can lead to misinformed inventory build-up and overproduction
Enter the “bullwhip effect”
That is where we first come across this phenomenon. The cause of the bullwhip effect is forecast inaccuracy at the end-customer demand point. While it starts there, it ends with considerable supply chain inadequacies. As we go up the supply stream, even small variability in demand downstream can lead to major problems upstream. This means that the problems will be felt with both manufacturers and their suppliers.
Given the unprecedented demand shockwaves that COVID-19 is responsible for, it makes sense that it could lead to extreme bullwhip effects. This could potentially lead to an unstable and unpredictable manufacturing environment, an environment where suppliers are struggling to predict demand in a sensible manner because of the panicked buyer behaviour. How are companies able to deal with this problem? To know to handle the problem, we first must understand what today’s supply chains are missing.
Why are we in this situation in the first place?
Companies have been focusing on a lean supply chain management strategy for years. This means low inventories by cost optimisation. That sounds positive until we realise that they were not designing agility and flexibility into their supply chains. This means that demand and supply shockwaves are hard to deal with.
When the factories began to shut down in China at the start of the year, there were many manufacturers who simply did not have a reliable second source to get high-quality components at scale. This meant that their supply chain was disrupted. Even though it might be cost effective to rely on a single source, unforeseen disruption could cripple your entire supply chain.
The global pandemic rewards early adopters
The COVID-19 pandemic has highlighted that those relying on custom or traditional systems lack a certain level of preparedness. Those companies that decided to invest in remote access to critical business applications and those who have a high degree of automation are being rewarded. These more agile companies can continue their work uninterrupted, thanks to the ability to work on smartphones, tablets, and home computers.
How can we hope to overcome the bullwhip effect in supply chain intensive industries?
There are several steps companies can take to help overcome this effect. There a a few noted below for your consideration.
Extend the demand chain in revenue driving ways
The bullwhip is often caused by demand in the traditional ‘brick and mortar’ points of sale. These include department stores, supermarkets, and others. While many of these may have already have an online sale channel (some even more than one) they can alleviate the effects of reduced demand by adding more digital channels.
Thanks to the options in modern integration technology and e-commerce marketplaces, just about any business could transform into a true ‘digital ecosystem.’ To create these valuable new revenue streams, the omnichannel approach is invaluable.
Develop the ability to onboard new suppliers as needed
In times of crisis, relying on a fixed supplier network that can easily be affected by disruption is not the best strategy for any business. That is why it is important to have the ability to onboard new suppliers as needed. For example, if one area with a high infection rate is seeing a decrease in its manufacturing output, companies must be able to switch to areas with lower infection rates. This could mean the difference between the ability to have high demand items in stock or having to sell ‘no’ to potential customers. This type of agility in supplier strategy will also lead to an increase in customer trust and loyalty.
Nurture a transparent digital relationship with suppliers
You could have a perfect understanding of your sales trends, but this information is worth nothing if you do not have the ability to act on what the data is showing. If you cannot leverage supplier networks when demand surges, even perfect data integration will not help. By expanding beyond a single supplier and having a holistic view of the supplier ecosystem you can refactor supplier integrations in accordance with the best price at any point in time.
Create a real-time understanding of supply and buyer trends
Most companies have supply chain planning systems and ERP, but few can have a real-time overview of demand and supply. This means these companies rely on batch updates to inform them about status updates related to the supply chain. You must have a good understanding of each sales touch point for better resource planning.
Unfortunately, the panic buys that we have seen due to COVID-19 are an unstable basis for predicting future demand. This means businesses cannot rely on batch updates but need real-time data aggregation. This allows you to respond to real-time changes and thus requires greater agility across existing supply chain integration points.
Businesses have seen the consequences of not being prepared for a global pandemic, and experts are already warning us that COVID-19 is expected to return sometime later in the year. This means that businesses should now want to act to be ready when a second wave does strike. By utilizing these tips, you’ll compete from a position of strength and beat the bullwhip effect. Or, at the very least, put you in a more beneficial position than before the new reality hit.