How to Prevent a Bullwhip Effect in Your Supply Chain
Toilet paper is a hot commodity during a pandemic. Once COVID-19 was announced, people flocked to the stores, panic-buying toilet paper, bleach, and any assortment of hygienic products they could get their hands on. Empty aisles are still not an uncommon sight in major retailers today.
The uptick in mass buying and hoarding is not just an inconvenience for shoppers but has a drastic impact on a supply chain. A sudden increase in demand without a commensurate increase in demand can lead to what Jay Forrester coined “The Bullwhip Effect.”
What Is the Bullwhip Effect?
When a product is in high demand, stores run out of supplies more frequently, causing stores to ramp up order volume from distributors. Distributors see the increased demand and need more product to supply.
They contact the manufacturer to make more goods. The manufacturer then orders more raw materials from its supplier. This influx is acceptable if the demand has risen and stays elevated. The problem arises when a “false demand” is established.
A false demand occurs when an uptick in demand is not matched by a consistent increase in the procurement of the product. This false demand causes an exponentially-increasing negative impact at each stage of the supply chain, leading to a surplus of unused products in the future.
What Causes a Bullwhip Effect in Supply Chain?
While the Bullwhip Effect itself is relatively straightforward, several activities can trigger a Bullwhip Effect in your supply chain.
1. Price Fluctuations
Having drastic sales on specific products or incentives for customers to buy en-masse rather than steadily over time can cause a bullwhip effect. Sudden increases in consumer incentivization create a false demand for the products on sale. Inversely, this can also be seen in price gouging.
2. Order Batching
Large orders allow for reduced per-unit shipping charges and increased convenience of having the product on-hand, but the excess product can lead to an unnecessary surplus (not to mention increased storage costs and overhead).
3. Shortage Gaming
Customers will order multiple products in advance when they know there will be a short supply in the future, hoping that their order gets at least partially filled. One example of this is the influx of orders for Lysol wipes and masks from online retailers.
4. Forecast Inaccuracy
Miscommunication and miscalculation throughout the supply chain builds in consequence at each step. When suppliers or manufacturers encounter unexpected variables that were not accounted for in a predictive sourcing strategy, this leads to significant increases in lead time that builds throughout the supply chain.
5. Panic-Buying or a Sudden Increase in Demand
Crises are hard to predict and appear suddenly. The resulting environment triggers an emotional reaction in consumers to buy more than they need.
What Are the Consequences of the Bullwhip Effect in Supply Chain?
Toilet paper is the first product that comes to mind when considering recent examples of the Bullwhip Effect. Patrick Penfield, Professor of Supply-Chain Management at Syracuse University, said to Business Insider that a large surplus of toilet paper is going to happen should the demand normalize in summer.
Consumer needs will go down once they realize their stock at home is sufficient and will not need to buy more toilet paper at the same regularity as before COVID-19. This will lead to excess on the shelves that will not be purchased at the rate needed to deplete the new surplus.
Though toilet paper is essential, the demand is typically predictable and will stabilize. When the Bullwhip Effect hits a volatile and essential supply chain like oil, gas, or coal, it causes a substantial economic and social impact. As detailed by the University of Minnesota’s Center for Infectious Disease Research & Policy, this fluctuation hit the coal industry in 1918 during the Spanish Influenza.
This shortage led to colder climate areas like New York to have problems during the harsh winter. Areas of the supply chain like transportation, storage, and production, where people are in close quarters, created a high risk to personal health.
With social distancing and decreased travel, there has been a substantial downturn in demand for gas and oil. With many oil refineries forced to shut down due to lack of demand, companies who are still producing are running out of storage for their excess reserves. Though decreased fossil fuel consumption has driven the price to historic lows, this could cause a significant price increase in oil down the road.
Sourcing Strategies For Preventing a Bullwhip Effect
While the notion of managing a supply chain through turbulent time may be daunting, there are a number of strategies you can count on to mitigate the chances of experiencing a bullwhip.
1. Adopting Sourcing Software
Properly implemented automation solutions such as Arkestro allow teams to react with confidence to sudden changes in the market. Having sourcing software solutions deployed before a volatile market develops equips a sourcing team with the tools it needs to mitigate negative consequences.
2. Frequent Ordering
While there is a direct impact on increased shipping charges related to more frequent ordering, having the correct amount of product from your suppliers will decrease the impact of a substantial increase in demand. Frequent ordering also encourages ongoing regular communication with your strategic suppliers. You may also see a sizable reduction in overhead associated with keeping excess surplus on hand.
3. Have a Predictive Sourcing Strategy: Forecast on Sales History
Researching similar supply chains allows for more accurate predictions. Having a trusted consulting team in multiple areas creates better analysis and data
4. Sourcing Collaborations: Information Sharing
Accurate, quick reporting on data fosters trust and reliability. Robust Sourcing Enablement platforms will have intuitive messaging features that encourage transparency for internal stakeholders.
5. Proactive Supply Chain Management
Marketing plays a vital role in crafting appropriate messaging during periods of supply chain volatility. Calming customers by reassuring them of your supply chain’s strength will reduce the fear of scarcity and subsequent panic-buying.
The Bullwhip Effect can be painful and cause panic, but it can be managed. The most important asset any supply chain can have are close relationships with its strategic suppliers. Markets will rise and fall, but the ability to source with flexibility and accuracy can minimize and prevent these negative shockwaves.
Excellent supplier relationships create a stable supply chain built on trust with your strategic sourcing partners. If you’re interested in reading more about how to talk with suppliers about bullwhips in the supply chain, check out another recent article titled 3 Ways To Empower Your Sourcing Team Working From Home During COVID-19.
Find out if Sourcing Enablement with Arkestro is a good fit for your team.