When the COVID pandemic hit, supply chain managers were suddenly all talking about the bullwhip effect in supply chain and how it can knock even the best-laid plans into a tailspin. The term “bullwhip effect” was coined for exactly such situations.
But it was labeled over 60 years ago. What is the bullwhip effect in supply chain? It refers to increasing swings in inventory — in response to shifts in customer demand — as one moves further up the supply chain. As many organizations have discovered the last couple of years, the bullwhip effect in supply chain quickly turns otherwise accurate forecasts into massive inefficiencies.
Accustomed to seeing ample supplies of diapers, toilet paper, and cleaning products on store shelves, consumers were in for a shock when COVID-19 began to take its toll on the world’s supply chains in early 2020. Although the barest of shelves began to be replenished by midyear, there are still some lingering effects even now.
Blame the bullwhip effect for creating this chaos and uncertainty.
“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”
Given the global complexity of the economy and the global impact of disruptions in any significant region or segment, supply chain managers would be wise to anticipate supply chain disruption and prepare for the next trigger of the bullwhip effect.
5 Supply Chain Strategies for 2022
Under “normal” circumstances, companies invest in extra capacity, inventory, labor and work shifts to minimize the bullwhip effect or to avoid it altogether. The problem during the most recent disruptions is that otherwise routine approaches didn’t work. Demand sensing, forecasting and other forward-looking predictions were equally ineffective, mainly due to the unprecedented nature of the global pandemic.
Here’s the good news: Shippers now have real world experience with a fairly extreme case of the bullwhip effect. Using their 2020 experience as their guide, companies can now prepare for the next potential disruption with a better understanding of the hefty impacts that it could have on global supply chains.
Here are five lessons that all companies should apply toward their future supply chain management to mitigate the bullwhip effect:
- Communication, data sharing, and visibility trump all when it comes to minimizing the bullwhip effect. One large national retailer, considered to be a leader in supply chain strategy, opened the lines of communication by allowing suppliers to access their inventory data. The result: increased customer satisfaction, a decrease in inventory and warehousing costs, and more stable supply lines.
- Third-party logistics experts have proven their worth. Well-equipped to handle the logistics, transportation and technology that go into a well-oiled supply chain, experts like Transportation Insight know both sides of the business (i.e., shipper and carrier), and can demonstrate and articulate how each node in the supply chain will be impacted by a specific decision. Operations executives at every level can draw on this experience and benefit from it.
- Scenario planning and simulations actually work. Think of them as the “war games” of your own supply chain, and use them to run simulations on historical data across different hypothetical scenarios (e.g., if we can’t get raw materials from country A, how will it impact the rest of the supply chain?). Getting the answers to these questions before a disruption occurs will help you be more prepared in the event of a disruption. Transportation performance dashboards (such as the least-cost carrier usage summary shown here) are critical in understanding the relationships and normal ranges of your current operations. Armed with this knowledge, you can hypothesize the effect of potential disruptions and be prepared to manage the bullwhip effect in your supply chain.
- Use dashboards and control towers to get big-picture views in real-time. The days when an operations executive had to wait until the end of the month for a performance report are long gone. Thanks to advancements in technology, managers can get the information they need in real-time and then use it for more timely and better informed decision-making. Being able to drill down into order profits, for instance, will help you better understand what you should actually be charging for shipping right now. This, in turn, helps support good margin management in any business conditions.
- Alternate sources of supply are a good thing to have. In surveying 150 senior manufacturing executives, law firm Foley & Lardner found that most expect to make “fairly drastic” changes to their supply chains post-pandemic, including a shift away from just-in-time manufacturing (JIT) and sourcing in China. In Global Supply Chain Disruption and Future Strategies Survey Report, the firm says that of those companies that were operating in China pre-pandemic, 59% have either already withdrawn operations, are in the process of doing so, or are considering it. Many of those organizations are looking to re-shore their operations closer to home in the U.S., Canada, or Mexico.
Depending on how you approach it, transportation can play a major role in avoiding the bullwhip effect in your supply chain. Through good communication and data-sharing across all supply chain partners, you’ll gain an understanding of both real-time and historical information as it relates to all points in the supply chain. The better decisions you can make, the better the odds of minimizing the bullwhip effect.
Tame Supply Chain Bullwhip Effect: Manage Demand Waves
Depending on how you approach it, transportation can play a major role in avoiding the bullwhip effect in your supply chain. Through good communication and data-sharing across all supply chain partners, you’ll gain an understanding of both real-time and historical information as it relates to all points in the supply chain. The better decisions you can make, the better the odds of minimizing the bullwhip effect.
