Preparing Your Supply Chain for The Bullwhip Effect
Written by Emily Ritchie
Read time: 3 minutes
In just one weekend in 2020, grocery store shelves went bare due to anxiety over the outbreak of COVID-19. The wave of orders for toilet paper, rice, and other essentials is causing suppliers and manufacturers to scramble. Soon, this will result in what is called the Bullwhip effect and will affect numerous supply chains across the globe.
Description and Causes
The Bullwhip Effect can be described as the impact caused by swings in customer demand. The effect can have an even larger consequence on the rest of the supply chain. The effect gets its name from the motion of a bullwhip. The customer holds the handle and their demand causes the whip to move in waves up and down. The Wall Street Journal describes the bullwhip effect as: “This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.” Due to the reaction of consumers to the COVID-19 outbreak, stores are seeing an increase in customer demand for products like toilet paper and cleaning supplies. We can predict what will happen next by following the Bullwhip Effect.
Now that stores are stripped of essentials, store managers will need to create orders to replenish their stock. Then the distributor will do the same, then the manufacturing will have to order more raw materials to supply the demand. These inventory swings will hit the raw materials manufacturer the most. Here is what you can do to avoid the effects of this phenomenon.
What You Can Do
In this case, one could not predict what was about to hit the world and how consumers would react. To ensure your supply chain is safe from influxes, there are a few practices you can put into place.
Communication is the most important thing within your supply chain. Either digital or verbal, without communication your supply chain will quickly fall apart.
Improve the Inventory Planning Process.
A quick response strategy could save your bottom line in the long run. Synchronize your production and inventory activities with actual sales from the retailer’s point of sale data to improve your response time. Implementing regular reporting and an early warning system to show major deviations in inventory before you deplete your stock. Another way to improve the inventory planning process is to optimize minimum order quantity and reduce the size of orders. Overall, improving communication throughout your supply chain will help things run smoothly.
Reducing variability by avoiding promotional sales and discounts. A good example is Walmart’s pricing strategy. Because they claim everyday low pricing, in theory they would not see large demand due to special discounts eroding their inventory too quickly.
Manage Lead Times.
Managing your lead times and trying to reduce them will reduce the variability in your forecasting as well. Older lead times can be reduced with cross-docking, the process of unloading and loading shipments in the same facility without storing product on racks. Information lead times can be reduced through electronic data interchange (EDI). The use of EDI is beneficial to prepare smaller and more frequent replenishments. Try to eliminate delays by cutting order-to-delivery time in half.
The best thing to do during times of crisis is to stay calm and prepare a plan. Those who follow a well-thought-out plan will perform much better than those who panic, do nothing, or become too greedy.
If you want to learn more about the supply chain or see how you can do your part, read this informative article.