Supply chain variability has become the norm across the globe, as consumer demand is constantly shifting while supply has been disrupted due to shutdowns and transportation backlogs. According to MIT Sloan Management Review, there is an increasing variability of orders up the supply chain, impacting retailers, wholesalers and manufacturers. Sometimes, however, there is a more drastic shift in demand combined with an over-reaction to ordering patterns due to supply disruption, leading to rapidly increasing inventory levels. This is called a bullwhip effect.
What is The Bullwhip Effect in Supply Chain?
While causes may vary, the bullwhip effect occurs when there is a stark shift in demand, whether a rise or fall, leaving supply chains with either excess or insufficient inventory to meet customer demand. Early in the COVID-19 pandemic, we saw empty shelves as consumer demand shifted to retail consumption instead of services like dining out on top of loading up pantries.
The Supply Chain’s Current Bullwhip Effect
Recent earnings reports for Walmart, Target and Kohl’s saw inventory levels increase by 32 percent, 43 percent and four percent respectively. In the second half of 2021, long lead times and supply uncertainty were rampant, leading to bottlenecks and concerns about product availability. These retailers, among others, began scaling up their ordering patterns significantly, flooding factories and container shipments – leading to huge increases in inventory throughout the end-to-end supply chains.
Today, consumer demand has shifted back to typical consumption patterns, and many product categories are now experiencing negative demand due to concerns over a global recession. Data from March 2022 show that inventory levels across the economy were up 14.7 percent compared to last year.
Manufacturers and wholesalers can expect future customer orders and buying patterns to be slashed by retailers and consumers. During the Great Recession of 2008, we saw this in action, with retail sales declining by 12 percent but manufacturing sales and imports declined by 30 percent. Given how tight the entire supply chain was in 2021, a small change in demand has a major change downstream.
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Tactics for Overcoming The Impacts of the Bullwhip Effect in Supply Chain
Unfortunately, there is no real timeline for when the bullwhip effect on oil will subside, but that doesn’t mean your supply chain is helpless. There are multiple tactics that, if leveraged properly, will strengthen your supply chain management and operations to maintain alignment between supply and demand, even in an unpredictable market. Here are some tactics that can help you start controlling the bullwhip a little more in your favor:
- Create flexible operations to adjust to changing demand – Having flexible production and inventory will allow you to adjust prices to match supply and demand and better meet consumer needs when demand fluctuates.
- Have a robust inventory strategy – Ensure you always have the right amount and type of inventory by strategizing allocation and product assortment. A best practice is to place inventory in locations where it can self-route to align with demand. Managing cash and driving obsolescence down will be critical
- Maximize efficiency in transportation – Maintaining efficiency of inbound transportation will decrease your dependency on oil. Maximize the miles your fleets travel and the capacity they can carry to achieve optimal efficiency.
- Transformative changes to supply chain – Executives across the supply chain should leverage the current economic conditions to review their end-to-end supply chain to address long-standing issues that have been hidden by booming economic growth over the last decade. These issues first became apparent when inventory was drained from the supply chain due to Covid, and now we see the other extreme as inventory grows rapidly.
Supply chains are ultimately looking to develop resiliency and responsiveness to match supply and demand faster. These tactics are crucial steps to take in achieving that goal.
Bullwhip effects are a natural part of the supply chain, and this is certainly not the last time we will see one. However, this doesn’t have to mean constant uncertainty for your supply chain. To ensure your operations are prepared for natural fluctuations in supply and demand, ask yourself one question: does my company have a demand forecast and planning process to adjust to changing conditions? Planning and forecasting are the backbone of a successful supply chain. Take an audit of what your processes look like and make sure there is flexibility built into them to account for shifts in demand.
Does your organization need a trusted partner to support your inventory management needs? enVista’s new solution, inventory forecasting and planning as a service (IFPaaS), is a first-of-its-kind subscription-based service. IFPaaS allows retailers, distributors and manufacturers to leverage enVista’s comprehensive inventory optimization solutions – including AI-powered dynamic inventory allocation capabilities – on an ongoing basis to remain ahead of supply and demand variability and optimize inventory by echelon and channel.
Want to learn more about how enVista’s IFPaaS can benefit your organization? Let’s have a conversation.
About the Author
A logistics leader with over 30 years of experience, Paul Baris serves as Vice President of Strategy Planning at enVista. He offers expertise leveraging Lean/Six Sigma methodology and systems technology to deliver significant, sustainable gains in supply chain performance and attain business objectives for clients.