Written by Jules De Weerdt & Victor Chartier
Remember the toilet paper shortages at the start of the COVID-19 pandemic? Fearful consumers hoarded toilet paper, leading to empty shelves at retailers. In response, retailers placed large orders with distributors, who then ordered even more from manufacturers. This chain reaction resulted in significant stockpiling throughout the supply chain, even though actual usage of toilet paper had not increased. Once consumers were stocked up, demand plummeted, but the supply chain was already flooded. This led to a 30% rise in storage costs and a 35% increase in production costs due to the extra labor needed to meet the initial surge.
This scenario perfectly demonstrates the Bullwhip Effect: a supply chain phenomenon where small changes in consumer demand cause increasingly larger fluctuations in orders and inventories as you move up the supply chain.
The Automotive Chip Shortage Example
The automotive industry faced a similar challenge with the global semiconductor chip shortage.
As the pandemic hit, car sales initially dropped, prompting manufacturers to cut chip orders. Meanwhile, demand for consumer electronics surged as people adapted to remote work and entertainment, causing chip manufacturers to shift their focus.
When car sales rebounded faster than expected, automakers found themselves at the back of the line for chips, leading to production disruptions. Many car manufacturers halted production, delayed launches, and reduced output. Some even produced incomplete vehicles, finishing the assembly further down the supply chain, such as at export ports, once chips became available.
Automakers adopted several measures to understand, contain and mitigate the risks:
Resizing Inventory: business planning resized buffer stocks of critical components.
Diversifying Suppliers: procurement sought to diversify their supplier base to reduce reliance on a single source.
Collaborating with Suppliers: procurement enhanced communication with semiconductor suppliers to secure and forecast supply.
Investing in Semiconductor Manufacturing: automakers like Ford and General Motors announced plans to invest in semiconductor manufacturing.
Despite these measures, end-customers faced limited availability, extended wait times for new cars, and higher prices for both new and used cars.
Understanding the Bullwhip Effect
The Bullwhip Effect is triggered by sudden demand fluctuations at any point in the supply chain but is facilitated by:
Overcomplex Supply Chains: extended, geographically dispersed supply chains increase lead times and management difficulties, with different languages and cultures raising the risk of miscommunication.
Inaccurate Forecasting: inaccurate customer demand forecasting, and its improper translation into production and orders, triggers instability, leading to wrong prioritization of problem solving.
Inadequate Procurement Management: ineffective procurement strategies that do not consider the criticality and risks of purchased goods and services lead to wrong prioritization and inefficient collaboration.
The Bullwhip Effect is often initiated by external factors but always exacerbated by internal practices. Its consequences include stock surpluses or shortages, increased operational costs, and customer dissatisfaction.
BrightWolves' Approach for Strengthening Supply Chain Resilience
In an era of globalization, high interest rates, and intense competition, the pressure on companies to eliminate waste and reduce costs is greater than ever, alongside the persistent risk of Bullwhip Effect. At BrightWolves, we help companies build supply chain resilience by ensuring the following key factors are integral to our approach:
Holistic Perspective: using a helicopter view, we examine the entire company and the various links in the supply chain to gain a comprehensive understanding.
Stakeholder Engagement: by being present with the client and interacting with various stakeholders, we gain a better understanding of processes and potential issues.
Root Cause Analysis: we strengthen qualitative analysis with insights from data analysis, believing in a combination of both to identify and address underlying issues.
Customized Roadmap: in collaboration with the client, we develop a tailored action plan to address specific needs and goals.
Implementation and Project Management: we guide the transformation process and remain involved during implementation to ensure sustainable growth.
By applying our approach to supply chain transformations, we have learned that communication is crucial. While state-of-the-art systems exist to connect various links in the supply chain and better share demand information, improved internal communication between sales and purchasing teams often has a significant impact. Our approach includes both long-term, sustainable solutions and the ability to recognize and capture quick wins.
Curious about other lessons we've learned from mitigating the Bullwhip Effect?
Stay tuned for the second part of this series!
Do you want to know more or share your thoughts? Don't hesitate to reach out to Victor Chartier or Jules De Weerdt!
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