Executives in our training programs have become accustomed to the dreaded “bullwhip effect” over the past year, a phenomenon when sudden spikes in demand are amplified upstream in the supply chain, from the consumer to the retailer to the distributor to the producer, which races to increase production for demand that turns out to be phantom.
Supply chain managers have responded to the dramatic rebound in global demand after the COVID-19 shutdowns by double-ordering and overstocking supplies. Economists have blamed product shortages such as semiconductors and the present spike of inflation, to an extent, on the bullwhip effect.
The bullwhip is known to cause great inefficiencies and cost increases through excess inventory, lost revenues, superfluous capacity and poor customer service. So why does a known phenomenon continue to wreak havoc on global supply chains? The bullwhip effect has not, in the main, been suppressed by the various entities along the supply chain. So what can be done to improve the situation?
Bullwhip is not a new phenomenon: it has received strong attention from both researchers and practitioners since the 1960s. Our own research in 2016 provided new evidence regarding the effect’s prevalence and magnitude. We found some firms experienced strong bullwhips while others did not. On average, demand variability is 90% higher for the supplier than for the buyer. The magnitude is stronger the further upstream in the supply chain you go: the retail sector experienced less of a bullwhip than manufacturing did.
Hence, we now know a great deal of the factors that cause the bullwhip effect, and what companies can do to reduce it. Decades of globalization, outsourcing and just-in-time production have led to more cost-effective supply chains, but these trends have increased their vulnerability to increasingly costly disruptions.
As supply chains have become longer and leaner, the lack of coordination, information-sharing and transparency have caused the bullwhip. The pandemic amplified those pressures and created new ones, such as a suddenly changing product and channel mix, as well as labor shortages. This caused a “perfect storm” for supply chains.
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