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What is the Bullwhip Effect in supply chain management?
The Bullwhip Effect is a phenomenon in supply chain management when a rapid increase in inventory fluctuation directly correlates with changes in customer demand trends. So, the needs and expectations of the end customer has the ability to create “waves” in global supply chains. As their demands change, it causes companies to adjust inventory levels which in result causes raw material suppliers to get greater fluctuations in demand. Ultimately, it’s called the Bullwhip Effect as small changes in demand in the beginning can produce a whip like effect upstream.
A prime example of the Bullwhip Effect in recent years can be seen through COVID-19’s effect on PPE and medical supplies. Things like surgical masks and hand sanitizer saw an incredible surge in demand, leaving factories scrambling to fill such large orders. When these outside stressors occur, organizations are often left at a loss, unable to source the necessary materials.
The impact of the Bullwhip Effect on your global supply chain
Now that we understand what the Bullwhip Effect looks like, how can you as a supply chain leader work to combat this? The first and most crucial step is understanding how this challenge can manifest itself in your organization. Let’s take a look at a few common areas that the Bullwhip Effect tends to impact most often:
Poor customer service. The Bullwhip Effect is an inherently customer centric issue, making it imperative that organizations plan to work with their end customers to ensure satisfaction. While it can be frustrating, customers often don’t see how complex global supply chains really are, all they see on their end is a delayed package. When shortages occur, especially if the goods in question are everyday essentials or medical supplies, customers are quick to get frustrated, in turn having a detrimental effect on your reliability and trust as an organization.
Loss of revenue. The Bullwhip Effect is notorious for causing severe financial loss for organizations everywhere. This can stem from a multitude of areas, including over purchasing of materials, lost revenue, or a general over investment in production.
Misguided capacity plans. With the nature of the Bullwhip Effect being so volatile and unpredictable, forecasting for capacity utilization can be nearly impossible for supply chain leaders. As the data collected while a company is under the stress of the Bullwhip Effect is often skewed or misrepresented, this can lead to detrimental loss in revenue and poor planning for the future.
Ineffective transportation. When the Bullwhip Effect occurs, we often see a significant impact on transportation activities. With transport time, capacity and efficiency all coming into play, customers feel the repercussions of delayed ships, trucks and blockages at ports.
Missed production schedules. A break in production schedule could potentially be one of the most damaging aspects of the Bullwhip Effect. When supply chain leaders work to invest time and energy into crafting a schedule and system that works for their organization, the Bullwhip Effect has the ability to turn their operations in the wrong direction entirely. As factories fight to keep up with demand and surges in raw materials, we see the lasting effects it has on organizations, potentially lasting years.
Countering the Bullwhip Effect using advanced supply chain management technologies
While the challenges listed above can make it seem like there might not be much hope, there are a few modern solutions using advanced technologies to help you combat the bullwhip effect. These solutions can ultimately help you focus on streamlining global supply chain processes, optimizing inventory management and reducing logistics costs.
When we look at organizations that have been hit hard by the Bullwhip Effect, they often have one thing in common: a lack of digitization, both in terms of used technologies and the digital mindset and skillset of the organization. These companies still rely on legacy systems spreadsheets and manual processes to manage their global supply chain. The bottom line is that supply chain leaders and their teams invest significant time, resources, and money to get to the root cause of a problem and fix it.
Advanced technologies such as AI, IoT, advanced data analytics and digital platforms to name a few are revolutionizing the world of logistics and supply chains. These technologies share a few key attributes, making them superior to legacy systems and technologies:
- They are cloud-based, making them highly scalable, flexible, and cost-efficient.
- They combine and leverage different technologies.
- They are agile and dynamic to adapt to changes in the system in real time.
- They provide insights into trends and patterns to better predict the future.
Conclusion
The Bullwhip Effect, like many stressors on global supply chains, is an inventible reality for most leaders. While the challenges that Bullwhip Effect poses are becoming more difficult to manage in today’s world, there are modern solutions using advanced technologies to overcome and reduce its effect on global organizations. Companies and those responsible for their supply chain should not be afraid to invest time and energy to address this fundamental problem, as any impact of the Bullwhip Effect will otherwise rob unnecessary additional costs and nerves.
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