The bullwhip effect, also known as the Forrester effect, describes a phenomenon in which inventory levels undergo increasingly larger fluctuations up the supply chain in response to a shift in consumer demand. What starts out as a small change in demand at the retail level leads to an even more substantial variation and uncertainty in supply, demand, and lead time. The bullwhip effect in the supply chain may arise due to variations in demand forecasting, order batching, over- discounting, rationing, and gaming. The bullwhip effect can lead to different outcomes such as over-inventory across the supply chain, over-hiring and firing employees, surplus and shortage of inventory, and poor service to customers in the supply chain
The novel coronavirus, COVID-19, has been impacting businesses and communities across the world in ways that seemed unimaginable even a couple of years ago. All industries have felt its effects, but brands and retailers in the consumer-packaged goods (CPG) industry are among those on the front lines of this fight. With consumer shopping habits fluctuating rapidly, there are new rules of engagement, to keep shelves stocked with critical items, and at the same time, keep shoppers and employees safe.
Supply chains have had to ramp up production to cope with the unprecedented increase in demand. However, as retailers place larger orders, so do wholesalers, suppliers, manufacturers, and so on, with orders and demand being magnified the higher one moves up the chain. High consumer demand, product shortages, and transportation disruptions in the second half of 2021 triggered inflation and changes to manufacturers’ order patterns, setting up the bullwhip effect.
The retail industry is currently stuck between a rock and a hard place, or rather a bottleneck and bullwhip, as transportation and manufacturing delays continue heading into 2022. Retailers felt the effects of transport costs and constraints even before the pandemic. Covid-19-related supply chain disruptions began in early 2020 and have only grown worse since. As more people have stayed home, commercial airline traffic has taken a nosedive. With significantly fewer flights, there is significantly less opportunity for retailers to rent cargo space to transport their goods in the sky. McKinsey predicts that air traffic won’t return to 2019 levels before 2024, so the effects will likely continue to impact retailers for years to come. At the same time, buyer behavior is completely unhinged due to the ripple effect caused by COVID-19. Manufacturers are inundated with replenishment requests, days or sometimes weeks after a supply shortage occurs. And, businesses are tapping into multiple manufacturers to procure the goods they need to manage the overwhelming influx of demand. This often leads to overproduction and misinformed inventory build-up.
Due to the current situation of the COVID-19 outbreak in the world, the pharmaceutical industry plays an essential role in the production of medicine and vaccines against COVID-19. In recent years, the production and marketing of vaccines have become a complex process. This complexity can be reduced through market coordination with producers and other sides. One of the influential factors that significantly decreases the performance of the pharmaceutical supply chain and the disruption of the vaccine, is the bullwhip effect.
A bullwhip effect in the vaccine supply chain would significantly affect the production and distribution of pharmaceutical products, especially vaccines. In vaccine supply chains, several factors make the supply/demand procedures complicated. These factors include product complexity, globalization, regulation, regulatory requirements for manufacturers, product quality improvement, government policies, public security, and general health sector supports. Recent studies have revealed that employing expert managers alongside well-trained human resources and appropriate transportation could significantly decrease the demand fluctuations’ effects and would make the supply chain much more stable. Poor production planning, inappropriate transportation, incorrect demand prediction, and increases in raw materials cost are among the most important factors that lead to a bullwhip effect in a vaccine supply chain.
Dealing with the bullwhip effect involves improved automation and real-time understanding. Companies that invested in good ERP and supply chain planning systems have done better than those keeping things status quo. A few things can be done to tackle the bullwhip creeping in and wreaking havoc:
- Real-time data aggregation to spot trends. It’s equally important to understand how panic buying happens, what is being panic bought, and how it affects overall demand.
- Frequent communication with vendors and suppliers to about availability of products and ease of procurements.
- Onboarding new suppliers needs to be rapid and hassle-free, and needs to be done in a way which does not push aside existing suppliers. The more sources one has, the better.
- Addition of more digital channels to cope with lower demand of a product
The results of studies have confirmed that information sharing throughout the supply chain would significantly reduce the bullwhip effect in the supply chain. The other factors which would reduce the bullwhip effect are identified as supply chain coordination, lead time reduction, accurate demand forecasting, information technologies alignment, real-time inventory management
Managing the bullwhip effects caused by COVID-19 requires situation awareness, localization, and an intelligent supply chain. Situation awareness is a vital concept in emergency response, knowing what is going to figure out what should be done. Furthermore, reducing the geographical distances between the firm and other parties in the supply chain, which equates to supply chain localization, enforces just-in-time inventory. Finally, supply chain digitalization is no longer an option; implementing such a solution enables end-to-end visibility, collaboration, flexibility, and optimization of orchestration of the supply chain.
References:
https://sloanreview.mit.edu/article/prepare-for-the-bullwhips-sting/
https://www.sciencedirect.com/science/article/pii/S2666412721000234
https://www.oliverwyman.com/our-expertise/insights/2020/apr/covid-19-shocks-supply-chains.html
https://www.oliverwyman.com/our-expertise/insights/2020/apr/covid-19-shocks-supply-chains.html
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