COVID-19 is unbalancing both demand and supply. With unpredictable buyer demand, as well as supply chain shutdowns in China and some parts of the U.S., it can be hard to keep goods reliably on the shelves. This can cause the bullwhip effect and create problems all the way up the supply chain.
What is the Bullwhip Effect?
If you wave a whip, the amplitude of the motion increases towards the end of the whip. The bullwhip effect happens when a small variation in demand is perceived as a large one, causing production to change.
As an example: Early in the COVID-19 pandemic in the U.S., there was much hoarding of toilet paper (and much mockery of said hoarding). Shelves were emptied and retail outlets were forced to resort to rationing. By March 23, 70% of U.S. grocery stores were completely out of toilet paper. A few months later, some grocery stores were doing BOGO deals on toilet paper after manufacturers ramped up supply to meet a demand peak that, of course, was short-lived. That’s because people realized there was no real shortage … and they ran out of storage space.
Bullwhip effects can happen when retail and manufacturing aren’t talking to each other, but right now they are caused by unpredictable demand. Shortages of the weirdest things have shown up during the pandemic, including retail flour (there was never a shortage of flour, but there was a shortage of bags), vegetable seeds, yeast, and even bicycles.
What Problems Does the Bullwhip Effect Cause?
This supply chain phenomenon puts stress on production, warehousing, and transportation alike. It is exacerbated by lean and just-in-time inventory, where stores buy only what they need for a given week (indeed, many grocery stores do not have space to store more than that). Add in genuine supply-end shortages, and you end up with retail shortages, sometimes followed by surpluses after demand proves short-lived.
Both shortages and surpluses result in reduced income for manufacturers. You can’t sell what you don’t have, and if you can’t store what you can’t sell you have little choice but to drop the price.
How Can You Protect Your Business From This Effect?
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 doing things “the way they’ve always been done.” Here are some things to consider:
- Real-time data aggregation is vital to spot trends. It’s equally important to understand how panic buying happens, what is being panic bought, and how it does and doesn’t affect overall demand.
- Communication with vendors and suppliers is vital. In more stable times, for example, manufacturers need to know about promotions and sales. In these times, it’s important to know who has the things you need and be able to switch suppliers (and customers) as needed.
- Onboarding new suppliers needs to be fast and easy, and needs to be done in a way which does not push aside existing suppliers. The more sources you have, the better.
- Adding more digital channels can help you deal with lower demand for a product, especially if that lower demand is local. For example, a store may have very low sales in an area where the infection rate is high, but may be able to ship the product to areas where the rate is lower in the meantime.
The key to surviving the bullwhip effect, both during the pandemic and moving forward, is having good inventory controls. SphereWMS offers warehouse management systems that can help you gather and use the real-time data you need to understand demand and avoid costly mistakes. To find out more, contact us today.
