3 ways to take the bullwhip effect out of your supply chain
The bullwhip effect phenomenon is making global headlines and challenging leaders to reevaluate their approaches.
The bullwhip effect — an overreaction to a demand surge in supply chains — is a potent reminder for all of us that historical data isn’t a panacea to predicting future demand. Keep reading on for a refresher on the bullwhip effect or skip ahead to the next section that explores how we got here as a supply chain industry.
A brief history of the bullwhip effect
In the 1980s, economists at Proctor & Gamble identified the bullwhip effect to — describing what happens when retailers overreact to a sudden and temporary surge in demand, rattling supply chains and causing long-term consequences. The bullwhip effect in supply chain management, also known as the “whiplash” effect, describes the danger of rapidly growing inventory in response to shifts in consumer demand.
The bullwhip effect defined
To understand the bullwhip effect in supply chains, think of consumer demand as the handle of that whip. As demand increases, it whips inventory and lead times in increasingly larger waves. Suppliers respond by wrestling with sudden surges and precipitous drops in demand, spurring significant demand variation down the chain. Unexpectedly long lead times directly hamper the ability to meet customer demand and make it hard to control working capital.
You can circumvent unnecessary losses by pinning down lead times and planning with greater precision. However, problems across your chain can extend lead times for every step — creating more difficulty in meeting consumer demand while fueling bigger, more problematic inventory-level fluctuations.
How did we get here?
The COVID pandemic in 2020 kept most of us working from home with limited access to travel and socializing. Funds previously spent on concerts, movies, going out to eat, and other in-person entertainment were diverted to more practical endeavors like household essentials, takeout or home delivery meals, and grocery basics. Historical consumer spending at the pandemic’s onset sent unprepared global supply chains careening into hyperdrive. The U.S. Census Bureau reported a year-over-year increase in retail and food services of more than 19% from January 2020 to January 2021.
The result? For years, big box retailers who focused on the e-commerce battle with Amazon have seen growing inventory as sales slow and supply continues building. Warehouses nationally are stuffed with inventory, some with under 1% capacity available. Even as retail giants report sinking demand levels, warehouses remain full before the holiday season due to a just-in-case pandemic-instilled mindset. Meanwhile, CNBC reports that year-over-year warehouse pricing rates have jumped by 20%, creating the perfect storm of costs and debt amid falling profits.
This record spending — bolstered by $5.8 trillion in pandemic recovery in the United States — triggered demand waves and ignited new issues that global supply chain leaders are still addressing today. Think about the once-surprising photos of empty or barely stocked grocery shelves. Retailers risk interpreting a volatile temporary disruption when shelves go bare as a long-term change.
It’s easy to understand the fear of more empty shelves and the ensuing overreaction. Distributors can be quick to bank newly inflated orders with manufacturers to keep up with quickly scaling retail orders — boosting orders by 10% to 25%, whether there’s a demand or not.
The latest sea change we’re seeing in consumer demand highlights the paradoxical need to balance historical data and predictive data to accurately forecast demand and plan pricing. After soaring demand levels in recent years, consumers abruptly scaled back on spending due to changing post-pandemic lifestyles, ongoing inflation, and the threat of a looming recession. Major retailers, like Walmart, are issuing refunds without taking returns. The thought of inventory taking up expensive shelf space and deprecating at speed is worse than eating the loss.
But there’s good news. With COVID requirements disappearing, retailers fully reopened, and employees returning to work in a hybrid model, the bullwhip effect appears to have reached its end. As the memory begins to fade, it’s important to learn from it all and prevent it from happening again.
Shock-proofing your supply chain against the bullwhip effect
Now is the time to evaluate your supply chain data, analysis, planning, and forecasting capabilities. Here are three best practices to protect your supply chain from the next snap of the whip.
1. Optimize your inventory management and planning, and be ready to pivot.
Staying competitive in a volatile digital age means excelling in inventory planning and optimization management. Your historical data isn’t enough amid the new normal of constant supply chain disruptions. Instead, be prepared to make intelligent pivots and plan for “what-if” scenarios, including demand sensing, to identify near-term trends. “What-if” scenario planning brings all possible variables into the equation so you can see precisely how much inventory is necessary at each location while modeling potentially disruptive factors’ impact on inventory and production plans. You’ll be poised and ready to react immediately to deviations to minimize the bullwhip effect.
2. Fill gaps in communication and supplier collaboration.
If a lack of communication across your organization and supply chain network is a problem for your organization, you aren’t alone. These siloes are abundant and a frequent cause of the bullwhip effect. Now is the time to take meaningful action.
Supply chain collaboration across sourcing and procurement stimulates accurate decision-making and increases value throughout your supplier ecosystem, helping you respond to future disruptions with greater agility. Supplier collaboration includes the ability to constantly re-optimize demand forecasts in real-time. You must bring the focus back to your product journey – from raw materials to consumers. Are you reaching your goals in the most cost-efficient way possible?
3. Break out of your supply chain planning siloes.
You’re probably already aware that supply chain planning is no longer the cost-cutting afterthought it was just a decade ago, and the expectations of you and your peers are increasing. That’s why retail giants like Walmart are upping investments in supply chain. However, investing in supply chain isn’t enough. If you’re siloed off by spreadsheets or stuck using error-prone BI tools, your uncoordinated planning efforts put your supply chain and bottom line at risk.
You must align and integrate business planning across supply chain, finance, sales, procurement, and other core operational functions to unleash a competitive edge and combat confusing demand surges. With integrated business planning (IBP), you and your counterparts across the business gain deeper visibility to navigating challenges before they become problems – the bullwhip effect included. Aligning your supply chain, sales, and operations planning can be a game changer for organizations looking to accelerate collaboration and performance.
Get away from the bullwhip effect and out of reaction mode.
You can mitigate the long-term impacts of the bullwhip effect in supply chains with forecasting methods that tap into future scenario planning. These methods allow you to look beyond historical trends and data and gain deeper visibility and alignment across your business by connecting the conduits of information. With the right data and planning approaches, you’ll be ready to understand dramatic peaks and valleys in demand and respond in near real-time. Only then can you deliver precision and IBP with the ability to run “what-if” scenarios on the fly, so a new plan is always ready.
That’s the power of the Anaplan platform. Through artificial intelligence and other state-of-the-art tools, Anaplan connects your business from one end to the other and makes using all the information to streamline your inventory plans into a routine task rather than an arduous chore. What better way to avoid the bullwhip effect? Explore Gartner Magic Quadrant Leader Anaplan for Supply Chain Planning.