What is Bullwhip effect and how to stop it ?

Whenever the mainstream media starts to focus on important, or worrying, economic or business issues, you can bet it is an indication of a backlog, rather than a lead, of a serious problem that could have a global impact.

Thus, the recent and constant media focus on empty store shelves and major procurement disruptions can be better understood not as a “new” problem, but as a result of the huge increase in demand for durable and unbearable goods from early 2020. You see. , when Covid-19 sent 330 million Americans — and a staggering 7.5 billion people worldwide — in a state of solitude, most of us began to do the same thing: online shopping.

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We cannot interact with other people or move freely, diverting too much money that we would otherwise spend on online shopping. Igrosa. Food and / or delivery. Household supplies in such quantity that we have caused a nationwide shortage of toilet paper, furthering our supply chains in the light of the world. We indulged in new gadgets to play with during our leisure time, and we began to improve the home, buying home remodeling and remodeling things like Amazon, Lowes, Home Depot and many other online retailers.

In doing so, we collectively sent supply chains to the hyperdrive where they were not yet ready to make that jump to meet an unprecedented need.

To be sure, some of the biggest benefits come from those amazing changes in spending. In January, the US Census Bureau reported that sales of basic goods and food services in 2021 had increased by 19.3% from 2020, when Covid-19 began to shock the economy. The increase was due to the $ 5.8 billion distribution of a unity government aid to the pandemic.

But all of that use has helped to create the supply chain problems that the world is facing today. Understanding the full scope of these problems is essential if we are to learn how to solve them or work effectively despite them.

Bullwhip Effect

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Excessive reaction to empty shelves only makes matters worse. Back in the 1980's, economists at Proctor & Gamble identified what they called the “Bullwhip Effect.” That explains what happens when retailers overreact to a sudden jump in sales in the short term and thus cause major, long-term problems.

When their shelves are empty, retailers often view that as not a temporary disruption but as a permanent or permanent change of need. Therefore, they overreact by placing orders for more items than they had ordered before the shelves were removed. If they previously ordered 100 widgets per week, they would order 110, 125 or 150 items. That’s because they understandably fear other instances of empty shelves that may send regular customers to competing retailers with a list available.

In the aftermath of subsequent reactions, distributors placed large orders at manufacturers to cover the most recent orders in stores, and added another 10%, 15% or 25% more. As retailers, distributors fear re-capture without adequate product and lose regular customers to competent distributors with a large inventory. Finally, even manufacturers are overreacting by releasing more products — to be sure.

Inevitably, overdrafts lead to the creation of many items that consumers will not need or purchase. That requires a deep reduction in order to move all excess goods, or worse, the exit of non-market assets. Either way, the bottom lines are crushed.

That is the result of Bullwhip. When you draw it, it will look like a bull's whip — a tool used by cowboy drivers. What starts out as a small whirlwind handle becomes a growing wave as the force decreases with the whip. Near the tip of the whip, the oscillations (or amplitude of that wave) are three or four times larger than the first wave. Then the wave stops as soon as the force passes through the crack point. That is similar to a manufacturer, a shipping company, or a retailer who gets stuck in a heap of goods.

Tough Questions Over The Bullwhip Effect

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Along with retailers and distributors, freight forwarders are faced with difficult decisions when responding to today's procurement challenges. First:

Do they get extra capacity, and if so, how much?

Do they hire more drivers, and how much will they pay to attract them?

Will consumer purchases return to pre-epidemic patterns?

Will consumers switch to spending money on entertainment, restaurants and other experiences, leaving less money to spend on goods to be shipped?

In short, will the Bullwhip Effect end up biting when the tip of the whip ends up cracking and all that excess energy is gone?

The Future You Have

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History suggests that the rapid rise in retail sales over the past 18 months is far less likely to be. Therefore, manufacturers and retailers should resist focusing only on what consumers want today and instead focus more or less on what will be needed when we restart (at least in part) our pre-epidemic life and spending patterns.

In fact, we have seen a decline during the 2021 holiday season, a time of year when traditional spending is on the rise. Although spending in January has increased again, the US Department of Commerce reported in January that December retail sales fell 1.9% from November, more important than the 0.1% decline expected by economists.

Now, with the delta and omicron variation of Covid-19 blurring, the masculinity of the mask, many retailers being fully reopened and businesses planning to relocate employees to their offices, it seems the Bullwhip Effect is nearing its end. So now is the time when companies need to collect their data, analysis and forecasting power if they want to avoid setting themselves up for another painful Bullwhip Effect.

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Warm regards,
@Winy

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