There are a few key problems that haunt supply chain managers everywhere — and one of the hardest to solve is the bullwhip effect.
At its core, the bullwhip effect is a problem of overly drastic changes in inventory caused by an initial shift in consumer demand that, like the crack of a whip, kicks off a chain reaction of increasingly bigger “swings” in the direction of ordering too much, or too little product.
Let’s take a classic and well-studied example, beer.
Imagine that during New England’s Winter Storm Juno, for example, demand for craft beer at a local pub in Boston is low because customers are trapped inside their homes. When the pub owner, whose shelves are usually emptied out by the end of the weekend, orders fewer cases of beer from her wholesaler, that wholesaler then orders less beer from his manufacturer, in a lower quantity than before because he anticipates a continuation of this lower demand. The manufacturer, who’s now looking to bottle less brew on his factory floor, reduces his orders of raw ingredients like barley and hops. In turn, those barley and hops farmers decide to grow less of their crop to adjust to this drop in demand. A few weeks later, the New England snowstorm is over, beer demand is back to normal, and local customers who want to celebrate the end of the blizzard are left with empty pint mugs and memories of the Celtics glory days.
Many in supply chain understand this problem, but few companies have truly solved it. The reason why is that too many have focused on demand. Prevailing wisdom says, predict what customers want better, and you’ll be able to minimize the steepness of the propagating bullwhip curves. But demand is volatile by nature, and predicting it is like trying to read tea leaves, an unreliable pseudoscience that leads to shaky assumptions and ill-informed decisions.
So how do we finally put an end to the bullwhip effect? The answer is with better technology on the supplier side of the manufacturing process. First, let’s look at some core problems at play here.
The Telephone Game
There’s a popular quote in the industry that “supply chain is selfish”. People working in supply chain don’t understand, or in some cases don’t trust, the accuracy of the information they’re receiving, so they alter quantities of production based on their own best guesses rather than what their partners in the manufacturing process are telling them.
There’s a breakdown of trust within the supply chain here, and the reason for it reminds me of the popular children’s game of “Telephone”. The premise of the game is that someone whispers one thing in a neighbor’s ear, that person whispers the message to the next, and so on. By the time the message reaches the last person in the circle, it might as well be in another language. Which is why it’s no surprise that supply chain participants often adjust demand forecasts based on their own guesstimates rather than listening to what downstream partners are telling them.
The Waiting Game
The second big problem is a more involved communication systems problem. Even if a manufacturer overcomes the “Telephone Game” hurdle of mistrust and manages to receive an accurate measure of the shift in demand rather than an amplified one, he still ends up “waiting” on that information for far too long before it turns into a real change.
Going back to our blizzard-and-beer example, let’s say a supply chain manager at our beer manufacturer has an accurate message from a warehouse about exactly how much to reduce his beer output. He then needs to communicate the resulting shift in production to his workers on the assembly line and monitor the progress. For many, this would mean a lengthy series of calls and e-mailed spreadsheets, leading to delays and errors despite the perfect demand information.
How SCM Technology Can Help
The first way supply chain technology will help is by increasing transparency, and therefore trust, across every node of the supply chain, from retailer to factory. With a more reliable platform for identifying a shift in demand across the supply, the “Telephone Game” problem of mistrust and muddled messages can be replaced with reliable, accurate communication.
Technology can also address the “Waiting Game” problem by making it easier for manufacturers to communicate vertically within their own company. Instead of updating a spreadsheet, they could monitor changes in inventory and production in the cloud. With instant feedback, knowledge won’t have to “wait” at this node, but instead would be updated and addressed in real time.
The implications of solving the age old bullwhip effect are huge. If supply chain technology succeeds in connecting nodes across the supply chain to quickly and accurately communicate with each other, it could revolutionize how companies handle shifts in both consumer demand and their supply base.
Manufacturers could stop moving excess inventory up and down the supply chain and wasting billions in inventory that will never be used. And they wouldn’t miss big sales opportunities, like selling beer to patrons of the local pub after a particularly brutal winter storm.
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