Adaptability is crucial to success in the supply chain, but it’s easy to react too harshly. As demand shifts, inventories swing in response, growing increasingly severe and disproportionate as they move up the supply chain. This bullwhip effect is common throughout the industry, and it can cause substantial setbacks.
As various stakeholders respond to demand distortions, they lose revenue from out-of-stock items and profits from deep discounts on overstocked ones. These losses cost the global economy $1.1 trillion every year, nearly equal to Australia’s GDP.
Where Does the Bullwhip Effect Come From?
Understanding how to counter the bullwhip effect starts with knowing where it originates. The simple answer is that sudden demand spikes and dips are to blame, but multiple factors play into this.
Complexity and lack of transparency are some of the most significant causes. More parties and touchpoints are involved in the supply chain, so there are more opportunities for uneven reactions to demand shifts. Delays, miscommunication and inefficiencies between multiple points make these demand distortions increasingly severe, leading to more extreme reactions.
Panic buying and placing too much pressure on having inventory also impact these errors. Ration gaming, where suppliers order larger quantities to account for shrinking upstream inventory, can produce a 6%-19% increase in the bullwhip effect. Staking too much on data without context can also exacerbate things.
Once warehouse managers understand these causes, they can take steps to counter them. Here are five ways to minimize the bullwhip effect.
1. Learn Why Demand Shifts Happen
The first step to countering the bullwhip effect is to focus on the “why” of demand shifts, not just the “what.” Buying behavior rising or falling is only part of the story. Warehouse managers need to see this data in context to make an appropriate decision about how to react.
A sudden spike in demand does not always indicate a lasting shift, so proportionately increasing inventory may not be necessary. These spikes could result from a client’s customers panic-buying, which won’t last long, leaving excess inventory when things subside. 2021’s widespread hand sanitizer surplus is one such example.
The solution to this issue is looking at demand shifts in more context. Managers should analyze why needs are changing, not just how much they are. Gathering the data to provide this context requires more real-time communication with other stakeholders through tools like electronic data interchange (EDI) systems and Internet of Things (IoT) sensors.
2. Streamline Supply Chains
Another important step is to reduce complexity in the supply chain. Every point where information has to pass between facilities or stakeholders increases the severity of any swings and demand distortions. Streamlining the supply chain can make it easier to communicate and enable timelier responses.
Warehouse managers should try to reduce their number of suppliers and remove intermediaries. Every transfer, whether it’s of goods, materials or data, should be as direct as possible. Partnering with more local suppliers can enable quicker reactions, which helps stop delays that exacerbate the bullwhip effect.
Warehouse managers should reevaluate their strategic partnerships as peak seasons approach. Multiple distributed suppliers may provide some security but having too many lends itself to more severe overreactions and delays.
3. Improve Inventory Visibility
Warehouses may react inappropriately as demand shifts because they misunderstand their inventory levels. More than one-third of e-commerce businesses have sold items they don’t have in stock. Others may order more inventory, not realizing they have some on-hand already. Better visibility is the answer.
Technology can provide this visibility. Industry leaders like Amazon and Staples have adopted artificial intelligence (AI) systems to automate picking, processing and record-keeping. These systems produce fewer errors than traditional, manual alternatives, making them less likely to contribute to over- and under-ordering.
IoT sensors, RFID tags and solutions that manage them like warehouse management systems (WMS) can help, too. These technologies provide accurate, real-time data about inventory levels, locations quality and trends. An easily accessible digital record of this information leads to more informed ordering decisions.
4. Maximize Communication Between Partners
Warehouse managers should also improve communication between their supply chain partners. Demand distortions grow increasingly severe as information takes longer to transfer between points and miscommunication occurs. Warehouses should communicate more frequently and in more detail with other stakeholders and encourage others to do the same.
Data sharing is perhaps the most important part of this communication. Warehouses should share inventory level and trend data with those upstream and downstream that they could affect. Similarly, they should request more sales and inventory information from other parties to provide a more cohesive picture.
Technologies like EDI can enable real-time data transfers to facilitate this communication. If possible, warehouses and their supply chain partners should use a single, consolidated system to share data to streamline communication and provide context. A single point of access will reduce the risks of miscommunication.
5. Minimize Lead Times
Warehouse managers can minimize the bullwhip effect by reducing lead times. Longer lead times make things worse. Products may arrive later than needed, creating overstock or temporary shortages that may cause over-ordering. More efficient supply chains will reduce this risk.
There are many possible solutions to this issue, but automation and localization are two of the most helpful. Automated systems can dramatically improve the efficiency of repetitive tasks. For example, conveyor systems can result in 300 picks an hour, compared to 60 to 80 with manual picking.
Working with heavily automated suppliers and downstream supply chain partners can maximize these benefits. Warehouse managers should also try to rely mainly on local partners and suppliers. Less physical distance will enable faster transportation and fewer logistics disruptions.
Reduce Demand Distortions This Year
These five steps may not eliminate the bullwhip effect, but they will minimize it. The future is impossible to predict with 100% accuracy, so some amount of demand distortion will always occur. However, if warehouse managers and their partners can eliminate factors that exacerbate the issue, they can minimize its costs.
These steps are some of the most critical in reducing distortions and errors that lead to or worsen the bullwhip effect. Warehouse managers can then become as efficient, agile and profitable as possible.
Emily Newton is the editor-in-chief of Revolutionized, a magazine exploring how innovations change our world.