5 Tips: Curtailing the Supply Chain Bullwhip Effect

A phenomenon that quickly turns otherwise accurate forecasts into far-reaching supply chain inefficiencies, the bullwhip effect refers to the increasing swings in inventory — in response to shifts in customer demand — as one moves further up the supply chain

Accustomed to seeing ample supplies of diapers, toilet paper, and cleaning products on store shelves, consumers were in for a shock when COVID-19 began to take its toll on the world’s supply chains in early 2020. Although the barest of shelves began to rejuvenate by midyear, there are still some lingering effects (plus the potential for more shortages later in the year and into 2021). 

Blame the bullwhip effect for creating a lot of this chaos and uncertainty. 

“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

Here’s what companies should be doing now to avoid supply chain disruption in the future. 

5 Supply Chain Takeaways for 2021

Under “normal” circumstances, companies invest in extra capacity, inventory, labor and work shifts to minimize the bullwhip effect or to avoid it altogether. The problem this time around is that otherwise routine approaches didn’t work. Demand sensing, forecasting and other forward-looking predictions were equally as ineffective, and mainly due to the unprecedented nature of the global pandemic. 

Here’s the good news: shippers now have boots-on-the-ground experience with a fairly extreme case of the bullwhip effect. Using their 2020 experience as their guide, companies can now prepare for the next potential disruption with a better understanding of the hefty impacts that it could have on their global supply chains. 

Here are five lessons that all companies should apply toward their future supply chain management: 

  1. Communication, data sharing, and visibility trump all when it comes to minimizing the bullwhip effect. One large national retailer, considered to be a leader in supply chain strategy, opened the lines of communication by allowing suppliers to access their inventory data. The result: increased customer satisfaction, a decrease in inventory and warehousing costs, and more stable supply lines.
  2. Third-party logistics experts have proven their worth. Well equipped to handle the logistics, transportation and technology that go into a well-oiled supply chain, experts like Transportation Insight know both sides of the business (i.e., shipper and carrier), and we can demonstrate and articulate how each node in the supply chain will benefit from a specific decision. 
  1. Scenario planning and simulations actually work. Think of them as the “war games” of your own supply chain, use them to run simulations on historical data across different hypothetical scenarios (e.g., if we can’t get raw materials from country A, how will it impact the rest of the supply chain?). Getting the answers to these questions before a disruption occurs will help you be more prepared in the event of a disruption.
  1. Use dashboards and control towers to get big-picture views in real-time. The days when a warehouse manager had to wait until the end of the month for a printed performance report are long gone. Thanks to advancements in technology, the same manager can get that information in real-time and then use it for good decision-making. Being able to drill down into order profits, for instance, will help you better understand what you should actually be charging for shipping. This, in turn, helps support good margin management in any business conditions.
    
  2. Alternate sources of supply are a good thing to have. In surveying 150 senior manufacturing executives, law firm Foley & Lardner found that most expect to make “fairly drastic” changes to their supply chains post-pandemic, including a shift away from just-in-time manufacturing (JIT) and sourcing in China. In Global Supply Chain Disruption and Future Strategies Survey Report, the law firm says that of those companies that were operating in China pre-pandemic, 59% have either already withdrawn operations, are in the process of doing so, or are considering it. Many of those organizations are looking to reshore their operations closer to home in the U.S., Canada, or Mexico.

Depending on how you approach it, transportation can play a major role in avoiding the bullwhip effect in your supply chain. Through good communication and data-sharing across all supply chain partners, you’ll gain an understanding of both real-time and historical information as it relates to all points in the supply chain. The better decisions you can make, the better the odds of avoiding the bullwhip effect.    

Tame the Bullwhip: Manage the Demand Waves

We examine the steps you can take to build a responsive supply chain management system in our latest Supply Chain Masters Series digital event. 

Watch the webinar to learn best practices for collecting, retaining and analyzing supply chain data. We also highlight the business intelligence solutions that drive continuous improvement and proactive strategy adjustment. 

Click the link below to learn supply chain strategies that minimize risk and protect your profitability today and tomorrow.

The Bullwhip Effect: Managing Swings in Demand

The “Bullwhip Effect” is a term often used to describe a phenomenon that quickly turns otherwise accurate forecasts into outdated information, amplifying misinformation along the supply chain. The dust was brushed off this broad concept, and it returned to the shelves not long after COVID-19 began disrupting global supply chains.

“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

That’s exactly what happened when an abrupt change in customer demand plus factory shutdowns put companies in the tight spot of having to forecast demand in the middle of an unprecedented, worldwide pandemic.

With demand for certain items amplified, the tiniest crack of the bullwhip’s handle caused an uncontrolled, snapping motion at the tip of that whip.

Balancing Demand Effects and Available Inventory

“When major swings in inventory occur from panic buying and hoarding, the impact of this sudden demand is magnified as it moves upstream in the supply chain (similar to the way a bullwhip’s thong amplifies in a wave as it moves away from the handle),” Jenny Reese explains in “Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” The customer feels the anxiety of empty aisles, the retailer loses sales, and customer service suffers. “Distributors are left scrambling to determine who should get how much of a given product in a shortage,” Reese continues, “and manufacturers are overwhelmed with sudden, unanticipated spikes in demand.”

With little or no visibility into demand patterns to lean on, many companies wind up flying blind and hoping for the best.

How Does the Bullwhip Effect Work?

Without accurate, accessible, and strong communication across the various partners in the supply chain, the bullwhip effect can occur in any business environment. In a supply chain made up of a factory, a distributor/wholesaler, retailer, and end customer, for example, the retailer and customer tend to be closely aligned. For instance, a customer places an order and a retailer reacts accordingly.

Continue further up that supply chain, however, and that alignment begins to diminish.

Manufacturers don’t always align their forecasts with retailers’ own projections and distributors are, frequently, caught in the middle of two entities that have zero communication with one another.

These gaps widen during events like COVID-19, with even a small variance creating a Bullwhip Effect. In fact, Jay Forrester, who first conceptualized the Bullwhip Effect in these terms, says that even a 10 percent change at either end of the supply chain can result in a 40 percent fluctuation in the middle. That’s when the wheels fall off the cart; all players in the supply chain make quick adjustments to compensate for the problem.

Why Should You Care?

Virtually every organization must address or, at least be aware of, the Bullwhip Effect. Without up-to-date and wide supply chain communication, companies risk having it adversely impact their operations and their customers. Since no organization is an island, even the most vertically-integrated companies should know the signs of the Bullwhip Effect and how to deal with it effectively.

It’s easy to recognize the Bullwhip Effect in retrospect, as customers are cancelling or returning orders that they were clamoring to buy because they bought too much, overestimating their need. In order to meet perceived demands, erratic production, excessive inventory and depletion of resources highlight this effect. During COVID 19, suppliers most at-risk from the Bullwhip Effect included makers and distributors of PPE, hand sanitizer, toilet paper, and other hard-to-find items.

As a Supply chain professional you’ve been exposed to the Bullwhip Effect. The costly consequences materialize quickly and immediately erode your profitability.

Are you able to make informed decisions based on real time data?

Transportation Insight allows your business to make evidence-based decisions. We amass data about your supply chain to give you a comprehensive understanding of your logistics network. Our expertise and tools enable contingency planning through “what if scenarios” that address the Bullwhip Effect before it impacts your bottom line. Transportation Insight monitors multiple key performance indicators that measure your business activity and reveal threats and opportunities to drive continuous optimization of your supply chain.

Tame the Bullwhip: Manage the Demand Waves

We offer more context around the Bullwhip Effect in our Supply Chain Masters Digital Event. Watch the webinar today and learn how you can manage demand fluctuations with a responsive supply chain management system:

  • Best practices for collecting, retaining and analyzing supply chain data.
  • Processes that encourage scalability and readinesss for decline, recovery and even growth.

Learn the supply chain strategies that minimize risk and protect your profitability today and tomorrow.

Logistics Outsourcing? 4 Things Your Partner Needs

Depending on the logistics outsourcing approach that your business deploys, make sure your provider’s skillset aligns with your organization’s needs. 

In today’s environment, supply chain practices are taking central focus. Recovery will depend on adaptive response to global pandemic, economic turmoil and a sharp shift in buying practices and delivery needs. 

A lot of companies don’t have a complete understanding of what their partners should be providing. Outsourced solutions supplement your internal response to these dramatic shifts. When your partner exhibits these 4 Outsourcing Must-Haves they have the buy-in to keep you in the game.

Your partner can’t deliver? Better understand why.

Outsourcing Must-Have No. 1: Responsiveness

If you are not with a responsive partner that is able to enact change quickly within your supply chain, you are setting up yourself and your company for failure.

What does it mean to have a responsive partner? Your broker or 3PL should have a regular cadence for response. This is more than a quick, timely email follow-up when there is a problem – although that is important.

More than that, a responsive partner lends an empathetic ear to what is happening within your organization. That is fundamental to internal communications within the partner organizations, and it streamlines the ability to enact change that delivers value back to you – and your customer. 

A global pandemic validated the vital importance of having a responsive partner able to deliver value in the face of your individual disruption. 

Outsourcing Must-Have No. 2: Visibility

Not long ago, visibility was on the wish list. Today, it is a must-have for doing business.

Global supply chains have become so complex with the myriad of partners that exist around the world. Even if you only have a domestic North American supply chain, it is still quite complex.

Whether you outsource logistics, manufacturing or human resources, your partner should be able and willing to provide you with visibility to your data. It is valuable beyond belief. 

Accessing that data – as well as meaningful analysis of it – requires technology. You should have access and visibility to what is happening down to the SKU-level, in terms of historical trends in the shipping market with parcel, LTL, truckload and warehousing costs. 

If you are trying to make a decision on outsourcing part of your business, there is data that is going to help you with those decisions. If you do not have access to that data – or if you cannot get it quickly, you are with the wrong partner. 

Outsourcing Must-Have No. 3: Agility

Look back at the first half of 2020. How many supply chains were turned upside down? Right or wrong, so many risks for the future have emerged.

For example, what happens if, culturally, we decide not to continue doing business with China? What if a big portion of your market does not want to buy from a company that sources from China? 

With strategic alignment to your business and operational agility, your partner has the ability to anticipate market changes and provide a response plan that mitigates any emerging threats to your profitability. 

Whether achieved through their own technology stack or internal alignment, your partner needs to have the flexibility to adjust as your business changes.

Look at the retail world. In the early stages of COVID-19, every retail store closed apart from the essentials. That spurred panic for organizations still trying to figure out ways to sell products. It forced the traditional retail model further toward e-commerce. 

Companies that have really thought about their supply chain were able to begin using their retail footprint to fulfill from stores. Ship-from-store strategies kept inventory moving without requiring moves from distribution centers scattered throughout the country. 

That helped Levi Strauss expand its e-commerce business 25 percent during its second quarter, including a 79 percent uptick in May. About one-third of that online demand was fulfilled by stores. Doing that requires a massive change. If you do not have the internal resources of Levis, you need a partner that can support you. 

Outsourcing Must-Have No. 4: Expertise

Global networks are complex, Technology is changing rapidly. Your supply chain drives many moving parts across your business. A world-class partner should provide expertise in managing each of these dynamics – in addition to its core executable value. 

What does that mean? You need a partner that is delivering expertise around technology, process, innovation and their experiences in other industries.

A supply chain master that manages hundreds of supply chains across diverse verticals, service models and geographies has the ability to apply strategies that deliver optimal logistics performance across a broad variety of operational environments.

That broad experience means that when there’s a new technology, innovation, or process that might improve manufacturing, our supply chain leaders are looking for ways to apply best practices in retail or distribution arenas.

If you are in a monitored outsourcing model focused simply on tactical execution, expertise has limited value. 

However, if you are looking for a truly strategic, orchestrated relationship with a partner, expertise keeps your company moving forward in a disruption-filled marketplace.

What Sets Your Partner Apart?

If you have a responsive partner that is agile, flexible and able to deliver visibility and a deep bench of experience – hold on to it. These are prerequisite traits for a successful service relationship.

It also helps to know some of the traits that set a logistics provider apart in the marketplace. Three capabilities really elevate the performance of your entire supply chain. We detail these qualities during “The Logistics Dilemma: Insource vs Outsource.” 

Watch the webinar today. Hear real world scenarios where our clients have realized elevated value from:

  • Trust
  • Transparency
  • Strategic alignment

Your organization works every day to fulfill strategies focused on meeting the needs of your customers – and deliver additional value along the way. If your partner does not have alignment to and understand your strategy, how can you expect them to align and create more value for you?

Open the webinar and learn more about what sets a Supply Chain Master apart.

3 Outsourcing Models. Which is Right for You?

Digging deeper into outsourcing options, the situation gets a little more gray – especially in the complex supply chain and transportation management environment where so many aspects of your business can be affected by diverse nodes across your network.  

If you are reading this blog, you probably know what is involved with insourcing your supply chain management. Let’s explore three approaches to outsourcing. The model that best fits your business depends on your goals.

  1. Complete, Monitored Control

If complete in-house operational management is at one end of the spectrum, monitored outsourcing is on the opposite end. This is the throw-it-over-the-wall type of outsourcing.

That’s the original equipment manufacturer that says, “Hey, I need to make this widget. Here are the specs. This is how many we need. This is when we need them.”

You might examine activity once a quarter, once every six months, maybe only once a year. If something breaks, it is very hands-off.

A lot of times in logistics management, there’s not a lot of differentiation in that monitored outsourcing. A lot of times, it is going to cost a lot less and yield a lot less added value. In this scenario, you don’t have the management resources or the people you need it to manage a business function, so you put that completely on your service provider.

  1. Orchestrated Outsourcing 

With an insourcing environment, you have complete control, but you also face the most cost in the staffing of expertise, technology resources and all those strategic drivers in your supply chain performance.

In an orchestrated outsourcing approach you relinquish a measured amount of activity.

A lot of 3PL relationships today operate in an orchestrated model. You are relying on a 3PL, maybe it’s a broker that executes shipments, but you are still managing them. You have staff assigned to oversee their performance, track those shipments and make sure that 3PL is doing the things they need to do.

There is a lot more review, a lot more interaction, and of course, you are still driving that strategy piece.

  1. Hybrid Model 

You can often realize the most benefit through a hybrid approach. Here, you outsource key functions and access expertise-driven intelligence that supports ongoing improvement. You give up a measured amount of control, but develop a strategic trust that can help you determine service adjustments as business demands change.

In a hybrid approach, our logistics experts might be on site with you, right in there operating in your supply chain. As things change, minute-by-minute, hour-by-hour, day-by-day, as your partner, we are there ready to pivot our objectives as well.

This creates a strong strategic alignment, and it allows for a lot of trust and transparency. We operate as your logistics department, utilizing performance monitoring processes that help you hold our team more accountable for results. 

What Outsourcing Approach is Best for Your Business?

Understanding your company‘s internal people, process innovation, technology, and culture helps you decide whether to insource or pursue orchestrated, hybrid or monitored outsourcing.

You can start with one model and adjust with emerging change – in business strategy, human resources, marketing or supply chain disruption. The challenge is, as we saw in the first half of 2020, things are changing at a pace we have never experienced before. 

Having a strategic partnership in place can help you adjust the control you want to have. More importantly, in that close partnership you will always realize more value in responsive communications and rapid deployment of alternative supply chain strategies.

If you are deciding whether supply chain management is best insourced or outsourced for your business, watch our webinar, The Great Dilemma: Insource versus Outsource.  It shares four things your logistics partner must be able to deliver, as well as company traits you need to understand before making a decision.

Insource or Outsource Supply Chain? 4 Questions to Ask Yourself

If you are a growing company and are not already asking that question, you will soon – especially considering all the changes we’ve experienced in our economy recently. 

When weighing pros and cons of this important operational decision, start with a look in the mirror. Who are you as an organization?

You examine closely potential partners for any outsourcing relationship. You should pursue the same due diligence within your own organization. Knowing where your business stands in key areas can help you decide if the time is right to insource or outsource.

Here are four things you need to know about your organization – and any of your partners – to drive your insource/outsource decision. 

  1. Do We Have the Supply Chain Talent?People are the driver behind success. This is incredibly important in today’s supply chain environment. There’s so much change happening in the marketplace you have to stay on the cutting edge

    How do you stay on the cutting edge? Experienced people with tons of drive, in terms of learning and bringing innovative ideas to your organization.

    The supply chain talent gap is already big, and it is only going to get bigger. Companies are fighting for the top talent, and it is difficult competing against companies with unlimited budgets – Amazon, Apple, DHL or Transportation Insight.

    Are you confident that your company has the ability and the resources to attract and retain top-tier supply chain experts? As a mid-market or small market company, it is not going to be easy to get.

    And it’s not just the talent. What is your bench strength? Is your supply chain resource depth going to be able to rise to challenges and power your company’s disruption-filled environment? 

    The intelligence, and the experience that these people have is critical, but it also comes down to raw numbers. If you are a growing organization, maybe at one point, one person with the experience and intelligence necessary to do the job can effectively handle every step of your supply chain. 

    As you scale your business, you may need more than one person. In our webinar we talk about how possessing the agility to scale up your organization rapidly can make a big difference in the responsiveness you need to deliver on sales. 

    Other organizations experiencing their own growth face those same needs for people. That exacerbates the talent gap.
  2. Do We Innovate Processes by Nature?As you continue to scale your business to meet demand, are you confident that you have the processes in place to not only support that, but also innovate within those processes over time? Is that driven through KPIs? Or through the talent that you have?

    Many organizations are not set up to consistently advance innovation and measure that evolution. Companies like Amazon have process innovation inherent in their DNA, but not everyone has it at their core.

    The first half of 2020 has been a stark reminder: processes that were sufficient yesterday may not position you to compete tomorrow. To respond rapidly during a global economic disruption, a dynamic shift to e-commerce, or even a simple hiccup, it is necessary to evolve.

    As you do, collecting and monitoring data around process change determines whether you are heading in the right direction or toward more required adjustments.

  1. Do We Have the In-House Technology?The speed of change in technology is nearly impossible to keep up with unless that is your primary focus. Does your current technology platform support your supply chain management now? Will it continuously evolve with you as your customers’ demands change?

    You can build your technology stack, maintain it in-house, and join the race with the Joneses of the Technology World – SalesForce, Microsoft and Amazon. This generates a need for ongoing capital investment. 

    Unless you are a technology company, this might not be your area of expertise. One of those technology companies will sell you a base solution and customize it at added cost.

    Alternately, you can realize cost effective value working with a partner built on technology to suit your specific business needs. Be mindful of the cultural effects a new partnership might create. 

    Change management is a huge piece of the insource versus outsource conversation, but it can also allow you to redeploy current resources toward supporting your core competency. 
  2. Does this Fit Our Culture?Culturally, what does your organization look like? How do you make decisions? Is it a top-down, “You’re going to do what I tell you to do,” or a bottom-up, “Hey, I want ideas, bring the ideas.” 

    Are you seeking internal innovation or are you more focused on your core competency? Do you build or buy to solve challenges? What will our culture tolerate? What will it support? What does it really need?

    You have to be honest with yourself, and your company, and your partners. Having this perspective is imperative to the success of any relationship. 

    You could be the best company in certain spaces, but outsource certain things that you are not good at, culturally. To do that, you have to understand your organization. Even though Amazon is extremely good at what it does, it also recognizes the areas where it is not good. That drives focused Amazon investment into supply chain improvement opportunities.

    Understanding your culture will also help determine how you work with your partners, and whether your organization is in a position to realize success from an outside relationship. 

Master the Logistics Dilemma: Insource vs Outsource

People, process innovation, technology and culture. Before deciding whether to insource or outsource supply chain management, develop a clear understanding of these four aspects of your own organization. Keep them in mind when considering potential partners.

For more insight that can help you determine whether your company is better suited to insource or outsource logistics activities, watch our webinar in Transportation Insight’s Supply Chain Masters Digital Event Series. 

Open the webinar today for real world examples of companies evolving their supply chain strategy for growth. You will also get insight on the three types of strategic outsourcing approaches and four things that your logistics partner must be able to deliver.