Introduction: The Bullwhip Effect!
The bullwhip effect is a distribution channel phenomenon in which demand forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in consumer demand as one moves further up the supply chain. It often occurs when retailers become highly reactive to demand, and in turn, amplify expectations around it, which causes a domino effect along the supply chain.
These types of scenarios generally arise from a lack of information, communication, or in most cases, a time-lag between the demand side and supply side.
In the case of face masks, we experienced/saw situations where wholesalers ordered masks from their suppliers overseas, but consumer demand dropped drastically while this shipment of masks was still at sea being brought in by cargo ship.
Example: example of increases moving UP the supply chain from end-user.
Let’s consider a PPE or First Aid Retailer sells an average of 5 face masks per day. As cases of covid19 begin to rise, the retailer sees sales increase to 50 units per day. The retailer increases their purchasing forecast with their supplier (wholesaler) in order to meet the new expected demand to 100 units. (This would be Exaggerated Demand Wave #1)
The wholesaler sees this larger order come through, and in turn, forecasts their demand. Rather than ordering 100 units to be manufactured, the wholesaler may order 200 units from the manufacturer thus creating a second wave of exaggerated demand.
The manufacturer sees the increase in demand from the wholesalers and may react by ordering enough raw materials to increase their manufacturing run to 400 units. This creates a third wave in the exaggeration of demand.
Imagine a scenario:
Retailer sells to consumer.
Retailer sees increase in demand from customer and in turn orders double from their supplier (wholesaler) to assure their shelves will always be stocked.
The wholesaler sees an increase in demand from their customer (the retailer) and in turn orders triple what they usually would from their manufacturer
Manufacturer sees this sudden increased demand and in turn orders 10x more in raw materials than they usually would just to make sure they can keep up with their customers growing demand.
But what happens when the demand for that product dies down? Who’s left holding the bag?
When or How does it all come crashing down?
If a retailer runs out of inventory at any point they may choose to switch to an alternative brand to meet customer demand. As sales of the original product begin to decline, the retailer may choose to stop ordering from that supplier altogether (this may in turn create an oversupply up the supply chain and distribution channels.)
The manufacturer has maintained increased production runs yet the demand on the consumer side has decreased dramatically. This is what leads to excess inventory. As backlogs in production or shipping (supply chain) begin to happen, the PPE retailer may run out of inventory during the pandemic whilst the manufacturer is producing new stock. At this point the retailer may choose to switch to an alternative brand to meet customer demand, this will then create a false demand situation as sales appear to slump to next to nothing so the retailer may then not place further demand for the original brand or mask even though the manufacturer has increased their production runs. Alternatively, as covid19 cases begin to decrease, this could result in an overstock situation across the supply chain as each tier of the supply chain has reacted to the pandemic sales and increased their demand.