A common phenomenon in all supply chains is the amplification and distortion of demand fluctuations. These start off small at the retail level and amplify further up the chain. When cracking a bullwhip, the handle of the whip moves 60 degrees yet the tip of the whip moves at 360 degrees so the terms bullwhip effect is most befitting. The impact at the retail level is low and escalates further up the supply chain with the manufacturer suffering the most.
A prime and often used example is that of Volvo when they found themselves with a lot of surplus green cars in their inventory. To get them off the dealers’ floors they ran a special offer, and the green cars started to sell. Unaware of the sales promotion, manufacturing saw an increase in sales and ramped up production for more green cars. As a result, at the end of the year, Volvo was left with a large inventory of unsold green vehicles.
Retailers, distributors and manufacturers all make their own forecasts, adjusting them to cover spikes in demand and taking into account economies of scale. As an example, if customers bought 30 items off a retail shelf, the retailer would order 35 items from the distributor, placing the additional 5 in safety stock to ensure they don't run out. The distributor would then order 70 items from the manufacturer to take advantage of bulk discounts. The manufacturer would increase the order to 120 because it costs less per item to manufacture more.
Despite the obvious issue of having cash tied up in excess stock, having an oversupply of inventory, one may argue, isn’t the end of the world. After all, companies can run promotions to reduce excess stock. However, consider for a moment the considerable loss that your business would incur if the inventory items had a shelf life and could end up as obsolete stock.
Lack of communication and misunderstanding is one of the main contributors to the bullwhip effect. Assumptions are made by players in the supply chain, which result in the over or under compensating of forecasts. Additionally, companies that use traditional business practices in their organizations are more susceptible as they aren’t able to adequately coordinate and plan. These conventional processes need to be updated to modern systems to mitigate the bullwhip effect.
Retailers and distributors adjust their forecasts to plan for contingencies and to take advantage of bulk buying prices. Manufacturers don’t have the insight available to see customer sales information at the retail level so that they can make informed production forecasting decisions.
One of the many solutions for manufacturers to consider is the implementation of a vendor managed inventory system in the supply chain. Manufacturers will have full visibility and control and with the advent of IoT, it is even easier to automate and track inventory levels in-store using RFID technology. Manufacturers will be able to assume the responsibility for maintaining inventory by having access to up to date information and can plan their purchase of raw materials and production schedules accordingly. By being closer to the source of the demand Manufacturers also ensure better communication throughout the supply chain. Take a moment to think how different the Volvo catastrophe could have been if the manufacturer had insight into the sales promotion and sales data
With the technology solutions available today and with the right communication strategies in place, there is no valid reason why your business should suffer the effects of the bullwhip phenomenon.
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