Toilet paper is a hot commodity during a pandemic. Once COVID-19 was announced, people flocked to the stores, panic-buying toilet paper, bleach, and any assortment of hygienic products they could get their hands on. Empty aisles are still not an uncommon sight in major retailers today.
The uptick in mass buying and hoarding is not just an inconvenience for shoppers but has a drastic impact on a supply chain. A sudden increase in demand without a commensurate increase in demand can lead to what Jay Forrester coined “The Bullwhip Effect.”
When a product is in high demand, stores run out of supplies more frequently, causing stores to ramp up order volume from distributors. Distributors see the increased demand and need more product to supply.
They contact the manufacturer to make more goods. The manufacturer then orders more raw materials from its supplier. This influx is acceptable if the demand has risen and stays elevated. The problem arises when a “false demand” is established.
A false demand occurs when an uptick in demand is not matched by a consistent increase in the procurement of the product. This false demand causes an exponentially-increasing negative impact at each stage of the supply chain, leading to a surplus of unused products in the future.
While the Bullwhip Effect itself is relatively straightforward, several activities can trigger a Bullwhip Effect in your supply chain.
Toilet paper is the first product that comes to mind when considering recent examples of the Bullwhip Effect. Patrick Penfield, Professor of Supply-Chain Management at Syracuse University, said to Business Insider that a large surplus of toilet paper is going to happen should the demand normalize in summer.
Consumer needs will go down once they realize their stock at home is sufficient and will not need to buy more toilet paper at the same regularity as before COVID-19. This will lead to excess on the shelves that will not be purchased at the rate needed to deplete the new surplus.
Though toilet paper is essential, the demand is typically predictable and will stabilize. When the Bullwhip Effect hits a volatile and essential supply chain like oil, gas, or coal, it causes a substantial economic and social impact. As detailed by the University of Minnesota’s Center for Infectious Disease Research & Policy, this fluctuation hit the coal industry in 1918 during the Spanish Influenza.
This shortage led to colder climate areas like New York to have problems during the harsh winter. Areas of the supply chain like transportation, storage, and production, where people are in close quarters, created a high risk to personal health.
With social distancing and decreased travel, there has been a substantial downturn in demand for gas and oil. With many oil refineries forced to shut down due to lack of demand, companies who are still producing are running out of storage for their excess reserves. Though decreased fossil fuel consumption has driven the price to historic lows, this could cause a significant price increase in oil down the road.
While the notion of managing a supply chain through turbulent time may be daunting, there are a number of strategies you can count on to mitigate the chances of experiencing a bullwhip.
The Bullwhip Effect can be painful and cause panic, but it can be managed. The most important asset any supply chain can have are close relationships with its strategic suppliers. Markets will rise and fall, but the ability to source with flexibility and accuracy can minimize and prevent these negative shockwaves.
Excellent supplier relationships create a stable supply chain built on trust with your strategic sourcing partners. If you’re interested in reading more about how to talk with suppliers about bullwhips in the supply chain, check out another recent article titled 3 Ways To Empower Your Sourcing Team Working From Home During COVID-19.
Find out if Sourcing Enablement with Arkestro is a good fit for your team.