Understanding the Bullwhip Effect on Supply Chains

Over the last year, the globe has seen tremendous swings in supply and demand stemming from the effects of the pandemic. We saw manufacturers shut their doors for anywhere from a couple of weeks to a few months depending on the circumstances. This was an obvious reaction to COVID-19 and what had been determined as the likely trajectory of business during the onset of the pandemic. We also experienced shortages on a number of household goods such toilet paper and cleaning supplies. The shortages did not stop there. We have continued to see shortages off and on throughout the pandemic, notably in home gym equipment, electronics, and raw materials for manufacturing. What we are experiencing is the bullwhip effect — something that many of us in the supply chain world are all too familiar with, but consumers are now seeing firsthand.
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Sharp drops in demand have led to manufacturers and retailers taking action, that was thought to be appropriate in order to safeguard their bottom line, by reducing inventories and cutting manufacturing where possible. Companies then began to drain their inventories as consumer demand started to grow, but manufacturing was far behind this uptick in demand. The global era of supply chain has led to sourcing decisions with suppliers scattered across the globe. This means that the ability of manufacturers to react to demand swings (especially all at once) is quite limited. If we consider the main links of the supply chain to be plan, source, make, deliver, and return, we can see there is a breakdown in the planning of what might happen, the forecast, and what is actually happening, the demand. Since the plan was incorrect, this will lead to inaccurate sourcing decisions adding to the delays.

The changes in the downstream (closer to the end-user) supply chain cause greater and more volatile swings in the upstream (earlier in the supply chain) supply chain as demonstrated below:

This shows how the suppliers may be impacted by small changes in the downstream supply chain. Changes in customer preferences or demand can cause bigger shifts in manufacturing which then lead to the greatest shifts at the very beginning of the supply chain. The beginning of the supply chain will get hit with the absolute greatest shifts and usually the least amount of time to react. In our current state of sourcing from international suppliers, combined with the continued shipping and port delays, this bullwhip effect is leading to great challenges of keeping up with consumer demand. This has resulted in business and manufacturing continuing to struggle with the increasing demand that was unforeseen at the beginning of the pandemic.