The COVID-19 Supply Chain Impact – Avoiding the Bullwhip Effect

The "bullwhip effect” is a phenomenon that refers to increasing swings in inventory in response to shifts in customer demand as one moves further upstream in a supply chain.

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The Coronavirus disease (COVID-19) pandemic reveals an under-recognized reality of business—companies in most every industry need the agility to onboard new suppliers quickly and open ancillary sales channels in order to meet customer demand and remain competitive. Countries heavily impacted by the virus, such as China or Italy, have restricted trade and closed borders, causing a huge disruption in supply chains and commerce.

At the same time, buyer behavior is completely unhinged due to the ripple effect caused by COVID-19. With a disrupted global supply chain and an uptick in panic buying, it’s a recipe for disaster for an unprepared supply chain. Manufacturers are inundated with replenishment requests, days or sometimes weeks after a supply shortage occurs. And, businesses are tapping into multiple manufacturers to procure the goods they need to manage the overwhelming influx of demand. This often leads to overproduction and misinformed inventory build-up.

Enter the “bullwhip effect,” a phenomenon that refers to increasing swings in inventory in response to shifts in customer demand as one moves further upstream in a supply chain. The bullwhip effect is caused by forecast inaccuracy at the end-customer demand point, and results in significant supply chain inefficiencies. Even small variability in downstream demand can multiply as you go upstream, ultimately becoming a big problem for manufacturers and their suppliers.

The demand shocks created by COVID-19 have caused extreme bull whip effects, resulting in an unpredictable and unstable manufacturing environment where suppliers struggle to intelligently predict demand as a result of panicked buyer behavior. How can companies combat this? Let’s first understand what’s missing from today’s supply chains.

What got the supply chain here in the first place?

For years, companies have been focused on building a lean supply chain management strategy, which optimizes for cost but often results in low inventories. However, they weren’t always designing flexibility and agility into their supply chains, making it difficult for many to pivot in response to supply and demand shocks.

When factories in China shut down, many manufacturers didn’t have a reliable second source to obtain high quality components at scale, which impacted the smooth functioning of their supply chain. While relying on a single source is cost effective most of the time, it can be crippling in the face of unforeseen disruption.

Interestingly, this global pandemic has revealed a certain level of preparedness that laggard adopters, such as those relying on traditional or custom systems, are lacking. On the flip side, COVID-19 is validating for those companies that already have a high degree of automation and remote access to critical business applications. These nimbler companies’ workforces can manage systems from browsers on home computers, tablets, even smartphones – enabling their business to run uninterrupted. Companies that haven’t automated have been forced to shut down until they can upgrade their operations or physically return to the jobsite. Both have obvious downsides in our current climate.

So how exactly can companies in supply chain intensive industries overcome the bull whip effect?

1.      Have real-time understanding of buyer trends and supply

While most companies have invested in ERP and supply chain planning systems, few have invested in ecosystem integration capabilities that provide a real-time view of demand and supply. This means they’re dependent on batch updates to report on supply chain status, and also lack end-to-end visibility across their order-to-cash and procure-to-pay processes. Superior resource planning calls for a firm understanding of each sales touch point, be it online or from a cash register. Point-of-sale data yields insightful demand trends – if you can aggregate it into one place and highlight those trends.

Unfortunately, panic buying creates an unstable basis for correctly understanding and predicting product demand. This means real-time data aggregation is more critical now than ever. In a pre-COVID-19 world, suppliers could create larger data sets that produce more long-term predictability. Now, manufacturers and suppliers need to rely on smaller data sets generated in near real-time in order to understand and communicate supply and demand. This method calls for greater agility across your supply chain integration points in order to respond to real-time changes.

2.       Foster a transparent digital relationship with suppliers

Even with real-time data and holistic understanding of your sales trends, your data will be useless if you don’t have the agility within your supplier network to act on what that data is telling you. We often see companies with spotless data integration, but who lack the ability to leverage supplier networks during a surge in demand.

For example, an agile company can connect with multiple suppliers for the same product. If Supplier A has 50 cases of toilet paper for $800, and Supplier B has 25 cases for $750, the grocer can purchase all 50 from Supplier A, and then source the rest from Supplier B based on prior buyer trends. By maintaining a holistic view of the supplier ecosystem and expanding beyond just one supplier, a company can find the best price at any point in time and refactor supplier integrations accordingly.

3.       Learn to quickly onboard new suppliers as needed

Having a fixed supplier network that could be negatively impacted by disruption is not the best operational strategy in times of crisis. Therefore, it’s critical to be able to onboard new suppliers in a timely manner. For instance, if New York’s high infection rates mean a decrease in its manufacturing output, it’s likely other areas with lower infection rates will be ramping up.

For a grocer, the ability to quickly onboard a new supplier from a lesser infected region could mean the difference between having ample stock of high demand items like bottled water and canned goods, or not. Not only will this type of agility relieve internal stress, it creates customer loyalty and trust.

4.       Create revenue-driving extensions of the demand chain

Oftentimes the bullwhip effect is precipitated by demand in so-called “brick and mortar” locations, such as supermarkets, or department stores. While more and more of these businesses also have online sales channels, they could add more digital channels to alleviate the effects of poor demand on their business.

With today’s e-commerce marketplaces and modern integration technology, virtually any business can transform into a bona fide “digital ecosystem,” with limitless growth potential. Such “omnichannel” strategies are a clear route to creating valuable new revenue streams.

With some authorities predicting COVID-19’s return in fall of 2020, businesses that have already seen the consequences of being ill-prepared for a global pandemic will want to act now to ensure they are adequately prepared for a possible second wave. Leveraging a modern integration platform to bring more agility into your supply chain will help you beat the bull whip effect and compete from a position of strength -- or at least be in a more advantageous position than you were prior to the pandemic.