Even though global supply chains are regaining their footing as the Covid-19 pandemic begins to ease, many businesses are about to be knocked off their feet again, reports The Wall Street Journal (June 14, 2021). Uncertainty surrounding the demand predictions needed to drive supply-chain decisions increased markedly during the past 15 months as the ripple effects of the pandemic disrupted supply-and-demand patterns. Toilet paper shelves were empty in most stores as demand spiked 700%, and the construction and travel industries ground to a halt.
Now, pent-up demand, relief checks and vaccinations are spurring spikes in consumer spending, triggering shortages of many products that were overabundant a year ago. From lumber to semiconductors, markets are experiencing price run-ups and stockouts, stoking inflation fears.
The result is that many companies want to kick manufacturing into high gear, replenishing inventory on expectations that today’s surging demand will continue. Firms should follow a “make more” strategy with caution, however, lest they become victims of the bullwhip effect, our topic in Supplement 11 (p. 473-75).
Bullwhip describes how companies typically respond to a spike in demand by ordering more products than required to hedge against potential continued growing demand and to avoid stockouts. This demand distortion is then passed along and amplified at each stage of the supply chain, with orders to suppliers furthest away from the point of sale far removed from the realistic views of consumer demand.
Bullwhip can lead to the rapid expansion of manufacturing capacity, including accelerated procurement of supplies, labor, warehouse space and transportation for finished goods, often at a cost premium. But just as the initial information reporting demand spikes takes time to reach upstream suppliers and manufacturers, so too does information about stabilizing demand. By the time companies reach peak capacity, demand may have stabilized at lower levels, leaving firms with excessive inventory.
The risk of overbuilding is highest in industries that may see demand surge as society reopens, such as tourism, dining and entertainment. Data indicate that consumer spending is already shifting away from “lockdown” spending on things such as home entertainment, workout and home-office equipment, and food-delivery services.
Classroom discussion questions:
- Explain the bullwhip effect in layman’s terms.
- Name several items that were impacted by bullwhip during or after the pandemic.