Tag: bullwhip effect

OM in the News: The Bullwhip Effect Hits Tyson Foods

Two years ago, chicken breasts were coming down the processing line at Tyson Foods’  Arkansas plant so fast the machine slicing them into 15-gram nuggets for Chick-fil-A would occasionally break down.

Now, the line has stopped—for good.

After pushing its plants and staff to increase production of nuggets, breasts and wings as the Covid-19 pandemic eased, Tyson is pulling back, reports The Wall Street Journal (Sept. 6, 2023). The company announced the Arkansas plant would close, one of six planned shutdowns in an effort to cut costs. Tyson’s chicken business, which produces 1/5 of the U.S. supply, is grappling with flat demand and a drop in wholesale prices, which some industry experts say Tyson itself exacerbated by ramping up production.

As the pandemic eased, demand for chicken surged as consumers headed back to restaurants, and fast-food chains capitalized on a craze for fried-chicken sandwiches. Chicken companies such as Tyson, Pilgrim’s Pride and Wayne-Sanderson Farms were challenged to keep up, as processing-plant jobs remained hard to fill.

Pumping out more poultry at each plant and capturing more market share from competitors became a central part of Tyson’s efforts to fix its struggling chicken business, which already had problems hatching enough birds and staffing its processing lines.

The company was killing 37 million birds a week at its processing plants during 2021. By 2022, the company had boosted that to 39 million, and Tyson said it intended to process 42 million chickens a week by the end of the 2023 to boost volume and gain market share.

Nationally, about 162 million chickens on average were slaughtered weekly during in 2021. That number rose to 164 million in 2022. As it pushed to produce more chicken, in a classic bullwhip effect (see pages 473-475 in Supp. 11 of your Heizer/Render/Munson text), Tyson miscalculated demand. In late 2022, the company wrongly predicted how much chicken grocery stores would buy for their meat cases and produced too much of the wrong type.

Tyson closed down two plants in May, laying off nearly 1,700 workers. (The company ousted the president of its poultry business shortly thereafter). Last month, the company closed an additional four plants, which employ about 3,000 workers. The four account for about 10% of its slaughter capacity.

Classroom discussion questions:

  1. Explain the bullwhip effect.
  2. What mistakes did Tyson make?

Video Tip: The Bullwhip Effect Hits Stores This Season

This could be the year of clearances and deals. Retailers have seen a surge of inventory as they found themselves carrying too much stuff that consumers no longer want so much of, including basic apparel, home appliances and furniture. says The Wall Street Journal (Oct. 5. 2022) in this 4 minute video (click here).

Ahead of last holiday season, retailers ordered with plenty of cushion in mind to prevent empty shelves. Now a bullwhip effect, which we discuss in Supplement 11, could be in store. The latest indication was from Kohl’s which reported that inventory rose 40% compared with a year earlier.  Walmart and Target saw inventory swell by 32% and 43%. Off-price retailers Burlington and Ross Stores indicated that they also saw closeout inventory start to skyrocket.

There are broadly two shifts going on that threw a wrench to retailers’ inventory planning. One is a shift from discretionary to essentials, which both Walmart and Target saw. And within discretionary spending, consumers are still spending, but getting pickier with their dollars. Kohl’s, Target and TJX Cos. all said sales in the home category have declined.

Spending instead is shifting to what shoppers need as they go back to the office, attend concerts and travel again such as dressier apparel, makeup and luggage. This isn’t an entirely surprising or alarming picture of consumer health, but low-income consumers clearly are feeling the pinch from inflation, which outpaced wage growth for 5 consecutive months. Walmart, for example, said some consumers are switching from gallons of milk to half gallons. They also are switching away from name brands to private label on categories such as deli and lunch meat.

Retailers with slower inventory turns—such as department stores and apparel sellers—might find current conditions especially difficult to navigate. On average, Macy’s  and Kohl’s sold and replaced inventory 3.88 times and 4.34 times, respectively, last year. By contrast, Walmart, Target and off-price retailer TJX all turn over inventory more than 6 times a year.

Retailers were on a high last year when everything—supply chain delays, low inventory, homebound customers and stimulus checks— conspired to feed their bottom lines. A comedown was inevitable.

Classroom discussion questions:

  1. Explain how and why the bullwhip effect takes place.
  2. Inventory turns are illustrated in Example 3 in Chapter 11 (see page 460). What do they mean and why are they an important measure of supply chain performance?

OM in the News: The Bullwhip Flares Again

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.

bullwhip

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:

  1. Explain the bullwhip effect in layman’s terms.
  2. Name several items that were impacted by bullwhip during or after the pandemic.

OM in the News: Food Supply Chain Problems

Americans are returning to restaurants and bars as Covid-19 restrictions come down, adding new strains in food supply chains, reports The Wall Street Journal (May 22-23, 2021).

Distributors are facing shortages of everyday products like chicken parts, as well as difficulty in finding workers and surging transportation costs as companies effectively try to reverse the big changes in food services that came as coronavirus lockdowns spread across the U.S. last year.

restaurant

“The start up has been, in many ways, as difficult as the shutdown…Everybody is trying to turn it on immediately and the capacity might not be there,” says an industry CEO. Shortages of raw materials are leading to erratic deliveries of items that usually arrive on predictable schedules. That disrupts entire supply chains.

The food sector is seeing a version of the bullwhip effect (as discussed in Supp. 11 of your Heizer/Render/Munson OM text), where companies that have pulled back their operations seek to rapidly scale up on signs of improving demand, leaving suppliers scrambling to keep up. Food suppliers allocated more capacity to retail customers like grocery chains during the pandemic leaving distributors short of some products as restaurants and institutional food-service operations open back up.

Demand has changed too. Restaurants that remained open slimmed down their menus during the pandemic and shifted from fresh ingredients for salad bars and buffets to using more prepackaged foods for takeout and delivery operations. Restaurants, hotels and institutional food-service operations are coping with big price swings on staple ingredients and erratic availability. The cost of pepperoni jumped 60% over the past five weeks while flour and tofu are out of stock about half the time for some restaurants.

The lack of available workers may be the biggest strain on the sector since the impact cascades from the production facilities to trucking to distribution centers.

Classroom discussion questions:

  1. Explain the impact of the bullwhip effect on the food supply chain.
  2. What can restaurants do overcome the shortages?

OM in the News: Too Much Toilet Paper

After a year in which toilet-tissue shortages left consumers scrambling for squares, sales are plummeting to below pre-pandemic levels. writes The Wall Street Journal (April 14, 2021). Recent sales fell more than 4% from the same period a year earlier, before the spread of Covid-19. The decline, which comes even though legions of Americans continue to work and attend school from home, indicates last year’s stockpiling is starting to have an effect on sales.

toilet paper

“You never knew when you weren’t going to be able to get it, so every time we went out we got some,” said one New Rochelle, N.Y. woman. “They just kept amassing.” She still has 54 rolls, stored in various places throughout her home: in a guest room, the back of a linen closet, the laundry room in the basement. (This is embarrassing–I just counted that my wife and I have 66 rolls in our closet and laundry room!)

Demand for toilet paper shot up in the outbreak’s initial weeks, doubling in the second week of March, and remained elevated throughout most of 2020. Americans spent more than $11 billion on toilet paper last year, up from $9 billion in a typical year.

A rush on other household staples, from disinfecting wipes to paper towels, led to equally or more-severe shortages of those products. But none triggered consumers’ anxieties as much as toilet paper. Walmart’s CEO, on a “Today Show” appearance in April 2020, urged consumers to stop buying so much toilet paper.

Tissue used in office bathrooms is generally built at different plants, and funneled through a different supply chain, than toilet paper sold to consumers at stores. So the sudden drop in demand for public-restroom quality tissue didn’t lead to a supply surplus of the higher-end stuff. Meantime, whereas companies were able to more quickly increase capacity for cleaning products, hand sanitizer and other in-demand items, doing so for toilet paper was less feasible given that making toilet paper in bulk requires 4-story-tall machinery that costs billions of dollars.

Classroom discussion questions:

  1. Relate this article’s topic to our discussion of the “bullwhip effect” in Supp. 11 of your text.
  2. How many of you also hoarded toilet paper last year?

OM in the News: COVID-19 and the Bullwhip Effect

Supply chains typically get beaten up during recessions. As sales decline, companies draw down inventories to conserve cash instead of purchasing more parts and materials. Entire pipelines of supplies get cleaned out.

When demand improves, even modestly, suppliers respond with an outsize increase in production to restock empty warehouses and assembly plants. The bullwhip effect, which is discussed in Supplement 11 of your Heizer/Render/Munson text, ripples all along supply chains, generating unusually large orders for suppliers that are far from end customers. This time, writes The Wall Street Journal (Feb. 23, 2021), the bullwhip effect is even more pronounced because demand for consumer products has been extraordinarily high. At the same time, companies are placing supersize orders to compensate for the extra time it takes to procure supplies from factories and freight operators constrained by global efforts to contain the coronavirus. That’s exacerbating the strain on supply chains. 

Malibu Boats of Loudon, Tenn., has struggled with supply shortages as it tries to meet soaring demand

A decadeslong devotion to making factories smaller, cheaper and more efficient made companies more vulnerable to the distortions of the bullwhip effect. To cut costs and boost profits, U.S. companies outsourced operations and whittled inventories. Many of their suppliers did the same. When demand increased unexpectedly last year, the same companies all placed orders at once into increasingly diffuse networks of far-flung suppliers. The result was a bullwhip crack more dramatic than usual that could eventually cause an oversupply in some industries. Everybody is saying, “I need to order a lot more.”

 Malibu Boats, for example, was preparing for a pandemic downturn as it stopped production. To the company’s surprise, within weeks its dealers started reporting many new customers. When Malibu reopened last spring, it ramped up production, but some suppliers were slow to respond. This lead to shortages of components for engines, windshields, and wiring harnesses. “The global supply chain is not as strong as people thought,” said one CEO. And companies have figured out that putting all their eggs in China’s basket is risky.

Classroom discussion questions:

  1. Explain the bullwhip effect in simple terms.
  2. What industries have been most effected by the pandemic in terms of the bullwhip?

OM in the News: Where OM Data Analytics Meets Chocolate

Todd Ferris uses advanced analytics to find solution to problems like ways to route peanuts.

Todd Ferris is a principal data scientist for Hershey Chocolates. He can track a cocoa bean from harvest to chocolate bar on a store shelf.  Here are some excerpts from  The Wall Street Journal (March 29, 2019)  interview that you might use in class when you cover our new chapter, Module G,  Applying Analytics to Big Data in Operations Management:

Our team goes after complex problems across the supply chain. Can we see our products from sourcing a cocoa bean in Western Africa all the way to manufacturing, shipping and getting it to the customers? It’s very difficult to keep track of all that data. 

We are always fighting this bullwhip effect, the phenomenon of small changes at one end of the supply chain creating huge issues once you get back to manufacturing. If customer demand varies by 100 chocolate bars at retail, by the time that information gets back to us at manufacturing that signal may be 1,000 bars. This creates a lot of inefficiencies.

We use a programming language called R, a counterpart to Python. You’ll do your modeling inside one of those programs; we’ll use SQL to access, manipulate and filter data before we bring it into analytical tools.

You can do procurement, like forecasting the health of crops or their availability. I’ve worked on manpower analysis—how we shape our manpower in our manufacturing plants in the best manner possible. We just worked on the best way to route peanuts from our suppliers to our plants. On one side we are forecasting crops and on the other we’re at the store level trying to determine if we have too much inventory or too little. We try to predict what’s going to happen and then make sense of how we need to respond.

Classroom discussion questions:

  1. Describe the “bullwhip effect” and its importance in OM.
  2. How would you describe “data analytics” to an executive and explain its role?

Guest Post: The Rise, Fall, and Rise Again of the Bullwhip Effect

Today’s guest Post comes from Kelly Thomas, who is a supply chain management professional and executive at JDA Software.

Demand variability is among the most important challenges facing supply chain managers today. Demand variability that is not properly managed manifests itself in terms of the well-known bullwhip effect, which results in large inefficiencies. Jay Forrester first described the bullwhip effect in his seminal work Industrial Dynamics, published in 1961. This effect says that a change in independent demand at the consumer level leads to increasing swings in dependent demand at each point upstream in the supply chain. This effect held sway over supply chains since the beginning of the industrial revolution.

However, during the mid 2000s, it appeared that the bullwhip effect had been reduced; studies by the Federal Reserve show the bullwhip effect attenuating dramatically from the beginning of the 1990s through the middle 2000s. These studies attributed this to the widespread adoption of improved supply chain management practices and supporting information technologies. These same studies postulated the overall economy had entered a new era of lower variability.

As we know by now, the Great Recession of 2008-2009 and its lingering effects have changed a lot of this thinking. It appears the bullwhip effect has come back with a vengeance. Increasing variability caused by demand uncertainty, globalization, new product introduction, and escalating customer expectations have outstripped companies’ abilities to effectively manage their supply chains. This has led to increased interest in supply chain segmentation, driving the supply chain from independent demand, visibility and synchronization, and optimizing the use of production and inventory resources.

To support these needs, companies are now going through a technology refresh phase to support higher levels of sophistication in such areas as S&OP, demand management, order promising, inventory optimization, and customer collaboration. For example, companies such as Dell and Sony are transforming their supply chains to stay ahead of the variability curve.