pandemic – The OM Blog by Heizer, Render, & Munson

OM in the News: Walmart and “On-time, In-full” Shipments

This is the latest shift in a logistics effort that has historically left companies scrambling to meet the retail giant’s demands.

Walmart wants suppliers to deliver shipments on time 90% of the time and in full 95% of the time, down from a 98% benchmark for both measures set in 2020 amid a surge in consumer demand. The change marks a significant lowering of Walmart’s “on-time, in-full” (or OTIF) thresholds that are meant to increase the efficiency of Walmart’s sprawling U.S. logistics network of distribution centers serving the company’s thousands of stores.

Walmart has been working to get tighter control over its inventory as it fulfills more online orders from its stores and competes on home-delivery speed with e-commerce giant Amazon.com. Vendors that fall short of Walmart’s on-time, in-full targets face fines worth 3% of the cost of the goods that didn’t arrive on time or in full.

Walmart last shifted its thresholds in September 2020, when it tightened the requirements as supply-chain disruptions left many store shelves empty of high-demand products during the Covid-19 pandemic. The latest change comes as the retailer returns to more normal ordering patterns after years of struggling with sharp fluctuations in stocking levels during the pandemic. The greater equilibrium in supply chains has helped relieve pressure on suppliers.

Consumer packaged-goods vendors delivered an average of 84% of orders on time in 2023. Walmart’s lowered thresholds should be welcome news to vendors that have struggled to meet the 98% benchmarks. “Very, very rarely do things go perfectly as planned with deliveries. Trucks break down or get caught in traffic, and orders are sometimes packed with the wrong quantity and mix of items, such as orange-flavored soda instead of grapefruit,” said one industry expert.

Classroom discussion questions:

Why is Walmart changing its OTIF policy?
How does impact suppliers?

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:

Explain the bullwhip effect.
What mistakes did Tyson make?

OM in the News: New York City’s Inventory Bust

Just last week we posted a blog by Howard Weiss that dealt with “stockpiling.” Now comes a surprising revelation on how New York City’s then mayor Bill de Blasio stockpiled over $225 million in pandemic-related supplies that are now almost worthless.

Since last summer, the city has systematically tried to auction off millions of dollars worth of Covid-related personal protective equipment (PPE) and medical supplies — gowns, face shields, hand sanitizer, KN95 masks, N95 masks — that it decided are no longer needed. Many of these supplies remain in their original packaging and are brand-new. About 9.5 million items purchased by NYC for $224 million have been auctioned so far, garnering about $1/2 million, reports THE CITY (a NY weekly on Feb.21, 2023) .

A top NYC official fretted in July 2022 that if the public learned about the auctions, it would prompt an inquiry “about the city’s over-buying during Covid,” an email reveals. So officials “crafted talking points to address why the city is auctioning off PPE while Covid cases continue to persist.”

Here are a few examples:

Taxpayers paid $12 million for 3,000 “bridge vent” breathing devices. The devices were unloaded, unused, in an auction described as “non-functioning medical equipment sold as scrap metal.” A junk dealer picked up the entire $12 million, 500,000-pound load — for only $24,600. It took 28 truckloads to cart the stuff away.

In many cases, the city paid wildly inflated prices. One company sold the city 50,000 face shields at $6.70 per shield when the average open market price was $3.67. So taxpayers paid $335,000 for items that on average should have cost $183,500. This month, the city put up for auction a lot containing 701,100 face shields, with an opening bid of $1,000. That’s less than one penny per shield.

Huge discounts were also available for isolation gowns. NYC has been trying to sell off millions of these — still packed in their original boxes — for a tiny fraction of what taxpayers paid for them. Last month it offered a lot of 97,850 of their gowns for $1,000. It got zero bids and put the same lot up again last week, dropping the opening price to $280.

As of last week, taxpayers had shelled out $17.8 million for warehousing 13,500 pallets of these stacked medical goods. A city official recommended more aggressive marketing of auctions, lowering starting bids, breaking lots into smaller purchases, and giving some of the stuff away “in parks, subway stations.” And one other option: “destroying whatever can’t be auctioned.”

Classroom discussion questions:

Evaluate this inventory situation.
How would you resolve the problem?

OM in the News: Pilots and the Airline Capacity Problem

Airlines have complained about a shortage of pilots for several years, but they made it worse during the pandemic by encouraging pilots to take early retirement when air travel collapsed in 2020. About 10,000 pilots have left the field since then, reports the Telegraph Herald (Feb. 10. 2023).

Southwest Airlines has more than 700 planes but parks 40 to 45 of them each day because it lacks pilots to fly them. That amounts to more than 200 flights a day or 8% of Southwest’s flying.

United Airlines’ CEO said the lack of pilots will continue to prevent airlines from expanding as much as they would like to take advantage of strong travel demand. “Pilots are and will remain a significant constraint on capacity,” he said.

The pilot shortage is most severe at smaller carriers that don’t pay as well and serve as stepping stones to the big airlines. Many of them operate regional flights under the names of American Eagle, United Express and Delta Connection. Those carriers have parked more than 400 planes for lack of pilots, and air service is collapsing as a result. Regional airlines are short by 8,000 pilots and a dozen smaller cities have lost all air service — about 50 more have lost half or more of their flights — despite the broad rise in travel demand. (The median annual pay for U.S. airline pilots last year topped $200,000 by the way).

If a pilot calls in sick, often there is no one immediately available to replace him or her, and that is leaving tens of thousands of travelers stranded. The lack of pilots contributed to a 52% increase in flight cancellations last year compared with 2021.

The shortage started even before the pandemic. Over the past decade or two, industry officials warned it was coming as travel boomed and thousands of U.S. pilots approached mandatory retirement age. The Federal Aviation Administration raised that age from 60 to 65 in 2007, which just pushed the problem off for a few years.

Classroom discussion questions:

Supplement 7 (Capacity and Constraint Management) provides what tips for when demand exceeds capacity?
What is the solution for regional carriers? For the major carriers?

OM in the News: Did the Pandemic Kill JIT?

Retailers struggle with an inventory glut and overstocked warehouses

Just-in-time supply chains took a lot of heat during the pandemic after empty shelves laid bare the pitfalls of ordering as little inventory as possible in the name of efficiency. But, with retailers now struggling with too much inventory, can the lean model, our topic in Chapter 16, be making a comeback?

Experts are mixed: While some believe that JIT has no place in the supply chains of the future, others say a modified version of the strategy will still be necessary to maintain resilience while keeping costs down. Here are the responses of three SCM experts as reported in Supply Chain Dive (Nov. 29, 2022):

CEO of LMA Consulting. JIT is not dead; however, the days of taking the concept literally and ordering inventory to arrive ‘JIT’ is dead. If ordering strategic inventory from China, you should account for likely demand and supply volatility and stockpile inventory appropriately. But most businesses took JIT literally, assuming the supply chain would continue to support their needs. They did not adjust their inventory profiles and were left empty handed during the pandemic. They are now assessing supply chain risk, reevaluating their supply chain footprint, dual sourcing key products and determining where to locate strategic capacity and inventory.

CEO of Assoc. for SCM. The pandemic blew a fuse, revealing flaws to JIT. JIT promotes efficiency and product quality, but sometimes at the expense of resilience, and therefore isn’t equipped to manage the turbulence of global events, like COVID-19, weather disasters and the Russia-Ukraine conflict. Now, around 64% of companies are pivoting from JIT to just-in-case to circumvent liability. This system depends on extra stock and buffers for high-demand products. A modified version of JIT can help where companies only stockpile certain vulnerable items to avoid fallout from potential disruptions. Consumers still have an expectation of high variety, rapid delivery and reasonable cost that defined JIT supply chains.

SCM Professor at Michigan State U. What we are seeing is the decision to reevaluate safety inventory levels. Safety inventories are a function of uncertainty of demand as well as uncertainty of supply. COVID-19 has exacerbated both forms of uncertainty, which results in companies holding more safety inventories to achieve the same target service levels. As we see supply chains normalize through 2023, we would expect companies to reduce their levels of safety inventory to correspond to the “new normal” levels of demand and supply uncertainty.

Classroom discussion questions:

Explain the difference between JIT and “just-in-case” inventory.
What was the impact of the pandemic on JIT?

OM in the News: Forecasting Fertilizer

Scotts Miracle-Gro’s warehouse at its Ohio headquarters this month.

Chapter 4 of your Heizer/Render/Munson text discusses many widely used forecasting techniques. And most companies use exactly these techniques. However, historical based techniques proved inadequate in a pandemic. Scotts Miracle-Gro fertilizer is a case in point. As The Wall Street Journal (Sept. 16, 2022) writes: “Never in the modern global economy have businesses seen such a rapid shift from shortage to glut.”

Scotts was in the middle of its selling season in 2020 when Covid-19 shut down much of the global economy. Scotts’ production had to respond, but like many firms, response was chaotic with production disruptions caused by sickness and an abundance of caution which eliminated entire shifts. It also soon became clear that homebound families were gardening more. Keeping stores stocked became a problem. And in spite of shortages, sales were up 20% in 2020 and another 10% in 2021.

So just months ago, Scotts was bracing for the biggest summer ever. After two years of struggling to fill store shelves, the company had ramped up production to catch up with consumer demand for lawn seed, fertilizer and other garden products. Massive investments in new manufacturing capacity were about to pay off as Scotts prepared for the usual rush of May orders from retailers looking to replenish their stocks. The CFO assured investors that Scotts was in a good place on inventory and that the firm was expecting banner 2022 sales.

But the orders never came. The pandemic was over, and inflation hit. Retailers cut orders. Scotts has cut 450 jobs and more layoffs are coming. Production schedules have been cut. Available cash is a fraction of what it was. Nobody is getting bonuses. Scotts was largely a casualty of bloated inventory at big retailers like Walmart, Target and Home Depot. Those companies didn’t foresee the sharp reversal in buying behavior that has taken place in recent months as shoppers, squeezed by inflation, cut back on furniture, electronics and other goods and shifted spending to travel, food and fuel.

Classroom discussion questions:
1. Chapter 4 discusses seasonal adjustments to forecasts. How much would seasonal adjustments have helped Scotts in the past two years?
2. Your text (see page 138) suggests a forecasting technique know as Stagger Charts. How might Scotts implement this technique?

OM in the News: Airlines and a Slew of Operations Issues

“Airlines have found that they can’t sustain the higher levels of flying they had hoped to offer to capitalize on rising demand,” writes The Wall Street Journal (July 22, 2022). Staffing shortfalls, training logjams and constraints at overwhelmed European airports in particular are stifling their resurgence and forcing them into more restraint. Airlines are reining in their schedules for at least the rest of this year—not because they can’t fill their planes, but to avoid costly OM stumbles.

American’s travel has surpassed 2019 levels and remains strong. But its third-quarter flying capacity will be 8% to 10% lower than in 2019 as the airline pulls back capacity to build additional buffer into its schedule. The weather in June was challenging, with significant issues on 27 days that overwhelmed the airline. It canceled over 5% of flights that month.

United and Delta have also said they would cap growth in the coming months to run more reliably. Those pullbacks and efforts to avoid delays and cancellations add to the cost pressures. Delta expects to pay $700 million in overtime and premium pay to help avert disruption, and United will stay overstaffed while it gives priority to reliability over growth. “There is weather, and people do call in sick, and and stuff happens. And the system just doesn’t have any buffer to deal with that,” United’s CEO said.

Carriers needed to bring on thousands of workers to replenish their ranks after offering buyouts and early retirement packages to slash costs in 2020. While their staffing levels are once again nearing prepandemic levels after a recent hiring spree, airlines have are finding that is no longer enough as they work through big backlogs of training requirements and adjust to a workforce comprised of less experienced employees to get back up to full force.

Air-traffic control is also short staffed, leading to problems in highly trafficked corridors such as Florida and New York. And acute staffing shortages at major European hub airports have been a big source of the summer’s chaos. London’s Heathrow Airport is capping the number of departing passengers and asked airlines to stop selling new tickets from the airport for the summer season.

Classroom discussion questions:

Outline the operations issues that airlines are currently facing.
In Supp. 7 (Capacity and Constraint Management in your Heizer/Render/Munson text), we we discuss ways to manage capacity and demand. Which can be employed here?

OM in the News: Chips and Chip-Making

Wolfspeed’s recently opened factory in Marcy, N.Y. faces long wait times for materials.

The drought in chip availability that has hit auto production, raised electronics prices and stoked supply-chain worries in capitals around the globe has a new pain point: a lack of chips needed for the machines that make chips.

The wait time it takes to get machinery for chip-making—one of the world’s most complex and delicate kinds of manufacturing—has extended over recent months. Early in the pandemic it took months from placing an order to receiving the equipment. That time frame has stretched to 2 or 3 years in some cases. Deliveries of previously placed orders are also coming in late.

As a result, hopes of quickly overcoming the global chip shortage are dimming as it stretches into its third year, writes The Wall Street Journal (May 4, 2022). What began as a pandemic-era aberration of supercharged demand for laptops and other chip-hungry gadgets has spiraled into a structural problem for the industry. Now many chip executives say the problem will persist into 2023 and 2024, or even longer.

Tools aren’t the only headache. There is the challenge of hiring people to work in new factories, supply-chain hiccups in essential chemicals and a shortage of “substrates” that connect chips to circuit boards.

Meanwhile, demand is showing little sign of ebbing. Chip-industry sales topped $500 billion for the first time last year and should roughly double by the end of the decade.

Lead times for chip deliveries remain at historic highs. In April they averaged more than 6 months, almost double where they stood at the height of the last boom period. More than 90 chip factories are expected to start production globally between 2020 and 2024—a huge number in an industry where a single manufacturing tool can cost tens of millions of dollars. Even with the supply issues, global equipment sales this year are expected to be more than $100 billion.

Although the demand peaks during the pandemic have eased and higher inflation is weighing on consumer spending, long-term market shifts such as the switch to electric vehicles, growing industrial automation and the ubiquity of smart devices are keeping factories booked up and prolonging the chip shortage.

Classroom discussion questions:

What industries will be impacted by this shortage?
What are the 9 technologies described in Chapter 7 of your Heizer/Render/Munson text and how is each related to this issue?

OM in the News: U.S. Workers to Become More Productive

Workers process fish in Massachusetts. With labor hard to obtain and demand strong, businesses have some of the strongest incentives in years to figure out ways to be more productive

American workers didn’t get much more productive last year, writes The Wall Street Journal (Feb. 4, 2022). But this year could be different. Productivity, as measured by how much the average worker produces in a typical hour, grew at a 6.6% annual rate in the 4th quarter from the previous quarter. For the whole of 2021, productivity only rose 1.9%. That was less than 2020’s 2.4% productivity gain, and the 2% in the pre-pandemic year of 2019.

The U.S. could really use a productivity boost right now. As we point out in Chapter 1, the more a worker can produce in an hour, the lower the labor costs for production go. When productivity growth is high, businesses can sell more, pay workers more and increase profits while leaving prices unchanged.

Better productivity might be on the way. One reason is that the pandemic precipitated changes in the way people work that, if the Covid eases this year, could pay big dividends. The ability to work from home when that is the better option and head into the office when it isn’t, or to meet virtually sometimes and in-person others, can make people far more efficient. The productivity payoff from online menus and ordering systems many restaurants have put in place may arrive as the restaurant business is now recovering.

But the supply chain snarls and product shortages that have beset the economy since the pandemic hit have been, among other things, huge time wasters. If goods start moving more freely, a lot of workers could suddenly become much more productive. And to the extent that car manufacturers and others have products that are fully built except for some hard-to-obtain semiconductors, the installation of some chips could create a real productivity miracle.

Moreover, with labor hard to obtain and demand strong, businesses have some of the strongest incentives in years to figure out ways to be more productive. Given the alternatives of losing sales or seeing labor costs take an ever bigger bite out of profits, many of them will come up with ways to be more efficient that they never would have when wages were stagnant and economic growth was mediocre.

Classroom discussion questions:

How are restaurants increasing productivity? Supermarkets? Airlines?
What is the difference between productivity and multi-factor productivity?

OM in the News: Restocking Inventory and Supply Chain Snarls

Find what you needed this year? It might be because you got someone else’s return. More retailers are working to quickly get like-new returned items back into their systems for sale, writes The Wall Street Journal (Dec. 28, 2021). They are hoping to fill shelves and websites, as supply-chain snarls limit the availability of some new inventory, and reduce the cost of handling returns overall, a bigger expense in recent years as e-commerce sales climb. A product sold online is more likely to be returned than one purchased in a store where a shopper can see and touch it first. Retailers are investing in automation, software and new warehouse systems that help cut the time it takes for returned products to become salable inventory.

American Eagle focused on streamlining returns last year after the pandemic shut down stores, the company’s main return channel. That strategy has paid off, as supply-chain problems this year delayed shipments of some of the company’s bestselling products. The company set up more warehouses to receive, clean and repackage returns, and employed new technology to gauge product demand to determine in advance which items are worth fast-tracking back onto shelves. Returning a product to shelves, depending on its priority status, now takes the chain 6 days, down from 14 days before, and costs around half as much.

Gap took a sales hit of around $300 million this quarter because supply-chain disruptions led to a lack of inventory. The retailer has focused on more efficiently processing returns during the pandemic when e-commerce sales surged and physical stores closed. Gap recently added new automation that helps return products to “in stock” within an hour of arrival at a warehouse, versus a couple of days with the previously manual process.

Walmart has been returning more like-new items to shelves as well as looking for ways to sell gently used products. Walmart already sells refurbished electronics on its website and in some stores, both to become more efficient and help reach the company’s sustainability goals.

In the past, returns were an afterthought. “Just a last thing to be processed, and it takes a while to get back to in-stock or just goes to close out sale. With the supply chain issues, we’ve been working with them to see returns as part of their inventory” said one CEO.

Classroom discussion questions:

Why are returns more important than in the past?
What can firms do to make the return process more efficient?

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OM in the News: Everybody Now Wants Supply Chains to Be ‘Resilient”

Container ships sit moored outside a terminal in Hong Kong , reflecting the disruption of global supply chains.

Supply chains as front-page news? That would have seemed unlikely—until the pandemic exposed many of the vulnerabilities in the far-flung networks that connect manufacturers, suppliers and buyers around the globe.

At first, the impact mostly reflected rapidly shifting patterns in demand, whether in PPEs or work-from-home and consumer products. But a subsequent spending boom left companies struggling to find import capacity on key trade lanes. Flotillas of container ships waited outside ports, wreaking havoc on shipping schedules, and importers struggled to hire enough truck drivers or warehouse workers to move all the cargo. As bottlenecks spread across the economy, they in turn exacerbated the shortages, as companies resorted to excess ordering and stockpiling.

The disruption exposed deep interconnections in supply chains, and just how dependent some sectors like the auto industry were on a few semiconductor factories in Taiwan, or the pharmaceutical sector on Chinese ingredients and chemicals. This challenged companies and governments worldwide to question their dependence on distant suppliers and logistics links that might be prone to interruption.

As a result, “resilience” has become the new watchword, writes The Wall Street Journal (Dec. 11. 2021) . How quickly can a company or a country bounce back from an interruption in the supply of critical products, components or raw materials? What if China suddenly cuts off U.S. access to rare-earth minerals, semiconductor chips or the ingredients used to make antibiotics and other drugs? But if we equate resilience with domestic self-sufficiency, we would have to relocate chip packaging, materials supplies, tool sources and much more from across Asia and Europe.

So who doesn’t want a resilient supply chain? But while there are some things that companies and governments can—and will—do to increase their ability to respond to future shocks, these will all come with costs. For instance, if better resilience means a more geographically diversified supply base, we will get some of it from “China +1” strategies that many companies are already implementing. Politically sensitive gear such as telecom and computing equipment have been in the lead, with firms shifting production to Southeast Asia and Mexico.

Will Americans pay higher prices for goods made in the U.S.A.? That is still a hard sell, so the real question is: how much of that kind of production will move back into the country? Not only will the finished products likely be costlier, but somebody has to pay for the transition costs—the move, the training, bringing in suppliers.

Classroom discussion questions:

Describe the supply chain risks listed in Chapter 11.
What are the difficulties in making supply chains more “resilient”?

OM in the News: Snarled Supply Chains Delay Shipping

Container ships waiting outside the Ports of Long Beach and Los Angeles

Long waits for merchandise deliveries and crippling costs are hobbling the efforts of small and midsize businesses across the U.S. to benefit from the economic recovery after a difficult year.

With retail giants like Walmart and Amazon rushing to restock to meet booming demand from U.S. consumers, smaller competitors are battling over dwindling cargo space on boxships coming in from Asia. Those who want immediate shipments often must pay about 3 times the going freight cost.

Shipping delays and high freight rates are among several challenges facing American businesses, which also are dealing with rising costs for products and a shortage of available labor, writes The Wall Street Journal (July 12, 2021). Things aren’t expected to get better in the near term. Retailers started booking cargo space for year-end holiday merchandise in June, 3 months before the start of the traditional peak shipping season.

The average price to ship a container from China to California is now about $6,000, up 43% since the start of this year and 344% since the start of 2020. The price for a box from Asia to Europe is $13,073, up 130% from the beginning of the year. “Pre-pandemic, we brought in our containers for $3,500 to $4,500 and the waiting time to sail was 10 days,” said the owner of a NY travel bag company. “That container now is $17,000 and it won’t move until September.”

Rising freight costs are the result of disruptions across supply chains that triggered delays at ports and inland distribution networks. They accelerated as a result of bottlenecks in the Suez Canal and congestion at the Southern California gateways and China’s Yantian port.

Rates started rising at the end of last summer as homebound Americans began ordering an unprecedented amount of online goods like furniture, exercise equipment and electronics. Some 700 ships were more than one week late in arriving at West Coast ports during the first five months of 2021, compared with a combined total of 1,500 from 2012 to 2020.

Classroom discussion questions:

What options do retailers have?
What can ports do to increase throughput?

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:

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

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:

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

OM in the News: Manufacturing’s Circular Economy

With a raging pandemic, disrupted supply chains, and a growing scarcity of raw materials, 2021 will present serious challenges to the global manufacturing industry. American Machinist (Jan. 6, 2021) sees a renewed resolve among manufacturers to focus on sustainability and join the circular economy – the strategic effort to eliminate waste and the maintain a continual use of resources. Manufacturers are approaching the circular economy model by rethinking how they design and produce their products with as little waste as possible, how they ship them, and how they approach the growing after-market repair and recycling market.

The circular economy is putting pressure on companies to reexamine their business processes; not only to improve quality and profitability, but because an efficient supply chain consumes less energy, uses fewer resources, and produces less waste. In short, gearing production toward sustainability is good business.

One example is DyeCoo, a textile company that has partnerships with Nike and IKEA, has developed a water-free process for dyeing. Using highly pressurized, recyclable carbon dioxide instead of water, the company can produce its product in half the time, using a fraction of the energy of traditional methods. Another example is Cambrian Innovation. This U.S. company treats wastewater contaminated by industrial processes, not only turning it into clean water, but even producing biogas that can be used to generate clean energy.

Manufacturers also will need to reengineer, and in some cases reimagine, their products. This means building for longevity in a sustainable business plan. If you are a lighting fixture manufacturer selling light as a service to an airport, you will want to produce lightbulbs to last long as possible, to maximize ‘uptime’ and revenue.

Manufacturers are also taking serviceability into account in the design phase. Consider Dell and its Latitude laptop computers, which have been designed with recycling in mind. Using removable batteries, standardized fasteners, and by eliminating mercury and adhesives, Dell is able to produce laptops that are 97% recyclable.

Classroom discussion questions:

How does Supp. 5 in your Heizer/Render/Munson OM text define “circular economy?”
Provide examples of how product design teams can use alternative materials to improve sustainability.