Gemma Thompson

21 August 2020
Topics in this article
  • Cost Optimization

As countries begin to emerge from the turbulence generated by Covid-19, so too does the real impact on trade. Add a global pandemic to a market already brimming with volatility, and it’s no surprise the term unprecedented times has become ironically familiar. Are those with supply chain resilience bouncing back quicker?

A heady mix of plummeting supply brought on by trade restrictions, and sky-rocketing demand from panic-buying, has led to an aftermath of misalignment and serious global supply chain disruption over the past months.

While some witnessed demand disappear almost immediately (think airlines), some supermarkets experienced sales higher than those expected at Christmas. Demand at this level, however, is just a catalyst to disruption in an unprepared supply chain.

As it moves upstream, demand is amplified as retailers, manufacturers, and suppliers each apply an incremental increase to protect their individual operations from shortages. The result is increasing swings in inventory, known in logistic circles as the “bullwhip effect.” As per the analogy, the slightest shift in demand can significantly affect suppliers and leave them struggling to predict demand in an unstable manufacturing environment.

A simple example is eggs. In Singapore, throughout March and April, eggs were in such high demand that they were frequently missing from the shelves. Jump forward to June, and more than 250,000 eggs were thrown away by distributors due to oversupply.

But of course, these challenges have created opportunities too. Just as dye is used to identify a leak, Covid-19 has shone a light on myriad weak spots in the global supply system, which offers an opportunity to learn, improve, and future-proof against serious volatility.

So how can companies overcome, and better yet, prevent the bullwhip effect? Here are four key points that supply chain leaders should consider…

1. Utilize real-time data, in real time

Data is king, and the past few months have proved the faster you can access your data, the faster you can respond (infrastructure allowing, of course). A common contributor to the bullwhip effect is inadequate demand forecasting, and demand spikes brought on by COVID have tested forecast demand planning programs to their limit.

Although forecasting will never be 100% accurate, there are measures that can better prepare organizations for similar future experiences and ensure supply chain resilience. While some opt to move to a demand-driven supply chain management approach, others may wish to introduce methods and models that exploit historical data and market knowledge to maintain a near-as-accurate forecast.

Complementary to this would be a move to automation. With strategic efforts and complex recovery at a peak in the wake of the pandemic, organizations must explore the potential of releasing valuable resources from labor-intensive demand planning procedures to automated and digitalized systems.

Similarly, this valuable, accurate information should be shared with your supply chain – and not just your immediate supplier, but further upstream too. The fewer middle-men for the forecast information to pass through, the less opportunity for it to be amplified.

2. Create options

As globalization surged over recent decades, supply chains have become far-flung, widespread, and as a result, vulnerable to the risks of over-reliance on cheap resources from LEDC’s and lead time implications. The counter to this is to create options within the supply base and explore the idea of shortening your supply chain. In the same way that dealing with suppliers beyond your immediate neighbor does, shortening your supply chain also reduces the number of middle-men – less handling equals less cost, less players to align and potentially an increased chance of supply chain resilience.

Another option is nearshoring – a solution that offers the cost benefits of offshoring but reduces shipping costs and lead times. This strategy is particularly useful in the mitigation of the bullwhip effect as it reduces time to market and means companies can respond more efficiently to changes in demand.

Organizations should also avoid putting all their eggs in one basket. Although dual sourcing comes with challenges associated with controlling consistent quality and effectively doubling the management responsibility, the benefits on offer outweigh by a longshot. Accessing extra capacity, staggering shipments to leverage lead times, and realizing cost flexibility through introducing competition can all come as a result of effective dual sourcing – remedies that would have allowed businesses to cope with the fluctuating demand of a pandemic.

3. Transparency, visibility, and true collaboration

The need to have transparency in your operations is becoming more and more evident as a result of societal pressure and changing consumer values, but how well do you actually know your supply chain?

90% of Fortune 1000 companies have second-tier suppliers in Wuhan, the central Chinese city where the virus was first detected, which caused huge supply disruption, yet many had little or no interaction with them.

Transparency, visibility, and collaboration are very intertwined with the common denominator being trust. Trust between a buyer and supplier is essential if accurate information is to be shared. It must exist in both competences in the parties’ ability and performance, and in the relationship itself. Once achieved, it can lead to true collaboration where both parties are working towards a common goal and are benefitting mutually along the way. In this case, by mitigating the bullwhip effect through the transparency of information, knowledge share improved inventory control and availability of products.

4. Build agility and the all-important supply chain resilience

Agility and resilience – two ever-present buzzwords of modern supply chains, and for good reason. Building agility and resilience requires a strategic focus, where some organizations will require transformative change. Organizations must exhibit alertness, accessibility, decisiveness, speed, and flexibility in order to monitor and respond efficiently and effectively to the volatile market.

Of course, enablers must also be in place. Supplier relationship management, sufficient IT infrastructure, innovation, and demand planning are a handful of the foundations upon which agility and resilience can be built.

This implies that effort is needed to make this work, and as product and resource fluctuations can impact a wide range of business decisions across a wide range of departments, this should be driven from the top, with buy-in at all levels. After all, managing the whole chain is a team sport.

Although there have been many cases of resourcefulness and adaptability, the challenges are far from over. However, on a positive end-note, this offers a real opportunity to drive change in procurement, where supply chain managers have never held more weight within a business.
When some sense of normality resumes, the uptake of suggested practices will be telling as to where companies see bolstering themselves as a priority – perhaps cost saving will take precedence for a little while longer, but visibility and improved alignment is undoubtedly a requirement moving forward.

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