The Bullwhip Effect: Dealing with the Supply Chain During Covid-19

COVID-19 is unbalancing both demand and supply. With unpredictable buyer demand, as well as supply chain shutdowns in China and some parts of the U.S., it can be hard to keep goods reliably on the shelves.  This can cause the bullwhip effect and create problems all the way up the supply chain.

What is the Bullwhip Effect?

If you wave a whip, the amplitude of the motion increases towards the end of the whip. The bullwhip effect happens when a small variation in demand is perceived as a large one, causing production to change.

As an example: Early in the COVID-19 pandemic in the U.S., there was much hoarding of toilet paper (and much mockery of said hoarding). Shelves were emptied and retail outlets were forced to resort to rationing. By March 23, 70% of U.S. grocery stores were completely out of toilet paper. A few months later, some grocery stores were doing BOGO deals on toilet paper after manufacturers ramped up supply to meet a demand peak that, of course, was short-lived. That’s because people realized there was no real shortage … and they ran out of storage space.

Bullwhip effects can happen when retail and manufacturing aren’t talking to each other, but right now they are caused by unpredictable demand. Shortages of the weirdest things have shown up during the pandemic, including retail flour (there was never a shortage of flour, but there was a shortage of bags), vegetable seeds, yeast, and even bicycles.

What Problems Does the Bullwhip Effect Cause?

This supply chain phenomenon puts stress on production, warehousing, and transportation alike. It is exacerbated by lean and just-in-time inventory, where stores buy only what they need for a given week (indeed, many grocery stores do not have space to store more than that). Add in genuine supply-end shortages, and you end up with retail shortages, sometimes followed by surpluses after demand proves short-lived.

Both shortages and surpluses result in reduced income for manufacturers. You can’t sell what you don’t have, and if you can’t store what you can’t sell you have little choice but to drop the price.

How Can You Protect Your Business From This Effect?

Dealing with the bullwhip effect involves improved automation and real-time understanding. Companies that invested in good ERP and supply chain planning systems have done better than those doing things “the way they’ve always been done.” Here are some things to consider:

1. Real-time data aggregation is vital to spot trends. It’s equally important to understand how panic buying happens, what is being panic bought, and how it does and doesn’t affect overall demand.
2. Communication with vendors and suppliers is vital. In more stable times, for example, manufacturers need to know about promotions and sales. In these times, it’s important to know who has the things you need and be able to switch suppliers (and customers) as needed.
3. Onboarding new suppliers needs to be fast and easy, and needs to be done in a way which does not push aside existing suppliers. The more sources you have, the better.
4. Adding more digital channels can help you deal with lower demand for a product, especially if that lower demand is local. For example, a store may have very low sales in an area where the infection rate is high, but may be able to ship the product to areas where the rate is lower in the meantime.

The key to surviving the bullwhip effect, both during the pandemic and moving forward, is having good inventory controls. SphereWMS offers warehouse management systems that can help you gather and use the real-time data you need to understand demand and avoid costly mistakes. To find out more, contact us today.

Frequently Asked Questions

What is the bullwhip effect in supply chain management?

The bullwhip effect describes how small fluctuations in consumer demand can cause progressively larger swings in orders as they move upstream through the supply chain. A minor increase in retail sales might trigger disproportionately large orders to distributors, manufacturers, and raw material suppliers. This amplification leads to inventory imbalances, production inefficiencies, and increased costs throughout the supply chain.

What causes the bullwhip effect to occur?

Multiple factors contribute to the bullwhip effect including demand forecast errors, order batching practices, price promotions that encourage forward buying, and lack of supply chain visibility. Long lead times worsen the effect by requiring earlier ordering decisions based on uncertain forecasts. Poor communication between supply chain partners and inventory policies like order-up-to levels also amplify demand variability.

How can warehouses help mitigate the bullwhip effect?

Warehouses reduce bullwhip effects by providing real-time inventory visibility to supply chain partners through WMS integration. Implementing vendor-managed inventory programs allows suppliers to make replenishment decisions based on actual consumption data. Cross-docking and just-in-time delivery strategies reduce the need for large safety stocks that trigger order batching behavior.

What role does information sharing play in reducing demand amplification?

Sharing point-of-sale data and actual consumption information with upstream partners eliminates reliance on distorted order signals. Collaborative planning, forecasting, and replenishment programs align supply chain partners around common demand expectations. Real-time visibility into inventory levels throughout the chain enables more accurate and responsive ordering decisions.

How do technology solutions help prevent bullwhip effect problems?

Advanced analytics and demand sensing tools use machine learning to detect demand pattern changes faster than traditional forecasting methods. Supply chain visibility platforms connect trading partners with shared real-time data. Inventory optimization software recommends optimal stock levels and reorder points based on demand variability analysis. These technologies enable more responsive and accurate supply chain planning.