Thursday, October 14, 2021
The Bullwhip effect on supply chains
This tells us that selected disruptions can turn an orderly supply chain chaotic. This can be done as an act of war. Today the number of ships in harbor is half what it should be and with ships standing offshore, it is deliberately done.
all this is meant to disrupt decision making and also finance. The effect will be visible and memorable and those who lack in house inventories will possibly suffer some. most households likely will do well enough.
At least when we see this happening, we will know it is also a temporary efect only displacing inventories.
The bullwhip effect
September 29, 2021
Supply chain whiplash
Toilet paper. Bicycles. Semiconductors. Over the past two years, the world has faced a series of shortages that in turn disrupted the supply of everything from cars to gaming consoles to household appliances. The pandemic, of course, is largely to blame. But there’s an economic phenomenon that helps explain how things got so bad so quickly: the bullwhip effect.
The bullwhip effect describes how small changes in demand for certain goods can create disruptions that ripple through a supply chain, causing bigger and bigger headaches. With mass layoffs, government stimulus spending, the rise of remote work, and an ever-changing landscape of lockdowns and re-openings, the global economy has seen massive shifts in consumer spending since 2019. The bullwhip effect has made those wild demand swings all but impossible for manufacturers to keep up with.
It’s not just a pandemic problem. Economists have been exploring the consequences of the bullwhip effect since the 1960s, and it’s a constant source of worry for supply chain managers.
Whips at the ready, we’re going on a supply chain adventure.
169: Industries affected by the global chip shortage, according to a Goldman Sachs estimate
1%: Estimated US GDP growth erased in 2021 thanks to the chip shortage
78%: Increase in bicycle sales in Q1 of 2021 compared to 38% in Q1 of 2020
$1.4 billion: Amount Americans spent on toilet paper in the first four weeks of the pandemic—a 104% increase from the same period a year earlier
761 mph (1,225 km/h): The speed a bullwhip has to travel to break the sound barrier
EXPLAIN IT LIKE I’M 5
What is the bullwhip effect?
The bullwhip effect describes how demand signals get exaggerated as they travel through a supply chain. To understand how it works, it helps to remember a few key facts:
Different people control different segments of a supply chain. The manager of a convenience store works separately from the owner of a wholesale food distributor who works separately from the floor manager at a Doritos factory.
Those people often don’t communicate well. A factory manager has limited information about sales at individual stores, and a store manager knows little about production at the factory.
Every person is trying to carefully balance their stock of goods. No one wants to order or produce too much of a good, but no one wants to have too little, either.
The bullwhip effect happens because managers tend to overreact to changes in demand. A classic example comes from Stanford Business School professors Hau Lee, V. Padmanabhan, and Seungjin Whang, who coined the phrase “bullwhip effect” in a 1997 paper describing a head-scratching discovery at Proctor & Gamble. Company executives noticed big swings in wholesale orders for diapers, even though retail sales were relatively stable.
The executives realized that retail stores were seeing small fluctuations in diaper sales. When sales went up a smidge, the retailers would order extra diapers from their wholesale suppliers to avoid running out of stock. When sales fell, retailers would cut their orders. The problem was, retailers might react to, say, a 10% increase in diaper sales by ordering 20% more diapers, because they were scared of running out of stock. The wholesalers, seeing a sudden 20% jump in orders, might panic and raise their diaper orders to Proctor & Gamble by 35%. P&G would then find itself ramping up diaper production by 50% to meet a major spike in order volume—even though demand hadn’t actually changed much.
Just as a cowboy can move his wrist a few inches and send his bullwhip flying several feet through the air, consumers can change their spending habits just a little bit and cause factories to wildly change their production.
Which of these is NOT a cause of the bullwhip effect?
Free return policiesNatural fluctuations in demandInaccurate predictions about future salesOvercommunication between retailers and suppliers
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The bullwhip was the first human invention to break the sound barrier. Humans were snapping strands of leather at Mach 1 about 5,000 years before Chuck Yeager reached the speed of sound in his Bell X-1 rocket plane in 1947.
PERSON OF INTEREST
The father of the “Forrester effect”
MIT management professor Jay Wright Forrester was the first person to describe the bullwhip effect. (He didn’t come up with a catchy name for it, so for decades it was simply known as the “Forrester effect.”) But Forrester’s foray into management science was more of a side project for a man whose main concern was shaping the development and use of computers.
In the ’40s and ’50s, Forrester headed MIT’s Project Whirlwind, which created one of the first digital computers. Forrester is credited with key discoveries that led to the invention of semiconductors and random access memory (RAM).
In the ’60s, Forrester founded the field of “system dynamics,” which used computers to model complex systems. His first case study was the world of business, which led him to publish the book Industrial Dynamics in 1961 and describe the bullwhip effect. In 1969, he moved on to modeling cities and wrote Urban Dynamics, which strongly influenced the development of Sim City.
His 1971 book World Dynamics laid the theoretical groundwork for the controversial bestseller Limits to Growth, which warned humanity’s unsustainable resource consumption would lead to serious environmental consequences. The book, and Forrester’s models, faced serious pushback at publication—but their basic message proved depressingly prescient.
The beer game
In 1961, Jay Forrester developed the “beer game” as a way to model the bullwhip effect for students. It’s now a common teaching tool in business schools, where professors hope their pupils will learn to avoid creating supply chain chaos when they become managers at major companies.
In the game, each player controls a different piece of the supply chain for beer: the retailer, the wholesaler, the regional distributor, and the manufacturer. Every turn, customers buy a certain amount of beer from the retailer, and every player puts in an order for more beer from their supplier. The trouble is, orders take several turns to arrive, and no one knows what’s happening in any other piece of the supply chain. Inevitably, small changes in beer consumption lead to panic ordering, shortages of beer, and massive spikes and crashes in beer production.
You can sign up for an account and play a full version of the game for free using the Beer Game App, or get a basic idea from this short demo. Feeling crafty? Set up the old school pen and paper version that Forrester created back in the ’60s.
“Under pressure, we focus on managing our own piece of the system, trying to keep our own costs low. And when the long-term effects of our short-sighted actions hit home, we blame our customer for ordering erratically, and our supplier for delivering late. Understanding how well-intentioned, intelligent people can create an outcome no one expected and no one wants is one of the profound lessons of the game.”
—John D. Sterman, a professor at MIT’s Sloan School of Management, describing the surprisingly emotional experience of playing the beer game