Breaking the Bullwhip

Breaking the Bullwhip

The bullwhip effect is the biggest problem in supply chain and remains persistent despite all advancements in AI, supply forecasting and planning. A better consumer demand signal is needed to feed up the chain.

That’s exactly what MOOS could deliver.

Bullwhip, what?

The bullwhip effect is a phenomenon in supply chain management where small fluctuations in consumer demand cause increasingly larger fluctuations in orders and inventory levels as one moves upstream in the supply chain (from retailers to wholesalers to manufacturers to suppliers). This effect can lead to inefficiencies such as excessive inventory, suboptimal production schedules, and increased costs.

So, what causes the bullwhip effect?

1. Demand Signal Distortion: Small changes in consumer demand are often exaggerated by retailers as they adjust their order quantities to maintain safety stock. These exaggerated orders are then further amplified by wholesalers and manufacturers.
2. Order Batching: Companies often place large orders periodically rather than smaller orders more frequently to benefit from economies of scale, reduce ordering costs, and take advantage of transportation discounts. This batching can lead to large variances in order quantities.
3. Price Fluctuations: Promotional discounts and pricing policies can cause customers to change their buying patterns, leading to irregular ordering and inventory levels throughout the supply chain.
4. Rationing and Shortage Gaming: When products are in short supply, suppliers may ration the available quantities to customers. Anticipating this, customers might over-order to secure their desired quantity, which distorts the true demand.
5. Lead Time Variability: Longer lead times can exacerbate the bullwhip effect because the further out a forecast must predict, the greater the uncertainty and potential for error.

So, what? How bad can it be?

• Increased Inventory Costs: To buffer against demand variability, companies may hold excess inventory, which increases holding costs.
• Reduced Service Levels: Variability in orders can lead to stockouts and delayed shipments, affecting customer satisfaction.
• Inefficient Production: Fluctuating demand causes production schedules to be erratic, leading to increased setup costs and underutilized capacity.
• Poor Demand Forecasting: The distorted demand signals make it challenging to accurately forecast future demand, leading to further inefficiencies.

Estimating the total cost of the Bullwhip effect quickly add up to huge numbers. Let’s consider FMCG and Retail supply chains in US and Europe

1. Inventory Holding Costs of estim $500 billion and holding costs at 25% is $125 billion
2. Production Inefficiencies: let’s say production costs are 60% of $2 trillion in sales, with inefficiencies adding 7%. That’s $84 billion
3. Lost Sales: Assume lost sales due to stockouts are 3.5% of $2 trillion in sales. So, $ 70 billion
4. Increased Transportation Costs: assuming logistics costs are approx. 10% of $2 trillion in sales, with transportation inefficiencies adding 7%. That’s $14 billion

That’s almost 300 billion in total! Annually!! These are obviously very rough estimates, but it’s clearly a big deal.

If it’s so big, why hasn’t it been solved yet?

Understanding and addressing the bullwhip effect is crucial for companies aiming to enhance the efficiency and responsiveness of their supply chain. Key actions are:

1. Improve Communication: Sharing accurate and timely demand information across the supply chain can help reduce uncertainty and variability.
2. Stabilize Prices: Avoiding large price discounts and promotions can help maintain more consistent buying patterns. This is not very realistic in a FMCG setting, with ever increasing promo pressure.
3. Optimize SCM. Synchronize Supply Chain Operations: Aligning order cycles, production schedules, and inventory policies can help smooth out the fluctuations.. Implement Just-in-Time (JIT) Inventory: Reducing inventory levels and relying on timely deliveries can minimize the amplification of order quantities. Reduce Lead Times: Shortening and standardizing lead times can decrease the extent of demand distortion.

The problem is persistent, because it has some structural challenges. First of all, it involves multiple layers and parties (suppliers, manufacturers, distributors, retailers). Global operations add further complexity and potential for information distortion. Secondly, limited visibility, information delays, and outdated data lead to poor decision-making. Just think of POS data being aggregated and delayed by a month. Then there are structural supply chain issues like batching, price fluctuations, shortages, gaming, long and variable lead times. Finally, there might be technological challenges and resistance to sharing, hindering the adoption of solutions.

Ultimately, it’s the consumer demand forecasting inaccuracies that amplify variability across up the chain.There must to be a better way to get a timely and accurate signal of consumer demand….

Our MOOS moonshot

At MOOS we developed a smarter way to capture shelf intelligence with patented paper-based sensors. This creates a better consumer demand signal than relying on aggregated, delayed and expensive PoS data to feed up the chain.

It’s early days, but our concept is proven and we can play a critical role in addressing one of the biggest challenges in SCM.

This is our moonshot. Our big ambition is to truly short-circuit the chain, curb bullwhip effects, and ultimately create less wasteful supply systems.

Get in touch if you want to learn more or are able to help accelerate this mission.