Ravi Chandran
Even the smallest shifts at each node can eventually lead to a significant multiplier effect as you go upstream, and lead to a supply chain shock
As economies went into lockdown and consumers flocked to stock up on essentials, one item in Singapore was overwhelmingly in demand: Eggs.
For periods in March and April, they were frequently missing from grocery shelves, both digital and in store. Distributors in the import-dependent city state scrambled to increase their stocks.
Fast forward to June, when distributors had to throw away more than 250,000 eggs due to oversupply.
The wild swing from deficit to surplus – known in logistics circles as the bullwhip effect – has highlighted the susceptibility of supply chain to such shocks. While a pandemic isn’t required to instigate it, the events this year amplified the impact.
“This is a great example of the bullwhip effect in action,” says Michael Ignatiadis, Head of Supply Chain & Logistics Solutions, JLL Asia Pacific. “Supply chains these days can be very long and complex. Even the smallest shifts at each node can eventually lead to a significant multiplier effect as you go upstream.”
Shocks and volatility
Here’s how the bullwhip effect can unfurl: Consumers jump to the conclusion that there is a shortage of goods the moment they see empty shelves, even though the supply chain might still be functioning smoothly.
Seeing the spike in demand, retailers then place more orders. That in turn forces distributors to request an increase in production.
“There is distortion in the signal which goes all the way upstream to the supplier of raw material,” says Ignatiadis. “This impacts logistics as warehouses are unable to cope with extra volume that hasn’t been matched by sales, leading to obsolete and excess stock.”
He says the core problem is companies’ inability to make accurate forecasts in a volatile environment. This was especially true this year. There was hardly a modern precedent for the pandemic, and so no historical data on which firms could rely.
However, the bullwhip effect can happen even during stable periods. One famed case study is that of the green Volvos in mid-1990s. Faced with an excess of green cars, Volvo’s marketing and sales departments offered them at discounts. When sales of green Volvos spiked, the manufacturing department mistook it as heightened demand and boosted production.
“This happened 30 years ago when supply chains were more linear,” says Ignatiadis, noting how the world is now much more interconnected. Most firms’ supplies are coming from multiple sources. Manufacturing is much more dispersed. Products are assembled in separate locations and are usually at least partially outsourced.
“You can imagine how changes at each point could trigger far-reaching impact in today’s world,” he says.
Space constraints
A problematic result of the bullwhip effect is excessive inventory. Fashion retailers such as H&M and Uniqlo were forced to slash prices during the coronavirus outbreak. Others have cancelled orders, causing distress for suppliers. Around the world, warehouses burgeoning with goods turned container ships into temporary floating storehouses as retail companies tried to slow deliveries in order to save on costs.
But for industries that require a continuous running of the production, such as semiconductors and chemical dyes, factories can’t slow down or stop, which means inventory is stockpiled. Producers try to cope by trying to store inventory as long as possible, for instance at a port, before passing on the storage cost to their clients.
One way to cope with excess inventory is flexible or on-demand warehousing, where leases are shorter, says Rich Thompson, International Director of Supply Chain, JLL.
“Companies that are looking for short-term warehousing space, or that have huge seasonality in their businesses, have been evaluating flex industrial space solutions such as Flexe in U.S.,” Thompson says.
Even before COVID-19, demand for flex warehousing was already on the rise due to e-commerce, which has accelerated volume orders and pushed for greater speed in order fulfilment.
According to Abdul Paravengal, CFO of Shipper, Indonesia-based logistics platform offering on-demand warehousing also as a service, it’s not just e-commerce players who are big users of their services.
“Another client base of ours are suppliers of critical spare parts which require time-bound delivery to avoid downtime costs,” he says. In a sign of how Shipper is growing, the firm had seven warehouses in Indonesia last September. It now has 38 and expects to reach 500 within a few years from now.
Ultimately, the best way to counter the bullwhip effect is through better visibility of the end-to-end supply chain.
“Better data and more collaboration among the parties involved are needed to enable for more effective planning and to reduce the distortion of the demand signal along the chain,” Ignatiadis says.
The supply of goods – or lack thereof – has become a burning issue amid restrictions aimed at slowing the spread of COVID-19. From surgical masks to empty grocery-store shelves, supply shortages have highlighted weaknesses in how goods are sourced, distributed and where they’re stored.
While managing these risks has always been important, the rapid development of the pandemic is set to accelerate decisions on building a more robust system, says Rich Thompson, who leads the global supply chain consulting practice for JLL.
“You can be sure to expect probing questions, from Boards of Directors to their CEOs, around what they will be doing to ensure that there is minimal disruption the next time a major global pandemic or any catastrophe happens,” he says.
The recent pandemic is not the first, nor the last, major disruptor to global supply chains. The devastating tsunami in Japan in 2011 kept the auto industry reeling for months, while flooding in Thailand affected the supply chains of many computer manufacturers dependent on hard disks.
A survey last year by global law firm Baker McKenzie found that 50 percent of multinationals were expecting “major changes” to their supply chains, with more than 10 percent advising of a “complete overhaul.”
“As companies focus on adapting their strategies to account for the next disruption, diversification will be key,” says Thompson.
