The Bullwhip Effect- Causing Empty Store Shelves

The Bullwhip Effect- Causing Empty Store Shelves

Shortages of basic products continue to hamper the US economy two and a half years after the epidemic flipped global supply networks upside down. Do you want a new car? Depending on the model, you may have to wait up to six months. Are you looking for a spicy condiment? Sriracha spicy sauce supplies have been critically low. Expect empty shelves or higher pricing if you give your cat or dog dry pet food. These aren't isolated items. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal, and many other commodities are projected to be scarce in the United States in 2022 – and popcorn and tomatoes are expected to be scarce soon.

Indeed, global supply systems have been under the most strain in at least a quarter-century, and have been for the most of the time since the COVID-19 epidemic began. For over 35 years, I have worked in supply chain management, both as a manager and consultant in the corporate sector and as an adjunct professor at Colorado State University-Global Campus. While each product facing a scarcity has its own story about what went wrong, a concept known in my area as the "bullwhip effect" is at the heart of the majority of them.

Defining the 'Bullwhip Effect'

Jay Forrester, an MIT computer scientist, invented the phrase "bullwhip effect" in his influential book Industrial Dynamics in 1961. It depicts what happens when changes in demand ricochet and amplify across the supply chain, causing difficulties and shortages to escalate. Consider the physics of a whip crack. The whip's wave patterns increase rapidly in a chain reaction, leading to the tip, a snap — and a searing agony for anyone on the receiving end. The same thing can happen in supply chains when orders for a product from a retailer, for example, increase or decrease by a certain amount, which is amplified by wholesalers, distributors, and raw material suppliers. The advent of the COVID-19 pandemic, which resulted in lengthy lockdowns, huge unemployment, and a slew of additional consequences that disrupted global supply networks, effectively amplified the bullwhip's snap.

Cars and Computer Chips Shortage

One such example is the supply of automobiles. Throughout the pandemic, both new and used vehicles have been in low supply, requiring users to wait up to a year for the most popular models. When the pandemic put most Americans on lockdown in early 2020, automakers began to expect a drop in demand and significantly reduced production. This signaled to suppliers, particularly those of computer chips, that they would need to find new clients for their products. Computer chips are not one-size-fits-all; they are designed differently based on their intended function. As a result, chipmakers began producing fewer chips for use in automobiles and trucks and more for computers and smart refrigerators.

As a result, when demand for vehicles unexpectedly increased in early 2021, automakers were unable to get enough semiconductors to speed up manufacturing. Last year's output was down roughly 13% from the previous year. Since then, chipmakers have begun to create more car-specific chips, and Congress has even introduced legislation to boost semiconductor manufacturing in the United States. To alleviate delays, some automakers, including Ford and General Motors, have decided to sell unfinished vehicles, which lack processors and the specific amenities they power, such as touchscreens. However, shortages persist. This could be attributed to bad planning, but it's also the bullwhip effect at work.

Just Like Covid, It Is A Global Pandemic

And this is a concern for a lot of commodities and parts, especially if they come from Asia, as semiconductors do. In reality, the bullwhip impact might affect almost everything Americans acquire from Asia - almost 40% of all US imports. The majority of this cargo is transported to the United States by container ships, which are the most cost-effective mode of transportation. That implies goods must normally travel for a week or more across the Pacific Ocean. When the information flow from client to supplier is disrupted, the bullwhip effect occurs.

Assume a customer notices that an order of lawn chairs has not been delivered by the specified date, possibly due to a minor transportation delay. As a result, the buyer complains to the retailer, who purchases more from the manufacturer. Manufacturers see an uptick in orders and send them on to suppliers with a little extra just in case. What began as a transportation delay has now resulted in a significant increase in orders throughout the supply chain. Now that the retailer has received all of the overordered products, it reduces the next order to the factory, which cuts its order to suppliers, and so on. Imagine a bullwhip of orders running up and down at the supplier's end. The pandemic produced several transportation interruptions, most of which sparked the bullwhip effect, whether owing to a lack of personnel, difficulty at a port, or anything else.

It's Just Getting Started

When will these issues be resolved? The answer will almost certainly disappoint you. As the globe becomes more interconnected, a minor problem might grow into a major one if information is not readily available. Life happens even when you have the right information at the appropriate time. A ship transporting new vehicles from Europe could be lost at sea due to a storm. When the major production is shut down due to a safety issue, having only a few suppliers of infant formula generates a shortage. Russia invades Ukraine, holding prisoner 10% of the world's food.

The pandemic's impact in 2020 caused a dramatic decline in demand, which reverberated through supply networks and output. A robust US economy and consumers rich with coronavirus cash resulted in a boom in demand in 2021, and the system struggled to keep up. Now, the impact of rising inflation and an impending recession will reverse that effect, resulting in a surplus of goods and a reduction in orders. And the cycle will continue. These disruptions, as far as I can tell, will take many years to recover from. As recent inflation reduces demand for goods and consumers continue to cut down, the bullwhip will work its way back through the supply chain, causing more shortages.