The Bullwhip Effect

How the world ran out of semiconductors and how to make sure your company doesn’t end up with supply chain shortages.

The shortage of semiconductors reached global proportions in early 2021 when multiple automobile manufacturers in the United States were forced to shut down because they couldn’t produce cars without the microchips. Whether the microchip industry affects your business or not, there are important lessons to be learned about global supply chains, forecasting and inventory management for every business. This article explains how you can apply the lessons learned to any manufacturing process.

The Bullwhip Effect

The Bullwhip Effect refers to the impacts of sudden or cyclical effects along the length of a supply chain. The idea is that a change in consumer behavior causes a ripple along the entire supply chain, magnifying the effect of a one-off or seasonal event to cause everyone in the supply chain to forecast inaccurately, which creates waves of shortages and gluts along the way.

It may be obvious that in an agricultural business, you can’t change the type of crop you’ve planted until the next season. Similar constraints apply to the semiconductor and other consumer industries. For example, when using recycled plastics for casing of a consumer product, people tend to buy different colors according to fashion trends and seasons. These changes might mean that it’s necessary to use a different supplier, because certain recycled plastics can’t absorb color the same way as others. This type of change has effects all the way down the line—from the plastic collection and transportation to the factory that produces it to the dye manufacturer.

Because these changes are seasonal rather than trends, a manufacturer needs to realize that the uptick in a certain color of the plastic isn’t a linear upward curve, but just a blip, and be ready to re-orient their supply chain and production line in advance of the next change. Depending on the sources and complexity, that might take a few days or a few weeks. On the other hand, the move to recyclables and renewables is an ongoing upward trend.

The problem with semiconductors was intensified because semiconductors are manufactured by a small number of large fabrication facilities worldwide, but microchips vary widely in configuration, so setting up a process for a new type of chip can take as long as 24 months—particularly in the case of automobile manufacturers, which is where the shortage showed up in the last few months.

It’s extremely difficult to calculate all of these supply chain risks, so working with a company such as Platform 88 allows consumer goods products to assess where the weaknesses might be in the supply chain and where alternatives are quickly available.

The Pandemic and the Bullwhip Effect on the Semiconductor Industry

The pandemic caused a huge uptick in the demand for semiconductors, specifically in the computer industry. People upgraded their equipment for work and study at home, and companies upped their use of cloud computing for WFH programs. At the same time, people stopped buying cars and automobile manufacturers stopped orders of semiconductors.

As a result, the semiconductor manufacturers pivoted their supply chains to produce more computer chips—and when automobile sales picked up again in 2021, the semiconductor industry could not pick up quickly enough to supply those chips. The only car supplier came out well in this crisis was Toyota. Despite being famous for their Just-In-Time manufacturing, they appropriately forecast the problem and had supplies on hand. This translated into a huge competitive advantage for the company as automobile car sales picked up.

Predicting Bullwhip Effects on your Company

To prevent the damage from the Bullwhip effect, companies can take a number of steps such as having multiple suppliers, maintaining inventory of key parts, and identifying the potential risks.

The following are the key factors to look out for when assessing whether a change in demand is a trend or a temporary shift that can trigger the Bullwhip Effect and some appropriate remedies.

  • Seasonality and business cycles: Many products are effected by seasonal demand or increases during the holiday seasons. Looking at year-on-year trends allows companies to produce better forecasting.
  • New product introductions: Consumer markets can move very quickly, and it’s sometimes difficult to differentiate between a fad and a trend. One hint can be the nature of a purchase. For example, people purchase ascaleor thermometer once every few years, but water bottles every few months or even more frequently.. For products where the fads change quickly, it’s useful to forecast on shorter cycles and to create products that use similar components to the previous product line, so that the company doesn’t end up with extra inventory.
  • End of life spikes: When a company announces the end of a life of a particular product, there may be a temporary spike in consumer demand for that item before it’s discontinued. These short-lived blips are key to identify for suppliers to those manufacturers.
  • Variety: Industries with a high level of variety can experience supply chain problems because manufacturers are set up for specific processes and raw materials. Variety was one of the factors in toilet paper shortages. Industrial and consumer production use different processes and materials, and in the consumer market there were as many as 60 SKUs in stock, creating a difficult-to-replicate process.
  • Also, toilet paper is not a seasonal product, so none of the organizations along the supply chain was ready for sudden variability.
  • Unexpected circumstances. The pandemic and knock-on effects are making every industry susceptible to unexpected events. The primary protection for unexpected circumstances is simply to maintain inventory of critical and difficult-to-duplicate parts

Increasing Company Resilience

To increase resilience and reduce the potential of being bitten by supply chain problems, companies can take on the following best practices:

  • Take into account the cyclical and seasonal nature of the industry and demand. Use multiple suppliers and different source locations.
  • Track competition, especially new product releases and end of life.
  • In trendy industries, have raw materials that can be used for different products in case the trends change in the future. The continued demand for sustainable goods means a global ramp-up of capacity, so if anything suddenly disrupts this requirement, companies in the supply chain could be fragile.
  • Maintain inventory of the most difficult-to-source parts in case of unexpected circumstances. Simple things like not having one particular fastener or the right color case can hold up an entire production line.
  • Create agreements that guarantee supply.

There’s an innate tension between maintaining efficiency and maintaining resilience, every company needs to make its own risk assessments. Companies that manage supply chain resilience properly can achieve a huge competitive advantage in times of crisis. At Platform88, we specialize in working with reliable production facilities and providing solutions that pre-empt potential problems. Give us a call today for an assessment of where we can resolve any supply chain problems caused by the bullwhip effect in your industry.

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