Bullwhip Effect on Business
I recently ran into an article in the Wall Street Journal that brought hope and happiness back into my life. It discussed the Bullwhip Effect in a light that it normally doesn’t deserve. If you are not familiar with the Bullwhip Effect (or Whiplash Effect or Forrester Effect after J. Forrester’s Industrial Dynamics 1961), it’s an economic phenomenon that explains how a small increase in consumer demand can dramatically affect suppliers upstream in the supply chain, as the perceived demand is amplified and an excess of inventory is ordered. The article views the Bullwhip Effect as a positive force in this economy. Please feel free to read the article by clicking this link.
Businesses large and small drastically cut inventories and workforce in order to survive in 2009. With the possibility of the Bullwhip cracking, we would like to offer some strategies to help recognize and prepare for its effects, both positive and negative, on businesses in the supply chain (that’s you!).
1. Create Strategic Partnerships
Partnering with other members in the supply chain allows for a more accurate forecasting of actual demand. Everyone can gain more by acting as a whole, but it requires a trusting relationship for information to be shared freely. Wherever your company falls within the supply chain, start the conversation for a strategic partnership with both your suppliers and buyers. The more information you have, the more likely your inventory levels will match actual demand, thereby eliminating the sonic boom of the bullwhip.
2. Invest in Information Technology
There are many software programs on the market right now that automatically inform suppliers when inventory is running low. The benefits of utilizing inventory management software vary from program to program, but overall it leads to a better communication flow among members in a supply chain.
3. Create Smaller Purchase Orders
By simply ordering supplies in smaller batches, companies can drastically reduce the effects of the Bullwhip. More accurate inventory levels outweigh the price savings of buying in bulk in most cases. Supply chain managers should focus on ordering according to need rather than bulk promotions to cut costs. If you have a strategic partnership with your supplier, communicate that you will be purchasing consistent batches, but that you need smaller, more frequent orders. This could help your partner adjust their company’s purchasing behaviors as well.
4. Utilize Contingent Employees (you knew I couldn’t resist!)
Many companies are already pervious to this strategy. You need only look at a major job board to realize that a substantial portion of all open positions are being placed with Staffing Firms. Why?—Flexibility. Contingent employees offer businesses the flexibility they need to stay competitive in this uncertain environment. Companies can hire without having to guarantee long-term, permanent work, yet they retain the option to hire contingent employees on permanently if they are a great asset and there is consistent work. If you would like to learn more about this strategy, please contact your Business Development Rep at Vision Staffing Solutions.
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