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Dealing with demand uncertainty – or, taking the bull(whip) by the horns

Updated: Dec 18, 2022

“These events are always interesting” Celena thought as she sipped an overpriced glass of what technically passed as wine, but in any other setting would have been dispatched for cooking use only… Office Christmas parties that is. A full year’s worth of co-worker’s pent-up feelings dangerously close to the surface as people relax and consume large amounts of alcohol… What could possibly go wrong?”

Celena Noch – SETPOINT Group’s fictional avatar – is back. Celena is a representation of our combined supply chain experiences, frequently used to convey our views on working capital and supply chain optimization – in an enlightening and (hopefully) also entertaining manner.

In this article, Celena will consider how distorted demand signals post-COVID can create a bullwhip effect with considerable impact on the supply chain as a whole.

Celena’s wandering mind was brought back into the present by a distinct clinking sound. The CEO purposefully rose from his chair, a spoon in one hand ferociously tapping his glass to get people’s attention, and a piece of paper in the other. It was time for the annual Christmas speech.

It is good to see you all…” he began with a solemn expression on his face; “especially since we had to cancel our last Christmas gathering due to the pandemic.”

“Looking back, 2020 was a tough year for us all. The company lost a lot of business and were forced to make some uncomfortable decisions. But no more! I am glad to say 2021 will be a record year – we are not only back to pre-COVID sales volumes but grew our revenues an additional 25%”. The CEO paused for effect, letting his last words sink in. He did not have to wait long until the room erupted in applause.

Celena looked round the room. “Good news mixed with alcohol really makes for a good audience” she thought, as the CEO started tapping his glass again.

And now…” – he started – “let us not be contempt with that! Let us set the bar even higher and make 2022 an even greater year! Who’s up for another 20% growth? His enthusiasm was this time rewarded with a standing ovation. From everyone but Celena who sighed deeply before using the general commotion to sneak away to the bar for another glass of wine.

Celena was not the only one seeking refuge at the bar. Sitting in a corner was an elderly gentleman she did not recognize. Or did she? She might have seen him in a corridor or other… Judging by his demeanor, he did not seem more pleased than Celena about his current whereabouts…

After receiving her top-up, she raised her glass in his direction and exchanged a supportive look. “Is it the party in general or the speculative growth plans that are bothering you?” she jokingly said with a smile? He looked up, smiled, and raised his glass in return before saying: “a bit of both I’m afraid…”

Celena soon learned he was a retired manager, now acting senior advisor to the company. Not that anyone seemed to listen to him, as he put it. Curious as she was, Celena asked him to explain what part of the CEO’s speech he had reacted to.

He looked at her gratefully before saying: “I have seen this before so many times… upper management misreading the market signals, making us chase after a demand that is not there. Mark my word, most of the celebrated sale increase this year was not from an increase in annual demand. It was the market catching up, filling the pent-up demand of 2020.”

Celena nodded in agreement, adding herself: “I am also quite sure that part of this year’s sales increase was our customers re-stocking their inventories. There is a significant risk our customers are now entering the new year fully stocked with our products, not placing any new orders in the foreseeable future. A classical bullwhip if I ever saw one. Ha, I bet you we’ll actually see a sales decline next year, with bulging inventories of our own as a result…”

They looked at each other with a newfound respect, having just confirmed each other’s thinking. “So how would you handle this?” she asked.

“Well” - the man started… “apart from setting new and realistic targets, I would make sure we would not end up in this situation again. A lion part of the problem is a lack of end-customer demand visibility in combination with a general lack of supply chain understanding across the organization.

Celena thanked the man for a good discussion and went back to her table to enjoy the last bit of her dessert. In between bites, she used her napkin to draft a list of recommendations she would put on the CEOs table first thing Monday morning…

-- Celena’s Napkin below –

Why is this important

A typical supply chain has several layers of stakeholders: from suppliers of raw material to manufacturers, distributors, retailers and finally the end customer. The intricate balance of supply and demand across these stakeholders relies on accurate two-way communication. The bullwhip effect happens when distorted demand signals oscillates back throughout the chain, often amplified at every stage, leading to a multitude of negative consequences, such as: unfounded build-up or ramp-down of capacity and stock, inefficient and costly production, damaged supplier/customer relations, lost revenues, and more…

Be ready for a future with an increased frequency in changes to demand patterns, not only driven by pandemics, but also new technologies and disrupting business models. Supply chain agility will be key to excel in this new reality. Be ready to shorten your planning and execution lead-times. Streamline your logistics and supply chain footprint. Improve your supplier relationships to allow for smaller and more frequent deliveries. And constantly monitor your inventories and safety stock levels to ensure right amounts of the right things at the right time (read more on topic in 3 considerations for a post-pandemic supply chain).

However, even if increased agility will dampen the effects from shifting demand, companies should also improve their ability to identify and pro-actively avoid future bullwhips:

1. Increase visibility and collaboration across all stakeholders

Be aware of your customers’ and end-customer’s needs – give your organization the tools to differentiate between short-term variability and long-term changes to market demand. Work to minimize future bullwhip effects through improved communication and frequent information sharing across your supply chain, as part of a robust S&OP or IBP process. Trust is key.

Take detailed stock of not only your own inventory, but also your customers inventories. Many companies don’t realize what the inventory of their customers looks like, making it difficult to differentiate between a true demand versus re-stocking activities. Encourage your larger customers to share information, or even install vendor managed inventories (VMI) of your standard items

2. Leverage new technologies to reduce uncertainties

Companies who invest in good supply chain systems, with the ability to plan and re-plan based on multiple scenario outcomes, will ultimately manage better than those who will not.

Embrace digital technologies to enhance visibility across the end-to-end supply chain, including external stakeholders. The ability to pro-actively identify and deal with distorted demand signals will be key going forward – requiring improved real-time data handling and visualization, as well as the ability to simulate multiple outcomes.

Improve data sharing with your supply chain partners. Examine ways to improve access to external data through supplier and customer portals, providing real time updates on stock availability and upcoming demand.

3. Lift the knowledge floor and increase the general supply chain awareness level

The first step in avoiding future bullwhip effects is making sure as many people as possible understand what causes them.

Even though the automation and digitalization of things will increase, human intelligence and experience cannot be fully replaced (yet!). Data is not enough, someone must be there to interpret, communicate and act on its meaning.

Lifting the knowledge roof is not enough, we also need to activate and lift the knowledge floor – creating a common platform of understanding across the organization in how your version of an optimal supply chains should operate.

Celena stopped writing and tucked the napkin and her pen into her handbag. “Enough work for tonight” she thought, as she stood up and started making her way towards the ladies’ room to powder her nose.

Halfway down the corridor she heard someone calling out her name. It was the CEO, who most likely wanted her input on his speech. “Damnit” she thought – “I am too tired and too tipsy for having this discussion tonight…”.

Too far away from the safe compound of the ladies’ room, Celena looked around for someplace to hide. The nearest door she could see was a broom closet. “Ah, what the heck she thought” and quickly opened the door to step inside.

”Not again” was her next thought as she saw the unmistakable form of a body lying on the floor.

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