Insight

Supply chain, the pandemic, and the bullwhip effect

Supply chain reaction to disruptions is to over-order and over forecast demand—what is the impact?

Rob Barrett

Rob Barrett

Principal, Advisory/Supply Chain Leader, KPMG US

+1 480-459-3535

Mary J. Rollman

Mary J. Rollman

Principal, Advisor/Supply Chain Strategy and Life Sciences Lead, KPMG US

+1 312-618-9863

Davis McNeil

Davis McNeil

Director Advisory, C&O Commercial, KPMG US

Dear Bullwhip Effect,

I never thought I would be writing about you again. The COVID-19 pandemic has been an incredibly challenging time and will forever be an event that will mark the people and organizations that lived through it. There will be studies done to understand organizations that performed well and those that may have struggled through this challenging time. But the study of the organizations’ financial results may not reveal the whole truth of what it took to deliver the results and the long-term impact of those actions. All supply chains have had challenges no matter what industry, issues with raw materials supply, transportation costs, logistics lead times, demand fluctuations—the list goes on. Almost every day, the function of supply chain is making the news for supply shortages. When the media attention subsides, the impact on supply chains will not and the long-term impact of choices made to maintain metrics will be difficult to connect back to the pandemic. 

The challenges of the last two years could not have been predicted. The actions taken by supply chains unfortunately had a flavor of behaviors that we have seen before and have worked hard to eradicate. The actions and reactions appear to be from an old guide of mitigation strategies that were taken decades ago, behaviors that resulted in birth of “The Bullwhip Effect”. What does that mean? It’s the “gaming” of the supply chain system by overordering and over-forecasting demand in order to capture more supply than is actually needed, second-guessing information and data that moves from upstream to downstream across organizations, each node of the end-to-end value chain acting as a “stand-alone” organization rather than the part of a system. In the Bullwhip Effect, a small action in one node of the value chain can create a greater and more destructive reaction as it moves from node to node or “upstream” in the value chain. This results in reduced service levels, higher cost, and—even worse—distrust among critical supply chain partners.

During the pandemic of 2020 and 2021, unfortunately, many of these Bullwhip-inducing behaviors resurfaced, appearing to be a fallback playbook of actions to take in a crisis to reduce impact on one piece of the larger value chain. 

In the near term, the actions taken may have artificially protected supply, but the long-term impact could plague the supply chain indefinitely. This residual impact includes millions in stranded inventory clogging logistics hubs and lanes. With overordering then subsequent cancelling of those orders, it is expected that thousands of containers and millions of dollars in inventory will have to be returned to manufacturers, destroyed, or sold at a deep discount. Historical data will be messy and unreliable. It could be many cycles before data will be stable enough to be confidently used for statistical forecasting, planning, and management of the supply chain. Relationships may be challenged as trust in the information that is being shared will be questioned. Costs will remain inflated as the Bullwhip hangover runs its course. 

The long-term effect of the pandemic will be varied, for supply chain the question is whether the end-to-end value chain can bounce back quickly, reducing the impact of the pandemic and the long tail of residual supply chain challenges.