Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

Planning For the Bullwhip Effect

Supply chains and economic recovery

Economists and others in the media are offering varying opinions regarding the speed or shape of the impending recovery. Along those lines, many of our client conversations these days are about when the recovery will take place and what strategies shippers should apply from a transportation management and optimization perspective. Should I think about a bid? Will my current rates last? Do I need to update my TMS rules and associated configuration? What types of conversations should I be having with my carrier partners?

I imagine that each of our shipper clients are experiencing something unique with regard to these discussions depending upon the particulars of their business, strategy and overall approach to the carrier community.

However, regardless of where you’re basing your plans on a U-shape or V-shape, whether it’s fast or slow ride, if you’re in a recovery, you will more than likely feel the impact of the Bullwhip Effect and we recommend that this be part of your planning processes.

The Bullwhip Effect not a new concept (postulated by Jay Forrester from MIT in 1961). The idea is simple. Sudden changes in demand (in this case increases in demand) have a profound ripple effect throughout a supply chain.

As demand surges, there is concern that the suppliers, factories and distribution centers throughout the supply chain can deliver the raw materials and finished goods required to capitalize on new selling opportunities. And, even if all cylinders are firing and the raw materials and goods are delivered, there is concern surrounding margins. Just how much extra did it cost to force all of those materials and products through the supply chain in a protracted amount of time?

From a transportation management or TMS perspective, there are meaningful cost considerations surrounding carrier capacity. If primary carriers aren’t expecting the surge in capacity, Tier 2 and 3 carriers often have to be utilized. Those rates typically aren’t as favorable as those of the Tier 1 carriers. The extra cost can eat into margins and deflate some of the exuberance that comes with an uptick in sales.

How can shippers mitigate this Bullwhip Effect?

One answer lies in the concept of Demand Smoothing. By working closely with sales, marketing manufacturing and other departments within an organization, supply chain teams can predict surges in demand. They can build models that forecast exactly when raw materials need to come in, when they will be converted into finished products and when those finished products need to be shipped to retail or customer locations.

Once this forecast information is known, transportation departments (collaborating closely with TMC, if they happen to be our clients), can plan the manufacturing process and pull demand forward. This smoothes the supply chain and mitigates the need to use more expensive Tier 2 and 3 carriers.

From a TMC perspective, the TMS tools we’ve developed have built-in functionality to help with this forecasting and demand smoothing. And our optimization processes are built on proven LEAN and Six Sigma principles.

5 tips for successful Demand Smoothing:

1. Dedicated Assignment. Asking a supply chain or transportation employee to fit this forecasting and planning responsibility in amongst their day-to-day tasks typically does not work well. Assign someone who has time to make it a priority.

2. Supplier and Carrier Collaboration. Give ample warning to vendors and Tier 1 carriers so they know what’2013-05-22 19:24:32’s coming. Often, they can make their own adjustments to help with surges in your demand.

3. Metrics Monitoring. Understanding route guide and tender, fill rate, CWT and visibility by way of track and trace and potential late loads all act as ways to manage and isolate areas of concern and success. Many of these metrics exist within the business intelligence module of our web-based TMS.

4. Use Proven Modeling Tools. While it seems simple, there is a science to Demand Smoothing. There are TMS-related technologies and processes that can be powerful tools.

5. Project 100 Days Out. Work with sales and manufacturing teams on the inside and with suppliers and carriers on the outside to create a Demand Smoothing plan that looks out 100 days.

Deploying some kind of Demand Smoothing strategy in the coming months can largely determine how well your company capitalizes on new sales opportunities that are driven by economic recovery. After a recession that lasted as long as this one, it’s important to maximize every sale and every bit of margin.

- Vice President, Customer Strategy, C.H. Robinson
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