I was immersed in supply chain management for more than 35 years, both as a manager and consultant in the private sector and as an assistant professor at Colorado State University – Global Campus.
While every product that experiences a shortage has its own story of what went wrong, at the root of most is a concept that people in my field refer to as the “whiplash effect.”
The term the whiplash effect was invented in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics”. It describes what happens when fluctuations in demand ripple and amplify throughout the supply chain, leading to worsening problems and shortages.
imagine it whip cracking physics. It begins with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to a spike, a snap – and a sharp pain for anyone who receives it.
The same can happen in supply chains when orders for a product from a retailer, for example, go up or down by a certain amount and this is amplified by wholesalers, distributors and suppliers. of raw materials.
The onset of the COVID-19 pandemic, which led to long shutdowns, massive unemployment and a host of other effects that disrupted global supply chains, essentially supercharged whip cracking.
An example is the supply of automobiles.
New and used vehicles were in short supply throughout the pandemic, sometimes forcing consumers to wait up to a year for the most popular models.
In early 2020, when the pandemic put most Americans in lockdown, automakers began to anticipate a drop in demand, so they drastically reduced production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.
Computer chips are not one size fits all; they are designed differently depending on their end use. So chipmakers started making fewer chips for use in cars and trucks and more for computers and smart fridges.
So when vehicle demand suddenly returned in early 2021, automakers were unable to secure enough chips to ramp up production. Manufacturing last year was down about 13% from 2019 levels. Since then, chipmakers have started producing more car-specific chips, and Congress even passed a law to bolster U.S. semiconductor manufacturing. Some car manufacturers, like Ford and General Motors, decided to sell incomplete carswithout chips and the special features they power like touch screens, to reduce delays.
But shortages remain. You could attribute this to poor planning, but it’s also the bullwhip effect in action.
The whiplash is everywhere
And that’s a problem for a lot of goods and parts, especially if they come, like semiconductors, from Asia.
Most of these things travel to the United States by container ship, the cheapest means of transport. This means that goods usually have to spend a week or more crossing the Pacific Ocean.
The bullwhip effect occurs when an interruption in the flow of information between the customer and the supplier occurs.
For example, suppose a customer notices that an order for lawn chairs did not arrive on the expected date, perhaps due to a slight delay in transportation. Thus, the customer complains to the retailer, who in turn orders more from the manufacturer. Manufacturers are seeing orders increase and passing on orders to suppliers with a little extra, just in case.
What started as a delay in transportation has now become a significant increase in orders throughout the supply chain. Now the retailer gets delivery of all the products he overordered and reduces the next order to the factory, which reduces his order to the suppliers, and so on.
Now try to visualize the boost of orders going up and down on the supplier side.
The pandemic has caused all sorts of transport disruptions – whether due to a lack of workers, problems at a port or something else – most of which have triggered the whiplash effect.
The end is not near
When will these problems end? The answer will probably disappoint you.
As the world becomes more and more interconnected, a minor problem can get worse if the information is not available. Even with the right information at the right time, life goes on. Storm could cause ship carrying new cars from Europe get lost at sea. Having only a few sources of formula milk causes a shortage when a safety issue shuts down the biggest producer. Russia invades Ukraine, and 10% of the the grain of the world is held hostage.
The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and led to lower production. A strong U.S. economy and coronavirus-fueled consumers have driven demand up in 2021, and the system has struggled to catch up. Now, the impact of soaring inflation and a looming recession will reverse this effect, leading to a glut of product and lower orders. And the cycle will repeat itself.
As far as I know, these disturbances will take many years to recover. And as recent inflation reduces demand for goods and consumers begin to cut back, the whiplash will once again work its way through the supply chain – and you’ll see more shortages as it is the case.