Bullwhip Effects in Supply Chains- Its Impact on working capital through covid-19
Covid-19 has led to a downturn in the markets and economies globally- a truly global financial crisis – which has led to disruptions in the funding markets and subsequent financing of supply chains.
This has revealed an under-recognized reality of businesses—companies in most industries are struggling to onboard new suppliers quickly to meet customer demand for new products, and alternative sources for existing products, a key requirement for revenue and margin generation.
This turns out to be a classic disaster recipe for unprepared supply chains model with disrupted global supply chains and a trend in panic buying. Manufacturers are inundated with replenishment requests, holding on for days or sometimes weeks after a supply shortage occurs. Therefore, businesses are tapping into multiple manufacturers to procure the goods they need to cater to the demand influx. This often leads to over-production and inventory build-up which is not aligned to actual demand.
Enter the “bullwhip effect,” a phenomenon incorporated into supply chain models by Hau Lee, a Professor of Engineering and Management Science at Stanford University, that refers to increasing swings in inventory in response to shifts in customer demand as one moves further upstream in a supply chain. The bullwhip effect is caused by forecast inaccuracy at the end-customer demand point, and results in significant supply chain inefficiencies. Even small variability in downstream demand can multiply as you go upstream, ultimately becoming a big problem for manufacturers and their suppliers.
The demand shocks created by COVID-19 have caused extreme bull whip effects, which has resulted in an unpredictable and unstable manufacturing environment where suppliers are struggling to intelligently predict demand as a result of panicked buyer behaviour
While most supply chain processes mainly focus on the bullwhip effect of physical material flows, the bullwhip effect on financial supply chain flows has been neglected, despite its growing significance.
We hereby, try to break down the interactions among the supply chain material and financial flows, resulting in an increasing amplification of financial distortion among the supply chains models & some of the remedial measures to same.
Bullwhip Effect- Supply Chain & Financial Patterns Disrupted
Bull- Whip Effect- what is it?- Most simply defined is the disruption in the supply chain model caused due to mis-match in the predications of meeting the consumer demand and swings of the inventory levels, resulting in overall supply chain inefficiencies across the business model.
Most commonly this phenomenon is caused because of-
- Distorted or lack of proper information flow across various points in the supply chain model
- Manufacturing delays
- Over- or under-reacting to demand expectations, such as ordering too many units or not enough
- Inaccurate forecasts & price variations /discounts that impact regular buying patterns
- Batch ordering
However, one of the key effects in this whole disrupted supply chain model, which most companies tend to overlook, would be the lack of availability of finance at the right point and the right time- here comes the financial bull-whip effect!
Apart from impacting the overall working capital cycle, unavailability of finance leads to suppliers not being paid, hence orders not being executed on timely basis, impacting businesses to meet the customer demands, ultimately hitting the top-line of the corporates.
Few of the key aspects impacting the same would be-
- In-ability of the suppliers to sustain participation in the supply chain, due to lack of finance
- Inability of the corporates to on-board new suppliers
- Lack of systemic process integrated with the financial flow
- Lack of availability of finance in times where demand patterns are uncertain
- In-ability to respond to supply and demand shocks created in uncertain times
Interestingly, this global pandemic has revealed a certain level of preparedness amongst the companies operating on traditional ways of operating their businesses. While, COVID-19 is validating for those companies that already have a high degree of automation and processes in place. Companies that do not have automated processes have been forced to shut down until they can upgrade their operations or physically return to the jobsite. Both have obvious downsides in our current climate.
Solutions to Tackle the Effect
While the physical supply chain effects can be minimized with well-coordinated, integrated processes in place, and real -time information flows financial disruptions can be minimised.
However, this is only if we have availability of finance that at the same time is integrated with the supply chain, capable of handling the financial disruptions caused due to the bullwhip phenomena.
A strong robust financial system will act as a “plug and play” in the overall supply chain process, handling the working capital gaps as and when need arises. This would allow corporates to handle the uncertainty with not just a sound supply chain model, but having a well- integrated financial support making entire process seamless.
Crossflow offers that optimal financing solution, backed by technology, which can well integrate with a corporates supply chain model, allowing corporates to seamlessly on-board their suppliers on real-time basis, handle multiple supplier requests at a single click, giving early payments to suppliers, thus improving the working capital gap.
Even if corporates have the finance available with them, and are struggling to fill in the gap on the technology integration with their financiers, Crossflow offers the right platform for the same as well, which can be efficiently integrated with the corporates’ supply chain model.
Leveraging a modern integrated platform to bring more agility into your supply chain, not just process driven but also financial driven, will help one beat the bull whip effect and compete from a position of strength -- or at least be in a more advantageous position than as prior to the pandemic
Tony Duggan is co-founder and CEO of Crossflow. He served as Supply Chain Director at Wickes and B&Q prior to serving as Product Development Director at SWIFT, the global banking network. He also managed an outsourced fintech development project for HSBC in Hong Kong.