Just Enough Stuff: Prevent Inventory Imbalances by Neutralizing the Bullwhip Effect
Over the course of a year, we’ve gone from “Where’s my stuff?” to “Woah, that’s too much stuff.” Case in point: major retailers are reporting a 17-45% increase in inventory levels compared to last year according to NBC News. The problem is retailers adjusted their inventory according to pandemic-inspired trends in 2021, but unfortunately, demand has since shifted as consumers abandon the patio furniture and leisurewear attached to their pandemic lifestyles and head for plane tickets and restaurants.
Now, retailers are left rummaging through the rubble. Wal-Mart, for example, has discounted more than 10,000 of its products. ABC News reports that excess inventory has become such a problem that many retailers are seriously considering a “keep-your-return” policy so as not to pile returned inventory on top of their existing excess.
So how did we get here, and how can your business avoid these inventory challenges in the future? It all comes down to the bullwhip effect.
What is the bullwhip effect?
The term “bullwhip effect” describes a supply chain phenomenon in which small changes in demand at the retailer create outsized impacts upstream in the supply chain.
First, the whip cracks
As retailers try to adapt to changing consumer preferences and buying patterns, they pass those changes along to the distributor, who then brings them to the manufacturer.
Then, the effect reverberates
In the end, the retailer’s small change has yielded an exponential increase or decrease in inventory at the manufacturer, creating supply chain inefficiencies.
What’s at stake?
The bullwhip effect describes the distortion of demand and increased volatility created when forecasts and orders move from the retailer to the manufacturer. Negative impacts include:
• Poor customer experience caused by stockouts
• Excessive inventory
• Weakened supplier relationships
So how can you avoid these negative impacts? Transparency, agility and resilience are all key. You want to focus on strengthening communication across your supply chain and improving your forecasting capabilities as preventative measures to ward off the bullwhip entirely.
Improve communication channels across the chain
The bullwhip effect is like a bad game of telephone. Conversely, when everyone communicates, everyone wins (or at least has the chance to). Make sure everyone within your company – and along your supply chain, from suppliers to distributors and manufacturing partners – are aware of potential issues. Supplier and project portals, Electronic Data Interchange (EDI) transactions and other supply chain management software tools can all support increased transparency and communication throughout the supply chain.
Predict the weather better
Easy, right? While it’s become even more difficult to accurately predict customer demand, as well as outside factors impacting supply (like the literal weather), you can take steps to make sure you have the most extensive visibility and forecasting capabilities available. Historical data is no longer a reliable basis for seasonal forecasting, given how quickly a disruption can shift behaviors.
Demand sensing and inventory optimization software tools that use artificial intelligence (AI) and Internet of Things (IoT) connectivity will allow you to complete more short-term forecasting using the latest sales data and improve your supply signal inputs.
Future-proof your supply chain with S/4 HANA
A cloud-based ERP like SAP S/4 HANA can help you improve supply chain transparency, visibility and performance so your company can stay agile to shifts in consumer demand. With S/4 HANA, you can transform a number of management functions, simplify complex processes and react faster to critical insights, all of which are mission critical when it comes to handling disruptions and unexpected shifts.
• Get early visibility into sales, purchase and stock transport orders to help plan and schedule goods in transit
• Take advantage of live inventory management with synchronized and transparent material flows
• Use one warehouse management platform for optimizing operations, processes and labor
• Create one harmonized materials requirement planning (MRP) process for unconstrained and constraint-based materials planning
• Plan, manage and carry out transports end-to-end with embedded transportation management
Take a tailored approach with the right partner
Advanced planning and optimization capabilities can help you deal with unprecedented levels of disruption but adopting new platforms and ensuring successful adoption throughout your organization can also be tall orders. A one-size-fits-all deployment approach won’t get you there.
We’ve helped Global Fortune 100 companies modernize their processes and transform their digital capabilities by implementing S/4 HANA, and we can help you as well. Ready to discuss how we can help you apply best practices according to your specific needs? Just email us at firstname.lastname@example.org.