Global supply chains are undergoing what is known as the “bullwhip effect.”
That’s the term used by industry analysts to describe how sharp upticks in demand can lead to amplification of expectations around it, which causes a domino effect along the supply chain.
The industry is experiencing an acute shortage of electronic components because the demand is so much higher than suppliers can fulfil. It is a situation that has forced component manufacturers to pay more attention to the supply chain and closely monitor demand signals to prevent further supply chain instability.
Many manufacturers are now demanding guaranteed, long-term orders for electronic components as a cushion against a possible easing demand in a few months. These companies are guarding against the bullwhip effect by ensuring they are not left with excessive inventory when demand stabilizes.
Before to talk about the airenc solution, read the 4 simple ways to crack the bullwhip effect.
The bullwhip effect often occurs when companies become highly reactive to demand, and in turn, amplify expectations around it by ordering more components than required to hedge against potential continued growing demand and to avoid shortages. This demand distortion then creates a domino effect along the supply chain, with manufacturers ramping up the production of components to increase supply. And when supply grows to finally meet demand, any small shifts in consumer demand can once again reverberate through the supply chain; it becomes a domino effect.
The bullwhip effect was first described in the early 1960s by MIT professor Jay Forrester and more recently explored by researchers at Stanford University. It is called the bullwhip effect because the order wave patterns (or demand signals) look something like the shape of a whip being amplified in a chain reaction.
Today’s crisis is characterized by abundant demand and a deficient supply of electronic components. However, the main cause of the bullwhip effect in the electronics industry is poor demand forecasting. Many companies rely solely on historical sales data or, worse, guesswork to predict demand. This introduces forecasting errors that are then amplified as orders move upstream to manufacturers. Because of this demand distortion, manufacturers often end up overproducing as a safety net, wanting to avoid the risk of shortages or losing customers.
Amplifying false demand signals also creates double bookings since OEMs and EMS tend to fill in extra orders to head off a repeat of shortages. This often results in an even more overwhelming crush of orders for components manufacturers. Unable to fulfil the substantially elevated orders, companies end up sitting on a backlog of orders and increased lead times snarling up the supply chain further.
Additionally, reporting of demand spikes takes time to reach manufacturers due to a lack of end-to-end visibility, thus increasing the risks of the bullwhip effect taking hold of the supply chain.
As a proof, a 2021 Gartner survey found that 68% of supply chain executives (not only in the electronic components industry) said they have consistently responded to “high-impact disruptions” in the past three years. Most people also said they didn't have time to bounce back from one disruptive event before catching up to the next.
See the example of the car market which is subject to the bullwhip effect.
This term may sound familiar to you. And that's understandable because it became popular during the Covid-19 crisis. Toilet paper effect has not been described by an MIT PhD. Rather, it was social behavior that brought this term. Indeed, the beginning of the sanitary crisis created a wind of panic around certain consumer products. By fear of the lack, and because people did not know how long lockdown will late, they literally threw themselves on first necessity products. Surprisingly, toilet paper was part of it. This sudden high demand and the irrational behaviors of consumers caused big shortages on retailers shelves.
The electronic components market was also hit by irrational behaviors. Except that it is not consumers who have stockpiled, but OEMs and EMS. The sanitary crisis has led to an increase in remote working and the need to be entertained at home. As a result, the demand for electronic devices (smartphones, laptops, video game console, TV, etc.) has increased. But this unprecedented demand led OEMs and EMS to stockpile electronic components because they were afraid of not reaching their customers expectations. And the lack of visibility amplified this irrational behavior.
The bullwhip effect is the basis for the famous “Beer Game,” a supply chain simulation in which participants play various roles in a beer supply chain. Every participant has to make decisions about how much beer to order from its supplier based on incomplete information about what’s happening in the market. So players invariably suffer from the bullwhip effect-style challenges and wind up with too much or too little inventory.
One of the factors that can make the bullwhip effect worse is hoarding. Hoarding distorts demand signals by creating the illusion of even higher demand, exacerbating the bullwhip effect. Even though hoarding harms everyone, it’s hard to convince any individual company not to stockpile parts during periods of high demand due to fear of shortages.
However, companies can learn much from the beer game about how difficult it is to predict demand with insufficient information. With so much riding on forecast accuracy, manufacturers should exert more effort into estimating their customers’ true needs, politely refusing orders to prevent hoarding while also ensuring that the right components get to the right people at the right time.
In this article we explain How To Guess Your Next Demand Forecasting.
The bullwhip effect in the electronic components supply chain can be reduced through enhanced collaboration and information sharing between a community of industrials. If a member has a sudden change in his production plan, instead of changing his supply order and creating a potential new bullwhip, he can maintain his original supply plan and call on the AIRENC community to stabilize his supply chain.
How can this be done?
Depending on the sudden change, if the member has an additional production, he can buy components through the AIRENC platform and if he has a drop in production, he can sell his overstocks to another member on the AIRENC platform.
AIRENC’s mission is to help manufacturers tackle demand-supply disruptions and limit the financial impact of the bullwhip effect, especially at challenging times like these. AIRENC is a peer-to-peer transaction platform designed to leverage the power of the community to facilitate direct buying and selling of electronic components at competitive pricing. We bring together the electronic components customers community to operate in an open, transparent and secure digital trading network to enhance supply chain collaboration.
The platform gives OEMs and EMS the ability to access crucial information and quickly detect signals and patterns from the electronic components market – through your connections on the network. This essentially enables companies to deal with supply chain disruptions as quickly as possible by enhancing their demand forecasting and inventory optimization capabilities.
Reducing the bullwhip effect through better forecasting and open collaboration is not just the ‘need of the hour’ but crucial to stabilize your supply chain in the long-run. Request a FREE demo to learn how AIRENC can help you to build a seamless supply chain.