Bullwhip Effect

The Bullwhip effect : History and solutions

Thursday, June 24, 2021

The ongoing global shortage of semiconductors can best be explained by a phenomenon called the “bullwhip effect”. As gadgets and materials become more expensive due to the violent swings in demand and supply, the bigger question is whether the situation has become too uncertain for manufacturers to respond effectively.

Read more about the bullwhip effect on electronic components.

What Is The Bullwhip Effect?

 

The phrase “bullwhip effect” first emerged in the 1990s, when the maker of diapers (Pampers) was experiencing swings in order volumes even though consumers buy diapers at a relatively constant rate. 

The company was enduring swings in demand that hit harder the further one moved up the supply chain, from retailer to manufacturer. This bullwhip effect explains how small fluctuations in demand can snarl up the supply chain, causing bigger and bigger swings in production. 

The same forces that snarled the supply chain for diapers are the ones that also led to desperate shortages of computer chips. In this case, the semiconductor market issues began with an abrupt surge in demand last year for consumer electronics and devices that keep people entertained at home during the pandemic.

There was an increased demand for computers, wireless earbuds, gaming consoles, and wireless speakers that require microchips. Meanwhile, auto sales remained relatively steady, prompting automotive companies to pull back production. That was followed by a rebound in demand for cars that use huge amounts of chips, adding a second crack of the whip.

Soon the global semiconductor industry was facing shortages as chip manufacturers fielded far more orders than any supplier could fulfill. 

Now, a year later, microchip shortages persist and factories shutting down, unable to churn out enough products to meet demand. The supply constraints caused by the shortage are expected to slash Apple’s quarterly sales by up to $4 billion. 

Samsung has warned it might delay the launch of the latest smartphone citing a “serious imbalance” in global supply and demand for chips. In the auto industry, the global vehicle output is expected to reduce by five million fewer cars this year due to the scarcity. 

Why Not Just Make More Chips?

While the obvious response to the semiconductor shortage is to simply make more chips, the fact that most projects aimed at increasing supply won’t be completely finished until the end of 2022 makes this option problematic. 

By the time these new factories come alive and are producing chips again, demand might have fallen and the immediate shortage might have eased. 

In the end, what you’re likely to have is a new situation of a global semiconductor overstock. Moreover, building a new chip foundry can be dauntingly expensive and time-consuming.

This dynamic can create a disastrous cycle for the industry: When suppliers stop building new factories, demand gradually grows until it falls in line with supply. 

At that point, small shifts in consumer demand can once again reverberate through the supply chain thanks to the bullwhip effect. Shortages beget supply gluts, which eventually lead to shortages again.

Group of rearchers working in a lab

How To Solve The Bullwhip Effect In The Electronics Components Supply Chain

The semiconductor conundrum is a striking example of how improperly assessing future demand can cause massive shocks in the supply chain. Here are some of the bullwhip effect solutions that can help similar calamities in the future. 

Curbing Hoarding And Stockpiling That Have Contributed To The Shortage Of Chips

Hoarding distorts the demand signals that are rippling through the supply chain, making it seem like companies need far more chips than are truly necessary to meet consumer demand.

Through our dedicated supply chain transaction platform, AIRENC helps OEMs and EMS improve their supply chain position amid shortages by offering greater visibility into critical components and enabling direct buying and selling of electronic components at competitive prices. This ensures that every member of the platform is able to grab a portion of the available components at an affordable price, and limits the tendency to stockpile components : there is a place where components are available. 

And in the case of overstock, the AIRENC platform can help electronic components manufacturers eliminate waste by selling excess items quickly and efficiently without any involvement of an intermediary

Accurately Assessing Consumers’ Actual Needs And Limiting Shipments

Before concluding, we give you 4 simple ways to crack the bullwhip effect.

Chip suppliers have to make efforts to more accurately forecast their customer’s true needs. This would involve limiting shipments to their buyer’s actual needs in order to prevent hoarding and ensure that computer chips are redirected to the more deserving industries like the automotive sector. 

Customer demand needs to be forecasted despite the predictability challenges of hoarding, repeated panic buying, and evolving consumer habits.

Inventory optimization with predictive insights can also help OEMs and EMSs plan budgets, availability, and inventory flows to maximize customer demand fulfillment while minimizing inventory risk.

Woman and man shaking hands via giant phone screens

Good forecasting requires quality analytics and with our platform, it is possible to collaborate and share data transparently and securely with every member within your supply chain network. 

This significantly enhanced collaboration between vendors and buyers leads to equally significant value when it comes to demand forecasting. Orders can be fulfilled on time and members minimize waste and overstock while still keeping abreast with changing consumer behavior.

How to sum it up? The bullwhip effect has upended global supply chains, and flexibility and resiliency will be critical for OEMs and EMSs as they move forward. Ultimately, this requires efforts to curb hoarding, enhance collaboration through data, quantify risks and adjust overall strategy. OEMs and EMSs can reverse the bullwhip effect in their supply chains by leveraging the AIRENC platform to directly sell excess or obsolete stock, allowing them to reduce stock liability and increase revenue/turnover.

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