Ever heard of the bull-whip effect?
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Post opening up, if there is something economically we need to fear, this is it.
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This supply chain anomaly is going to lead to massive wastages.
Bull-whip effect/ Forrester Effect’, first appeared in Jay Forrester's Industrial Dynamics (1961).
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It explains how interconnected supply chains can get confused by due to signal confusion.
Let me simplify -
A small spike in consumer demand post lockdown is going to send a signal of a sudden consumption increase.
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Retailers read this new spike as a signal of recovery and place backward orders.
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Distributors, sensing surging interest place orders on the manufacturers to cover stocking lead times.
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Manufacturers increase production output to be able to meet manufacturing lead-times.
Suddenly, consumption drops.
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The customer is unwilling to wait to consume.
Like a bull-whip, there ends up being excesses everywhere leading to:
> wastages
> unwarranted discounting
> sale at a loss simply to clear working capital
Who gained?
No one.
> The consumer did not get what he wanted.
> Distributors & retailers locked up capital for a while.
> Manufacturers end up taking the brunt of lower pricing.
How to get through?
Eliminate the signal from the noise.
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