Can technology prevent the ‘bullwhip effect’?

The notable shortage during the Covid-19 pandemic was toilet paper. Why? The sudden spike in demand could not be quickly met by suppliers.

The cause was associated with a phenomenon known as the “bullwhip effect,” where demand signals from a store’s shelves are too far disconnected from suppliers. During 2020 lockdowns and other restrictions, domestic demand for toilet paper soared, with people working from home, while commercial-grade (office, hotel) demand disappeared almost overnight.

One theory is that the mismatch was insurmountable because manufacturers could not simply shift production to domestic grade as the machines are different, and there is a long lead time to purchase new ones. The result was empty shelves because manufacturers and retailers failed to link shelf demand signals with supply.

Laura Cecere, analyst and founder of Supply Chain Insights LLC, said: “Manufacturers and retailers have not figured out how to…use shelf take-away (point of sale data and channel inventory levels) to trigger demand with less latency.”

Bullwhips and supply chains

The bullwhip concept first appeared in Jay Forrester’s Industrial Dynamics and is an analogy: The amplitude of a whip increases down its length. In other words, forecast accuracy decreases as you move upstream along the supply chain.

This is what caused the toilet roll crisis at the start of the pandemic.  Demand latency – the time to translate retail replenishment to a manufacturing order – was huge. As manufacturers and retailers seek to reduce demand latency, the answer could be the Internet of Things (IoT). IoT connected devices and smart shelves would allow you to know actual on-shelf inventory and how fast product is being removed from the shelf. This could really help improve balance of supply and demand. Sensors on shelves can determine depletion, providing manufacturers with a demand signal that can be used to improve planning and response.

Walmart is innovating significantly in this area to drive efficiency in-store and along the supporting supply chain. Walmart saw the need to centralize IoT data to convert it to actionable insight. In addition to shelf-level demand signals this could include:

• Store energy management
• Predictive maintenance for freezers
• In-store traffic monitoring

The big question is: “Why are other retailers not yet following Walmart’s lead?” Walmart’s VP of Technology provided us with a clue. He highlighted that the biggest issue Walmart faced was dealing with different standards and protocols for the devices they were connecting. This is a major challenge for any IoT initiative.

Imagine for a moment if you had out-of-the-box connectivity to hundreds of different devices and protocols – with the ability to rapidly connect to existing systems. What if you could use an approach proven by IoT pioneers across multiple industries, who have already seen a return on investment of 339% in less than three years?

This would fast-track your IoT projects, allowing you to reduce the impact of the bullwhip effect but also open up hundreds of new possibilities within you supply chain.

Software AG’s Cumulocity IoT has exactly these characteristics. But don’t take my word for it – try it yourself for free. Click below to get started.