Insufficient facts always invite danger.
This is a quote from Leonard Nimoy speaking as the character Mr. Spock in Star Trek and in the logistics
Nothing could be truer.
Let me give you a very simplified example.
Let’s say you normally buy one case of soft drink per week.
Your purchases are very steady weekend and week out one case per week.
You decide that you’ll have a party next weekend.
So this week you buy five cases of the soft drink the grocery store sees this sudden spike in sales
and is immediately worried about running out of product.
So they place a rush order with the distributor for more cases of soft drink.
The distributor sees this rush of water come in and also worried about running out of stock.
Now increases its regular order with the soft drink company the soft drink company schedules over time
as it rushes to meet the sudden surge in demand.
Happy that more people want to buy their product.
If one distributor has increased orders they reason more host sellers will follow every member of this
logistics system believes that customer demand for this product is increasing.
When in actuality this is simply one isolated event.
After the party you return to your one case per week schedule and the supply chain is wondering what
to do with all this inventory what happened to the demand.
They ask this phenomenon is known as the bullwhip effect because the further away you are from the customer
the more your information is distorted.
Just the flick of the wrist at the handle of the bullwhip.
An actual change in customer demand can cause a huge movement at the end of the whip where the manufacturer
would be in your logistics channel if you picture a fly fisherman in Montana.
You can see the same effect here.
Let me tell you this type of occurrence is real.
A few years back I worked for a major US semiconductor firm in the chip industry especially back then.
Supply and demand were constantly out of balance when supply was up.
Prices would fall and manufacturers would suffer.
But when demand outpace supply and prices not only went up dramatically but chip companies would often
allocate product to their customers.
The customer might want 2 million chips for example but our company would only accept an order for 1
This way we had some product for each of our customers and it was really a feast or famine business
Well of course once the customer realized that I would only provide one half of the initial order.
The customer simply doubled the next quarter if he needed two million chips for example an order was
priced for 4 million.
Every customer was doing this and to make matters worse many customers were placing duplicate orders
with another chip company just in case we failed to deliver.
With a small penalty the customer could cancel that second order.
So in short we thought the demand from this one customer was million chips.
When the actual demand was only one million in the industry thought the demand was 4 million and almost
every customer was presenting the same picture.
You see the problem in a rush to meet this artificial demand my company began plans to build a new factory
budgeted at 3 billion dollars.
We actually bought the land cleared it and poured the concrete foundation before we realized that the
demand was not real.
It was about five more years before actual demand allowed us to complete the project.
As Spock so wisely stated insufficient facts always invite danger.
Now how do we prevent this bullwhip effect.
The answer lies in sharing information and coordinating efforts throughout the logistics network and
along the supply chain.
A really good practice is collaborative planning forecasting and replenishment known commonly as CPF
or applying CPF are to both these examples.
All members of our logistic system would work together to understand and react to changes in customer
demand the objective here is to optimize the system rather than an individual part of the system.
The retailer the wholesaler and the manufacturer worked together with one plan and they provided one
forecasts and they design one system to move inventory to the customer based on their collaborative
forecast and their collaborative plan.
The Internet certainly assists collaboration and coordination of information and speeds up the transfer
of that information.
Remember also that the closer you are to the customer the more accurate your information will be.
So short channelings also assist coordination and communication efforts.
The major obstacle to CPF are trust.
Each member has to know that their information is not going to be used inappropriately by the other
CPF is a strategy that can be applied with your key partners.
Once you have been doing business with for some time.
Once you have a vested interest in optimizing the entire logistics channel rather than their position
in the channel do you suffer from the whip effect.
How good of a job does your company do in balancing supply and demand.
The key ingredient to success here is closer collaboration with the right logistics partners.