Bullwhip Effect

Ever hear of the “Bullwhip Effect”?

This is an interesting situation, which in the fast-changing supply chain for today’s construction materials, has lots of causes and effects.  Added to this is a number of unplanned events (weather, disaster, labor shortages, COVID,…) that further put pressure on the supply chain and the associated costs.  The construction trades have experienced this in a very significant way over the last few years.

As defined from Wikipedia, “The bullwhip effect (also referred to as the Forrester effect) refers to the distortion in-demand information within the supply chain to the variability in demand orders among supply chain participants. The bullwhip effect refers to increasing swings in inventory in response to shifts in consumer demand in the upstream supply chain.”

The bullwhip effect causes swings in inventory/demand throughout the supply chain, and this will also have a significant effect on both the cost and revenues sides for each level of the supply chain.  Basically, the demand forecasts create supply chain inefficiencies, increased production (if capacity is available) and inventory swings.  These occur in response to consumer demand (which is often unpredictable) – ie, increased demand for housing across all types – single and multi-family.  As costs rise through the system, the market dynamics of increased cost drive other segments to make improvements in their current homes (retro).

How can we work to reduce the effects, especially in the construction trades?  Much of this comes down to one of the key objectives of every organization – communication!  If you can share knowledge from customers to suppliers, determine what is causing the actions (or overreactions) a company can begin to reduce the effects and the risks that come with this.  Communication is so important – find ways to improve and make it a focal point.  Technology can help but one should remember that talking vertically within the supply chain will always help planning and execution.

It has been a very interesting ride and will continue to be into next year.