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OM in the News: COVID-19 and the Bullwhip Effect

February 23, 2021

Supply chains typically get beaten up during recessions. As sales decline, companies draw down inventories to conserve cash instead of purchasing more parts and materials. Entire pipelines of supplies get cleaned out.

When demand improves, even modestly, suppliers respond with an outsize increase in production to restock empty warehouses and assembly plants. The bullwhip effect, which is discussed in Supplement 11 of your Heizer/Render/Munson text, ripples all along supply chains, generating unusually large orders for suppliers that are far from end customers. This time, writes The Wall Street Journal (Feb. 23, 2021), the bullwhip effect is even more pronounced because demand for consumer products has been extraordinarily high. At the same time, companies are placing supersize orders to compensate for the extra time it takes to procure supplies from factories and freight operators constrained by global efforts to contain the coronavirus. That’s exacerbating the strain on supply chains. 

Malibu Boats of Loudon, Tenn., has struggled with supply shortages as it tries to meet soaring demand

A decadeslong devotion to making factories smaller, cheaper and more efficient made companies more vulnerable to the distortions of the bullwhip effect. To cut costs and boost profits, U.S. companies outsourced operations and whittled inventories. Many of their suppliers did the same. When demand increased unexpectedly last year, the same companies all placed orders at once into increasingly diffuse networks of far-flung suppliers. The result was a bullwhip crack more dramatic than usual that could eventually cause an oversupply in some industries. Everybody is saying, “I need to order a lot more.”

 Malibu Boats, for example, was preparing for a pandemic downturn as it stopped production. To the company’s surprise, within weeks its dealers started reporting many new customers. When Malibu reopened last spring, it ramped up production, but some suppliers were slow to respond. This lead to shortages of components for engines, windshields, and wiring harnesses. “The global supply chain is not as strong as people thought,” said one CEO. And companies have figured out that putting all their eggs in China’s basket is risky.

Classroom discussion questions:

  1. Explain the bullwhip effect in simple terms.
  2. What industries have been most effected by the pandemic in terms of the bullwhip?

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