I came across the bullwhip effect as a descriptor recently in discussions around the global chip shortage. Bullwhip effect is a concept that is well known in supply chain circles.
The bullwhip effect is also known as the Forrester effect. Disruption ripples back from the retailer, through the wholesaler, manufacturer, on to their suppliers and so on.
The usual causes for the effect are:
- Demand forecast updating – this might be where a company might want to change their product mix to match consumer demand, if a product is very successful or grossly underperforms
- Order batching – where members of the supply chain round up, or round down the quantity of orders. This happens with the periodic memory gluts or shortages affecting the technology sector
- Price fluctuations – price discounts can encourage non-linear increases in purchases as it becomes worthwhile for customers to stock up, hedging against increased prices down the line. Oil reserves would be a classic example of this phenomenon
- Rationing and gaming – buyers and sellers delivering over or under their order quantities. An example of this would be the actions of Enron in US electricity markets. This could be used in a positive way to promote changing the supply chain like renewable sources of electricity generation
What caused the global chip shortage that is driving the bullwhip effect?
There were three causes to the global chip shortage
- Partial shutdown – The semiconductor industry went through a partial shutdown because of the COVID-19 epidemic. This meant that there was a smaller supply of chips.
- Unusual increase in demand – Home working drove an increase in demand: increased sales in PCs, wi-fi routers, external hard drives, mice, keyboards, printers and so on. There was also a corresponding increase in home entertainment as consumers upgraded smart TVs, Apple and Roku set top boxes. This all coincided with the launch of the next generation of gaming consoles by Sony and Microsoft – which can usually drive a squeeze on their own
- Supply chain disruption – A fire in Japan at Renesas Electronics. A trade war affecting Chinese semiconductor manufacturers. Freezing winter weather in Texas disrupting employees and their businesses. Now there is a drought in Taiwan affecting TSMC – the world’s largest semiconductor foundries
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