Another consequence of Coronavirus: the “bullwhip effect”

March 31, 2020 By Natalia Andueza

Covid-19, better known as Coronavirus, is causing a surge in purchases due to fears of product shortages. This increase in sales produces a demand peak, generated by the large purchase volumes of end consumers. The fear of finding empty shelves or out-of-stock products causes us to overstock.

But it goes further; the infections and the rapid spread of the virus create an immediate need for medical supplies, which also contributes to generating extremely high demand peaks. In response to this situation, supermarket chains, shops, and pharmacies are generating larger purchase volumes to secure their inventories. The fear of stockouts therefore increases material and production requirements.

The effect of Coronavirus on the Logistics Chain

The effect of such a large increase in the purchase of basic and medical products sends an immediate message to the Supply Chain. Retailers pass market needs upstream to wholesalers and distributors, who in turn pass them to manufacturers, and these to raw material suppliers. However, with one major difference: each link in the chain requests more from the next.

The problem is that, to meet demand peaks, the manufacturer must increase its working capacity, making the cost of the product supplied to the chain more expensive and decreasing the value it generates.

Order volume also causes delivery times to increase. Consequently, retailers and distributors increase their orders. This creates periods in which orders rise drastically, loading the entire supply chain with stock and, therefore, increasing the costs of maintaining such a high volume of stocked merchandise.

Once demand stabilizes, manufacturers, distributors, and retailers will find themselves overstocked and will therefore resort to pricing policies, discounts, or rebates to move the merchandise. As a result, there will be a deterioration in the value generated by the Supply Chain.

How Industry 4.0 can mitigate the bullwhip effect

Transparency and information flows between the different links in the chain are key in this regard. Currently, data analysis allows for the extraction of the information necessary to visualize real market needs, define optimal reorder points, or set pricing policies based on price and product elasticities.

The solution to the bullwhip effect lies in a coordinated, transparent Supply Chain where the different members have visibility of the previous one. Today, many companies benefit from these types of solutions. At LIS DATA, we develop custom projects that allow for the connection of information between links, increasing control over real demand by 80% to 95% and optimizing logistics processes.

How do we solve the bullwhip effect at LIS DATA?

Our project developments are based on finding the best solutions for your company through our experience in the Logistics Sector and advanced data analysis.

Demand forecasting: we develop automated systems with different forecasting methods that can regularly predict the demand for thousands of products, minimizing prediction error and transparently communicating its reliability. With this information, we can know when to produce, which product, or how much material we should buy.
Supply Chain Control Towers: your company will have real-time visibility of Supply Chain processes, enabling you to monitor, manage, and make better decisions in your company’s management.
Stock optimization: with a single click, you will have a summary of past consumption and inventory levels along with the most relevant KPIs, and you will also obtain a future sales forecast. As a result, this is one of the best tools on the market for graphically representing the state of your warehouse and optimizing your stock levels.
Correlation analysis: correlation analysis allows you to understand how your business variables relate to each other. That is, which product should I offer my customer every time they buy my product A. Correlations indicate a consumer’s propensity to acquire a second product based on different variables or market consumption patterns. Therefore, it allows us to answer which variables determine or correlate with an increase in purchases, more visits to my website, or larger increases in product baskets.
Optimal purchase points: through our product Frigg, you will be able to reduce your stock, thus avoiding the accumulation of fixed assets in your warehouse; avoid stockouts, allowing you to provide better service to your customers and increase your sales; and plan your orders based on the purchase suggestions that Frigg™ will provide you.
Elasticity analysis: allows for the calculation of the degree of response of the quantity demanded of a good or service to changes in the price of that good or service. That is, through mathematical algorithms and clustering processes, we obtain the optimal prices for each product, being able to increase or reduce the profit margins of each product to increase your company’s total sales. Demand forecasting: we develop automated systems with different forecasting methods that can regularly predict the demand for thousands of products, minimizing prediction error and transparently communicating its reliability. With this information, we can know when to produce, which product, or how much material we should buy.

Conclusions

The bullwhip effect causes a chain reaction of purchases and procurement from the consumer to the manufacturer. New advanced data analysis technologies will allow you to have total visibility of your Supply Chain and optimize your logistics processes. The benefits of supporting your decisions with data and having a real reading of demand will increase your competitiveness and, therefore, your sales and service.