Leveraging 3PL’s to Combat The Bullwhip Effect

May 19, 2017 Vincent Tran 0

“Alone we can do little, together we can do so much.” ~Hellen Keller

We all want our companies to grow and flourish. Whether you are a company owner, manager, or even employee, a flourishing company leads to more profits, room for growth, and employment stability. However, with growth comes a lot of uncertainty. How can we expand or improve the quality of our product? What are the next steps in handling our increasing demand? Do we need to contract another manufacturer due to demand? How do you manage your logistics? Say you sell different customizable packages, how do you manage to assemble these kits that are catered to each order? This in itself can lead to a logistical nightmare if you aren’t prepared. As much as you forecast, there is always some level of uncertainty.

Let’s not forget that once you figure all of this out, demand is never linear. There will be times where a sudden shift in customer demand might put your company in a panic mode which will disrupt your work culture and employee morale. Spikes in over time, especially when unprepared can leave lasting negative feelings about the company which does cut into worker productivity. According to Queens School of Business, organizations that disengaged workers have 37% more absenteeism, 60% more work-related errors, and have 49% more accidents. Low employee loyalty also increases employee engagement by 50%. And these are just stats on internal effects. The companies you contract with, such as third-party logistic companies and suppliers, are heavily affected by these demand shifts as well and if not properly informed, suffer more for lack of preparation which in turn can lead to more errors in your supply chain.

However, if you maintain clear communication, throughout your supply chain, you can turn these “disruptive” events into opportunity.

To manage your supply chain, you have to consider all verticals of your supply chain such as your supplier, manufacturing, distribution, and your customers. A poorly developed value chain can deteriorate even with the most minute shifts in demand. This can be devastating especially for medium to small size companies.

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Aside from the workplace effects, a poorly optimized value chain can cause problems with your order quantity. An example of this would be the Bullwhip Effect.

What is the Bullwhip Effect?

The Bullwhip Effect is a supply chain phenomenon in which the variance in quantity order grows the farther you go up the supply chain from the customer.

The picture below demonstrates the effect of the Bullwhip effect. As you can see, there is a small shift in order quantity from the customer on the first graph. In response to this, the stock from the retailer dips and the retailer is forced to order more. However, this is where the problem starts. Say the customer demand shifted from 500 units to 800 units, the retailer would reorder 900 units in order to mitigate variations in the new demand shift. Now imagine the same scenario happening every step on the supply chain. By the bullwhip effect reaches the manufacturer, they may be creating 2000 units for what would have normally have been 900 units.

Despite this, it should be noted that customer demand shifts are merely a trigger to the effect. Below are common reasons why some supply chains suffer from this effect.

Common Reasons:

1. Lack of Communication: A lack of communication throughout the supply chain is one major reason as to why this effect occurs. Without proper communication, firms would spend most of the time guessing and forecasting with the limited knowledge they have as opposed to having an open communication on changes in demand.

2. Sales: Unprecedented sales can lead to this effect since it shifts customer demands. Usually, companies have prepared their labor for the event such as sales but every now and then, an unprepared sales event can place a lot of pressure on a company. For example, say there was a 50% off sale and you expected an increase in the sale of 200%. What would you do if the sale ends up being a 500% increase? You would order more product to be manufactured. However, if this wasn’t properly communicated to the manufacturing company or your distributor, they would not be prepared or equipped to hand the volume increase.

3. Disorganization: A shift in demand isn’t the only reason why a Bullwhip effect would occur. A disorganized supply chain can cause logistical problems in the sense that an unoptimized supply chain can lead to longer lead times.

4. Unclear Return Policies: Without pre-set return policies, you run the risk of customers over order and returning the excess stock.

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But how do to prevent problems such as the bullwhip effect? Here are a couple tips on how to ensure your supply chain:

  1. Having open communication: No matter where you are in the supply chain, it’s essential that your firm is willing to admit mistakes and communicate collaboratively. Lack of communication, especially where there is an error such as bottlenecking can deteriorate your relationship with that partnering company while also diminishing the quality of the product going through the supply chain. Though it may be difficult to swallow mistakes, especially when discussing them to your clients, it actually builds a level or trust and understanding between you and the client.
  2. Have clear and defined benchmarks for your partners and yourself: Keep track of any errors to determine what areas are struggling and how they can be fixed. Sweeping problems under the rug or playing the blame game are signs of an optimal supply chain which is why it’s important to keep the standards you set between you and the firms clear.
  3. Collaborative efforts: It is extremely important to be able to meet with everyone in your supply chain in order to solve problems such as bottlenecking in certain parts of your supply chain, whether this is due to increase in demand or technically issues, a collaborative solution is much more effective as it take in multiple viewpoints and may even lead to potential win-win situations.

Those concepts are fine and all, however, you need to consider the practical applications these three tips. How does one have “open communication” throughout their value chain? It can be safe to say that there is no one size fits all solution. However, below are examples of how the Dot Corp, a 3PL company, follows these three tips.

Medical/Biotech Client

One of our clients works specifically in sending out medical kits to their customers. Our task is to import the file of orders, provided by the client, and assemble the kit based on the individual customer. These orders would then be mailed out to the individual customers. Below is a simplified chart of how their order is processed under out facility.

 

I have simplified the steps on how we carry out these orders into a small graph.sdas

As simple as this process seems, there is a large amount of complexity in the processes. For one, there are numerous checks going on between each process to ensure that the correct product is going to the correct customer, assuming that the submitted orders are correct. Whenever there seems to be an abnormality in the order, such as an unusually high volume or orders or repeated names and addresses. Communication is key to ensure all of our client’s customers receive the correct order which is why if there a possibility for delays, we make it a point to inform the client promptly. It may be difficult in the beginning, but open communication builds trust between us and the client.

With every client, we establish a set of standards and benchmarks that must be met in order to deem the partnership a success or if it needs improvement. For this client, the main benchmarks are heavily based on speed because this process is very time sensitive. Any error in the system or if the machine breaks down can lead to a buildup of delays. In order to avoid this, certain contingency procedures are in place. These contingencies can range from routine checks to having back up machinery in case the main machines break down.

A collaborative solution is always important. Unlike the bullwhip effect where communication along the value chain is limited, communication between us and the client is essential as it allows for us to coordinate our supplies and materials mitigated the effects of the bullwhip effect. The team assigned to work with this particular client has a meeting with them one every couple weeks. If there is any suspect spike in demand, the Dot is able to increase or decrease their workforce to meet those demands allowing for the client to spend based on the volume of work as oppose to a flat rate.

These practices allow for the Dot to meet the needs of the customer while increasing customer satisfaction. It also allows us to determine how to expand and improve our servicers which are why The Dot Corp had decided to reorganize itself recently to better serve their customer. Check in the next few weeks for our article on what was changed at The Dot Corp!

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