Ever heard of the bull-whip effect?
Post opening up, if there is something economically we need to fear, this is it.
This supply chain anomaly is going to lead to massive wastages.
Bull-whip effect/ Forrester Effect’, first appeared in Jay Forrester's Industrial Dynamics (1961).
It explains how interconnected supply chains can get confused by due to signal confusion.
Let me simplify -
A small spike in consumer demand post lockdown is going to send a signal of a sudden consumption increase.
Retailers read this new spike as a signal of recovery and place backward orders.
Distributors, sensing surging interest place orders on the manufacturers to cover stocking lead times.
Manufacturers increase production output to be able to meet manufacturing lead-times.
Suddenly, consumption drops.
The customer is unwilling to wait to consume.
Like a bull-whip, there ends up being excesses everywhere leading to:
> unwarranted discounting
> sale at a loss simply to clear working capital
> The consumer did not get what he wanted.
> Distributors & retailers locked up capital for a while.
> Manufacturers end up taking the brunt of lower pricing.
How to get through?
Eliminate the signal from the noise.
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