Demand Dropping Crisis
I’ve observed master supply chain and operations managers wielding a billion dollar P&L ramp down production and lean out inventory faster and harder than what is comprehensible.
Think of a billion-pound freight train that is 10 miles long. It has been chugging along for 10 years going 150 mph. During those 10 years there has always been track in front and it’s been continually updated to run without stopping. The masterful conductor although he really doesn’t have to worry about it, still keeps an eye out for obstructions to the track. One day, he’s having his coffee, and he sees something strange on the horizon. It’s weirdly dark and he can’t see the usual glare of the track. A few seconds go buy and then he realizes what it is. There is no more track; only a huge gaping cliff to which he is approaching at 150 mph. “Oh man, this one is going to be close,” he mumbles to himself. But because he is a master conductor, he rallies all his people running the train and they stop that thing so hard the spikes start coming up out of the ties. And just as hard as that conductor can stop a train, he can get it moving again.
Most other conductors were less skilled and as such they either stopped watching the track 5 years ago, or never learned how to use the brakes. Either way, they went over the cliff and the only thing that stopped their demise was an expensive government airbag to catch them at the bottom. Just as they didn’t know how to stop, they also are not well versed in building up the momentum quickly to get their ten-mile-long train moving again.
This is what his happening to global supply chains right now. When demand dropped to zero, supply chain and operations managers in an effort to preserve cash, slowed production to a minimum and pushed out their inventory orders to stop the cash bleed. The skillful ones did this with agility and precision. Therefore, they were able to bounce back when demand returned. The rest, which is most of them, bled too long. Some firms got a blood donation from the government. Overall, many are still coasting their trains at a minimum pace and are now struggling to get back in it.
The Bullwhip Effect
The problem with getting the train moving again is that most firms stopped their supply chain pipeline. In general, every time a firm steps outside of their regular supply ordering, their immediate supplier has to react accordingly, which tells the supplier’s supplier to react, and so on and so forth. That chain reaction has a lag time associated with it where it might take three months before the supplier three tiers up the chain even feels that there is a disruption. This lag time ends up amplifying the supply disruption. When demand returns to a manufacturer who just ran themselves out of raw material and shut their three-month pipeline off, the manufacturer places huge orders to replenish that pipeline. In so doing, each supplier up the chain orders a little extra to anticipate even greater demand based on such an irregularly large order from their customer. Three months later, the supplier furthest up the supply chain finally catches wind of the demand. But it’s not just wind. Within that three months’ time, manufacturers have not been able to produce to meet their new demand, so they all start panic buying. (We observed the effects of panic buying with the toilet paper shortage during the COVID-19 pandemic.) The supplier three months up the chain receives the hurricane of all the panic demand and turns on that factory full blast and even raises their prices knowing that there is much higher demand than they are able to supply. Thus, you have this bullwhip effect that shocks the whole supply chain. This doesn’t apply to ALL supply chains but it applies to enough of them that entire markets suffer from commodity shortages and huge price increases. Think of the chip shortage from May of 2021, or the current lumber shortage and subsequent unprecedented increased prices.
The Opportunity
The takeaway from this is supply chain professionals can sit back and REACT as they have been for years, or they can choose to grind and build an agile supply chain that literally brings their firm a significant competitive advantage over their competition the next time commodity markets go through a demand squeeze. This strategic supply chain cannot be built overnight. It will take years, but if it is done right, the firm benefiting from it will be able to dance around their competition as if nothing is wrong.
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