If you’ve been to any store lately you have probably seen several items that have a healthy amount of stock while other items are completely depleted. This is accentuated for more complex items (metal pipe vs. bathroom appliance). However, this is all that you as the consumer can see. This is the behind the scenes story of master distributors feeling manufacturing bullwhip crack.
In general terms, a small manufacturer of goods will have small direct contracts with small entities like “mom and pop” shops. As the manufacturer grows, it is difficult to keep multiple direct contracts, and instead work with a master distributor(s). This master distributor (MD) still sells to small shops as well as large chain stores. MDs have honed formulas over years to dictate their expected and preferred stock level. The preferred level is the maximum amount of product projected for purchase while expected is their most accurate projected without being zero. These calculations are crunched semi- to bi-weekly using production lead time values.
However, in the last two years, this formula has been hamstrung by that variable. Previously, the lead time has stayed rigid and in cases of a delay, the manufacturer and master distributor will negotiate and calculate a new larger value that would compensate for the change. Lately, manufactures have been running long production lines for specific products to both increase efficiency and total product amount that is completely consumed for the market. This is accentuated in the kitchen fixture industry with lead times twice to three times larger than usual. This is the bullwhip effect, where production and demand wildly spike and drop creating a diagram that resembles a bull whip.
Typical sales from manufacturers to MDs have a goodwill 1% stock rotation clause. A stock rotation allows the MDs to return items up to the negotiated value for a manufacturer credit and a promise to purchase more of any SKU in addition. With the wild swings, MDs are placed in a precarious position with two options, after receiving a large purchase of late product that is out of demand. They can either hold the product with the expectation for demand to drive up leaving them in prime market position and no new manufactured product for competing MDs to receive, or perform a stock rotation for a hot item with an unknown arrival time.
Stock rotation = X*.01+Z; where X is the original purchase value and Z is the extra promised purchase.
With this section of the supply chain in mind, there are two identifiable links that, when fixed, will prevent whiplash. If there are stores that have demand from an item, they can contact any MD to purchase the product. Albeit, not the longest contracts, most stores and MDs have exclusive agreements when it comes to products of specific brands and to purchase just one SKU from a competing MD would be considered a break of contract. Moving down the chain, the manufactures can give more precise lead times to the MDs so that the MDs can purchase the optimal SKU amount. However, manufacturers themselves have a difficult time knowing this value when taking in changing values of work force size, raw material arrival and transportation from the manufacturer to the MD after production. In addition, the structure of stock rotation agreements do not encourage the manufacturers to a regular production cycle. And until manufacturers receive their steady inputs and creates a predictable rhythm, we are all in for a white-knuckled ride.
Have questions or want to learn how to avoid the bullwhip effect in your supply chain, reach out to one of our subject matter experts today at firstname.lastname@example.org
Contributor: Matthew Segars, Senior Supply Chain Consultant at Bricz