It is hurting you more than you realize. Take these 2 actions to stop the hurt.
As I discuss improving strategic procurement performance with companies, I’m hearing distressing supply chain news…
…because of spikes in demand, buyers are panicked about being able to bring in materials on time in full…
…because buyers are panicked, and want something to land on their docks so that supply chains continue to operate, multiple purchases of the same materials for the same orders are being made with multiple suppliers in the hopes that something comes in.
See the problem?
As procurement personnel desperately try to fill their order needs, there is growing overbuying of materials.
In other words, false demand signals are being shoved into supply chains due to panic buying and scarcity mindsets.
Scarcity is an issue for specific materials.
There is a need to know what is on the shelves now that I can buy because I need it now (I think).
There are real shortages in delivery capability.
These three elements added together ramp up intensity, spill over into corporate mindsets, and justify the thinking that nothing will be available if I don’t take a scattershot approach to just do something, anything, everywhere possible.
This means the problem of scarcity is magnified, exaggerated, and false demand signals are created. The false signals cause an increase in material scarcity and eventually shut down entire supply chains.
Unfortunately, many companies do scatter shoot their way through a problem (those without a Plan B). Be wary of risk your company may be exposed to taking this approach. Why? First you end up with multiple times what you need. Second, you can’t always send it back or get a refund. Third, partners expect to be paid – whether your actions were for real demand or not.
Combine scarcity with many companies’ intense desire to improve forecasting to eliminate all error rapidly in real time and you have a recipe for short tempers, chaotic supply chains, and demand signals that vary all over the place.
While a forecast is never 100% correct, when the bullwhip effect rears its ugly head, the demand you are seeing and the demand you are forecasting based on current numbers, is fake. The true demand in your forecasts is masked due to heightened demand levels from panic buying. As supply chains begin to move, extraneous orders may be canceled at the last-minute creating chaos and fear of overstocking due to overordering. Of course, not all orders can be canceled.
The bullwhip effect means your supply chains, and your supplier’s supply chains, signal for more demand than exists. As your upstream partners panic based on your wildly changing and/or increasing demand signals, demand signals are significantly increased and multiplied throughout the entire supply chain.
Remember too, panic is contagious. Your panic may instigate other supply chains to panic as well. It certainly causes supply chain pipelines to become clogged.
Recall the Covid toilet paper stockouts? The true demand did not suddenly rise. Contagious panic buying did. Shelves remained empty in stores while individuals hoarded supplies they wouldn’t use for months. Supply chains were blamed. However, panic buying based on perceived scarcity was the true culprit.
Here’s the problem, if you can’t separate the real demand signal from the false signal, you’ll be left with huge bills, large inventory counts for material that won’t necessarily move, and significantly less cash flow.
There are very real reasons supply chain panic buying is called the bullwhip effect: the fluctuations only increase as you go upstream in your supply chain and, getting snapped by the whip hurts.
Is there a way you can prevent and unravel panic buying from true demand?
If you are just starting to try and tame this issue, it may be a tough slog. But the slog is worth it if you want more sane supply chain operations.
If you are lucky enough not to be caught in the current whirlwind, you will want to put these pieces in place now so that balancing reality and shortage mentality buying later is much easier and based on data and logic.
1: Develop relationships with your supply base, your delivery base, and your key customer base
Relationships oil the workings of finely-tuned supply chains.
If you know the performance your company requires to best serve its key customers, then you’ll need to partner with suppliers and delivery partners that can deliver the performance required.
That performance matching alone will eliminate much of the angst between you and your bases of supply and delivery during times of stress.
Performance alignment also helps negotiations – you know exactly what your partners need. You can agree to share order information and specific forecast data. You can also agree on crisis metrics that provide extended supply chain visibility and increased communication to improve alignment and sort through false demand signals.
If partners are not required to run around processes, and…
If partners don’t have to invent temporary metrics on your orders to satisfy what could be labeled as your constantly changing demands, and…
If you stop causing chaos, then…
You will be a key customer/supplier – even if you are not the largest.
Compared to all companies, it is easy doing business with you. Your partners don’t have to spend extra just to get regular product built and shipped. Partner employees are not always frustrated when your orders come in. Partner eye rolls are gone when discussing your company.
Planned correctly, all the above happens before the relationship truly begins because you become aligned on performance requirements and understand capacity limitations.
Now work your magic and create a comfortable working relationship built on respect and trust.
When times get bad, even if you don’t have the purchasing power of other companies, you will be taken care of.
And, when the bullwhip effect comes into play, you have partners who can provide insight into the demand explaining what is real and what is imaginary due to panicked buyers. As a supply chain manager, you can continue moving product and services without the drama, gnashing of teeth, and sleepless nights those who haven’t invested the time into relationship building now have to contend with.
2: Bring in technology that can help you identify panic buying trends and false demand signals
I like AI (Artificial Intelligence) for this task.
Think of AI as the defender of supply chain sanity, the righter of wronged forecasting, and the provider of truer market knowledge.
AI does what you and your teams do, only faster, in more depth, and often with built in analytics designed to provide you with decision-making options.
Because let’s face it, AI has only one job to do and you many times more jobs that are often radically different from each other. So put a focused, narrow “minded”, ready to dig into the data piece of technology on the job of gathering data and serving up options that make sense.
Options that make sense because your company spent the required time needed to fine tune your AI to deliver meaningful insight.
Insight that makes sense because you’ve tested it. In this case, the AI analyzes data from various sources to make sure it picks up demand patterns, customer sentiment, and trade activity you will probably be subject to. It then will analyze and present options you have confidence in, knowing that there is not a large piece of critical data missing that will change the options you are presented with. AI doesn’t come out of the box ready to go. Your company must carefully train the AI so that you develop confidence the tasks it performs and the options it presents for decisions that affect business health.
Once you have viable and often innovative options, share them. Using your risk management framework, reach out and into your extended supply chain and work together to survive the upcoming storm, put Plan B in place early, and protect your joint supply chain and its customers from the panic that is coming. Extended teamwork is built on solid relationships, hence the need to start with relationship building immediately if you don’t currently have deep, reliable partner relationships.
To align the critical pieces: performance, supply/delivery/customer relationships, and technology (AI in this case), I use SCOR (Supply Chain Operations Reference model). When integrated into your supply chain processes, visibility can be achieved in real time. Continuous monitoring of what is going on in your extended supply chains can be married with data providing key partners instant insight into global events, geopolitical changes, consumer sentiment, and trade adjustments.
As an extended team, you then determine how to react in a sustainable manner – not from a position of panic.
But what if you don’t have these pieces in place now? What can possibly be done in the middle of a panic filled situation?
1) Talk to your key customers to understand what their true demand quantities are. How much padding is being added – and will they allow it to be removed.
2) Talk to your critical supply and delivery partners. Learn what their capacity constraints are, what the constraints mean to you, how you can effectively work within the constraints for now, and if there are any quick adjustments you can make that won’t hurt your company but will allow you to improve the material flow.
3) Get agreement on how you and your extended supply chains will handle this supply crisis as a team – calmly, sustainably, and without introducing unnecessary risk. Be innovative.
The old saying holds true: never let a good crisis go to waste.
Start knitting your supply chains together more closely today.
Make sure you and your supply chain partners are all talking the same supply chain language. Define and collaborate on the metrics being used. Note differences in how partners evaluate a crisis and its effects.
Use a tool created to help align your extended supply chain performance. Consider using a tool such as SCOR, which melds people, process, performance (metrics) and practice.
While you may not have been able to avert this crisis, you can be well prepared for the next, and get out of this one in better shape.
You also eliminate those sleepless nights caused from relying on panic buying for business survival.
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Cynthia Kalina-Kaminsky is the CEO of Process & Strategy Solutions where she assists companies of all sizes successfully navigate supply chain transformation, digital technology solution integrations, and panic attacks that ruin your customer performance. She also provides virtual training including an upcoming May SCOR course providing hand-on mastery to creating focused performance strategy, digital technology integration, and safe supply chain operation without chaos. Please click to learn more