Building a flexible supply chain for uncertain times.pdfVIP

o p e r a t i o n s M A R C H 2 0 0 9 Building a flexible supply chain for uncertain times The “bullwhip effect” means that distortions in data cascade through a company’s suppliers. Businesses must remain flexible to protect themselves. Christoph Glatzel, Stefan Helmcke, and Joshua Wine 1 The global downturn’s speed and severity have significant implications for the supply chains of global manufacturers. Among steelmakers, chemical players, and some high-tech companies, for instance, order books—and therefore prices—are under tremendous pressure. Output in the steel industry dropped by an unprecedented 30 percent and prices by about 50 percent from June 2008 to December 2008. That kind of volatility wreaks havoc on traditional supply chain planning: the process for determining production levels, raw-material purchases, transport capacity, and other vital factors, largely by examining historical patterns of demand. “Every month, we produce a rolling three-year plan,” said one metals executive recently, “but right now I can’t see even three weeks ahead.” Indeed, the forecasting challenge is particularly acute because in many upstream industrial settings, as supply partners along the chain anticipate that demand will fall, the supply chain appears to be decoupling from downstream consumption—the focus of most fore- casting models. Against this backdrop, senior executives should reconsider the implications of the “bullwhip effect,” first identified in the 1960s and known to generations of business students as the “beer game.”1 In this classic phenomenon, distortions in information snowball along the length of a company’s supply chain, propelling relatively small changes in end-consumer demand into much larger and less predictable swings in demand further upstream Exhibit 1a and Exhibit 1b . How relevant is the bullwhip effect today? Consider the US inventory-to-sales ratio, which rose sharply from June to December 2008. Exhibit 2, bearing as close a resembl