Edition 11 | Autumn 2022

How to avoid the bullwhip effect?

2021 was, as we have been told by many of our customers, one of the busiest years on record. What does this mean for this year?

With raised demands for aggregates due to the current housing market and the number of large roading projects going on, many aggregate producers have had to ramp up production. Speaking in the short term, this has been something many quarries have been able to capitalize on taking up new supplier contracts, however, to err on the side of caution, we must consider what might be happening in the quarrying industry right now.

Are we currently seeing the bullwhip effect?

In terms of supply chain, the Bullwhip effect is something any producer or supplier should consider when forecasting. For example, an aggregate retailer may keep 100 tons of aggregate in stock. If it normally sells 20 tonnes a day, it will order that replacement amount from an aggregate supplier weekly. One day they sell 70 tons of aggregate and decide that to keep up with this sudden new demand they must order 100 tons extrain their next order.

The supplier may then respond by ordering double or 400 tonnes from the quarry to ensure they do not run out. The quarry then produces 800 tonnes to be on the safe side. Following the supply chain from the customer to the quarry the amount needed was 70 tons at the customer level which has now been amplified to 800 at the manufacturer level.

The big question becomes how do we avoid the bullwhip effect? It all becomes a balancing act of not over or under ordering and producing while trying to forecast which way the market will go. The best solutions put forward by our own Supply Chain Manager, Ivan Skobe, were based on all-around communication. Without clear communication between the retailer, supplier, and everyone in between the bullwhip effect is much more likely to happen. Ivan suggests:

• Improved communication and information sharing with downstream customers
• Share information like sales promotions, planned demand peaks, and more so upstream suppliers don’t get misled into thinking the market has picked up.
• Communicating information on actual demand rather than orders as well as planned promotions or increases in safety stock can prevent this occurrence or lessen its effect.

In the quarrying industry, this sort of effect could see huge demand for aggregates in the short term with the government’s 4-year infrastructure investment plan funding many large highway projects throughout the country.

This coupled with a raised demand for aggregate in the home building industry (with each home requiring on average 250 tonnes of aggregate) is causing a huge elevation in demand, however, we must ask the question, will it last? Our expert recommends that to avoid over producing due to the bullwhip effect, we should all be watching key market indicators 3-4 years ahead of time. By looking that far ahead we can predict when large projects may be ending or started causing the demand for aggregates to rise and fall.

By keeping communication channels open and watching trends in the market defined by key indicators, you can keep up with ever-changing demand patterns and avoid the effects of amplified demand. This leads to smarter decisions when it comes to forecasting and mapping out what the future will look like for your business.