Too many eggs: Supply chain shocks arise from COVID-19

This spring, as consumers flocked to stock up on essentials, one item in Singapore was overwhelmingly in demand: Eggs.

For periods in March and April, they were frequently missing from grocery shelves, both digital and in store. Distributors in the import-dependent city state scrambled to increase their stocks.

Fast forward to June, when distributors had to throw away more than 250,000 eggs due to oversupply.

The wild swing from deficit to surplus – known in logistics circles as the bullwhip effect – has highlighted the susceptibility of supply chains to such shocks. While a pandemic isn’t required to instigate it, the events this year amplified the impact.

“This is a great example of the bullwhip effect in action,” says Michael Ignatiadis, Head of Supply Chain & Logistics Solutions, JLL Asia Pacific. “Supply chains these days can be very long and complex. Even the smallest shifts at each node can eventually lead to a significant multiplier effect as you go upstream.”

Shocks and volatility

Here’s how the bullwhip effect can unfurl: Consumers jump to the conclusion that there is a shortage of goods the moment they see empty shelves, even though the supply chain might still be functioning smoothly.

Seeing the spike in demand, retailers then place more orders. That in turn forces distributors to request an increase in production.

“There is distortion in the signal which goes all the way upstream to the supplier of raw material,” says Ignatiadis. “This impacts logistics as warehouses are unable to cope with extra volume that hasn’t been matched by sales, leading to obsolete and excess stock.”

He says the core problem is companies’ inability to make accurate forecasts in a volatile environment. This was especially true this year. There was hardly a modern precedent for the pandemic, and so no historical data on which firms could rely.

However, the bullwhip effect can happen even during stable periods. One famed case study is that of the green Volvos in mid-1990s. Faced with an excess of green cars, Volvo’s marketing and sales departments offered them at discounts. When sales of green Volvos spiked, the manufacturing department mistook it as heightened demand and boosted production.

“This happened 30 years ago when supply chains were more linear,” says Ignatiadis, noting how the world is now much more interconnected. Most firms’ supplies are coming from multiple sources. Manufacturing is much more dispersed. Products are assembled in separate locations and are usually at least partially outsourced.

“You can imagine how changes at each point could trigger far-reaching impact in today’s world,” he says.

Space constraints

A problematic result of the bullwhip effect is excessive inventory. Fashion retailers such as H&M and Uniqlo were forced to slash prices during the coronavirus outbreak. Others have cancelled orders, causing distress for suppliers. Around the world, warehouses burgeoning with goods turned container ships into temporary floating storehouses as retail companies tried to slow deliveries in order to save on costs.

But for industries that require a continuous running of the production, such as semiconductors and chemical dyes, factories can’t slow down or stop, which means inventory is stockpiled. Producers try to cope by trying to store inventory as long as possible, for instance at a port, before passing on the storage cost to their clients. 

One way to cope with excess inventory is flexible or on-demand warehousing, where leases are shorter, says Rich Thompson, International Director of Supply Chain, JLL.

"Companies that are looking for short-term warehousing space, or that have huge seasonality in their businesses, have been evaluating flex industrial space solutions such as Flexe in U.S.,” Thompson says.

Even before COVID-19, demand for flex warehousing was already on the rise due to e-commerce, which has accelerated volume orders and pushed for greater speed in order fulfilment.

According to Abdul Paravengal, CFO of Shipper, Indonesia-based logistics platform offering on-demand warehousing also as a service, it's not just e-commerce players who are big users of their services.

"Another client base of ours are suppliers of critical spare parts which require time-bound delivery to avoid downtime costs," he says. In a sign of how Shipper is growing, the firm had seven warehouses in Indonesia last September. It now has 38 and expects to reach 500 within a few years from now.

Ultimately, the best way to counter the bullwhip effect is through better visibility of the end-to-end supply chain.

“Better data and more collaboration among the parties involved are needed to enable for more effective planning and to reduce the distortion of the demand signal along the chain,” Ignatiadis says.