Light at the End of the Tunnel?
As Congestion Looms, There May Be Some Relief in Sight
October is generally a spooky month. Depending on your perspective, it’s the end of Q3 and you realize the year has flown by, you need to decide how to one-up your costume from last year, or if you’re in the shipping business, you realize that even Santa won’t be able to deliver on time this year.
Let’s be honest, this has been a very trying year for trade and our monthly updates have been relatively doom and gloom, but we have a responsibility to be honest and transparent with you. With that said, this month we are looking forward (possibly way forward) and we think there may be some light at the end of the tunnel.
Whatever your stance is on inflation these days, the Fed’s transitory outlook has been consistent and largely stems from supply chain issues. So how did we get here? Clearly, the pandemic had something to do with this but the series of outcomes that led to our current situation has been studied by economists and feared by supply chain experts since the 1960s—it’s called the bullwhip effect.
Jay Wright Forrester was the first person to describe the bullwhip effect (though at that time it was called the Forrester Effect). Essentially, when a cowboy can move his wrist merely a few inches and send the bullwhip several feet in the air, slight changes in demand can create a ripple of big supply chain disruptions. According to Quartz here’s why:
- Different people control different segments of a supply chain. The manager of a convenience store works separately from the owner of a wholesale food distributor who works separately from the floor manager at a Doritos factory.
- Those people often don’t communicate well. A factory manager has limited information about sales at individual stores, and a store manager knows little about production at the factory.
- Every person is trying to carefully balance their stock of goods. No one wants to order or produce too much of a good, but no one wants to have too little, either.
The bullwhip effect happens because managers tend to overreact to changes in demand. A classic example comes from Stanford Business School professors Hau Lee, V. Padmanabhan, and Seungjin Whang, who coined the phrase “bullwhip effect” in a 1997 paper describing a head-scratching discovery at Proctor & Gamble. Company executives noticed big swings in wholesale orders for diapers, even though retail sales were relatively stable.
The executives realized that retail stores were seeing small fluctuations in diaper sales. When sales went up a smidge, the retailers would order extra diapers from their wholesale suppliers to avoid running out of stock. When sales fell, retailers would cut their orders. The problem was, retailers might react to, say, a 10% increase in diaper sales by ordering 20% more diapers, because they were scared of running out of stock. The wholesalers, seeing a sudden 20% jump in orders, might panic and raise their diaper orders to Proctor & Gamble by 35%. P&G would then find itself ramping up diaper production by 50% to meet a major spike in order volume—even though demand hadn’t actually changed much.
Okay, so this runs a parallel to our toilet paper shortage back in 2020 and is a definite explanation as to why we’re at where we are today. The real question is, how do we stop the bullwhip from cracking the sound barrier (aka our sanity) and bring us back to normal? The answer is that we may never return to pre-2020 normal but we might be able to make normal better.
The pandemic has forced most industries to adapt or die. The work from home revolution was accelerated by the need for businesses to survive and will likely change the way we work forever. The silver lining in all of this is that society has the incredible ability to do some amazing things when under pressure. Supply chain is no exception.
The Port of Long Beach is adopting 24-hour gate operations to keep up with demand, the Port of LA is focusing hard on boosting efficiency in operations. Businesses like Costco are taking matters into their own hands by charting ships to transport goods and navigate around supply chain troubles, and companies like Palantir are offering state-of-the-art software to connect suppliers around the world to limit the bullwhip effect.
Aside from innovation, the Chinese Golden Week holiday, a power cut notice from the Chinese Government affecting factories, and an ongoing COVID-19 situation in Xiamen and Fujian are easing the volume of cargoes on the market. This may allow some much-needed respite for an industry heading into the holidays.
While this may seem messy, sometimes it takes a shakeup to bring about positive change and M.E. Dey & Co. sees light at the end of the tunnel. We will continue to keep you posted on new developments and hopefully an easing in demand over the next couple of months. In the immediate future, we recommend ordering that Halloween costume sooner than later.