What does Elon Musk think about Supply Chain?
“The supply chain stuff is really tricky.” ~Elon Musk, CEO of Tesla and SpaceX
A concept that might be tricky, is something called the bullwhip effect.
Bullwhips are tools that are used to make animals move. They are used to create a small sonic boom and can be dangerous to the animal or anything in the way. A bullwhip has a large handle, with a tapered lash, that varies in length. Then at the very end of the whip is a popper. The handle is moved, and the physical waves move progressively faster when the whip is flicked until they end at the popper, which provides a loud popping sound, moves incredibly fast, and is quite dangerous.
In the supply chain, think about the handle as the end manufacturer or distributor of a product to the customer. This is the retailer, the car company, the construction company. Next, the lash is the series of suppliers that go into making the product. Lastly, the popper is the negative effect in excess inventory, production capacity, and wasted capital.
For a vehicle manufacturer, a simplified version of ONE of the many thousands of parts that go into a vehicle might have a supply chain that looks like this.
End vehicle
Brakes Supplier
Rotor Supplier
Rotor Casting Supplier
Steel production
Raw Material Mining
Demand has recently skyrocketed for vehicles with inflation in the USA of around 27-30% on used vehicles and 5% on new vehicles as of June 2021. The vehicle manufacturers may begin to increase capacity and produce more vehicles. If they do that, the bullwhip will start to move. This is the largest part of the whip, or the supply chain starting to move.
If the OEM (Original Equipment Manufacturer) tells the brake supplier, they need an increase in supply of 15%, they begin to expedite their own production. They would talk to the rotor supplier, who talks to the rotor casting supplier, who talks to the steel production company, who then finally talks to the raw material mining company.
The bullwhip happens when each level of the waves get larger. The brake assembly supplier might grab a little extra and go up in capacity 20%, the rotor supplier moves 25%, the steel supplier goes up by 30%, and lastly the raw material mining supplier has to increase volume by 35%. Along the way significant increases in production are legitimate as more people, capital equipment, and consumable equipment are bought along the way.
However, the popper or end of the whip is felt by the raw material mining supplier. They end up producing almost double.
Take a look at the diagram below to understand the waves of the bullwhip. Image created by Right Sized Inventory.
So What?
At each stage of the supply chain every wasted resource eventually goes back into the cost. The bullwhip effect can add some of the following costs into your supply chains and where you may be able to find some of the cost in your everyday life.
When the last supplier gets the end of the whip, those costs are eventually passed right back through the chain. The mining company in order to remain profitable will either increase cost or find new customers who might increase your pricing as well.
How do I fix it?
If you are facing a shift in demand, please be sure to react within the normal safety stock no matter where you fit in the modern supply chain economy. Please be sure to assess if the change in demand is a temporary spike or a permanent change. If you want to understand what the amount of safety stock to carry is, contact RSI today. We use modern machine learning and AI to simulate your supply chain.
