The Bullwhip Effect: Mitigation Strategies
Mitigation Strategies to Avoid the Bullwhip Effect:
As detailed in our previous blog article, the negative impact of the bullwhip effect could pose significant risks to participants of the European steel industry, including inventory shortages, increased costs, missed market opportunities, and potential disruptions downstream. As the chart below prepared by GMK Center illustrates, the inventories levels in the European Union have reached record low levels exposing thereby the steel ecosystem to the volatility of a bullwhip effect.
In this post we examine how some of these risks can be mitigated through proactive measures and strategic decision-making.
Mitigation strategies and how can Vanilla Steel support
Strategic Inventory Management:
The pandemic demonstrated how JIT (Just In Time) lean inventory practices and geographically distant / long lead time supply chains can combine to create product shortages. It also demonstrated how misunderstood the much admired Toyota Production System (TPS) was. Maintaining optimal inventory levels and closely monitoring demand patterns in crucial items can prevent sudden shortages or excesses. Effective collaboration among suppliers, distributors, and manufacturers can facilitate better visibility and coordination across the supply chain. Enabling timely adjustments to inventory levels based not just on accurate demand forecasts but also on the criticality of each inventory item.
Vanilla Steel is empowering the steel market participants to proactively manage their inventory as they can sell or buy at any given point in time their stock. A blocking point in building inventory is the perception to be stucked with it. Being aware that you can sell your slow movers in a fast and efficient manner and sell them on the secondary market removes some complexity in building a necessary Strategic Inventory. This facilitates effective inventory management by optimizing procurement decisions, reducing carrying costs, and improving overall supply chain efficiency. Vanilla Steel is ultimately building the necessary liquidity in the market to facilitate an efficient supply chain ecosystem.
Enhanced Communication:
Establishing robust communication channels between supply chain partners is essential. There are examples in the auto sector of buyers being granted progress visibility of their ordered product at the producing mill. But such is not the case for many. Sharing accurate and timely information concerning demand forecasts, production capabilities, and lead times can enable proactive decision-making and mitigate the amplification of demand fluctuations. Finally, collaborative forecasting and planning can help align supply and demand more effectively.
A digital platform is ultimately facilitating seamless communication between buyers and sellers as it is providing real-time information in a structured manner: Vanilla Steel thereby is shortening the negotiation process. The platform provides a more transparent and efficient communication channel where participants can quickly engage in discussions, negotiate terms, and finalize spot contracts. The combination of efficient communication and shorter negotiation cycles enables steel businesses to respond promptly to market opportunities and optimize their procurement strategies.
Diversification and Resilience:
Diversifying suppliers and developing alternative sourcing options both internally in Europe and outside can help mitigate disruptions caused by sudden shifts in demand or supply. It's a matter of proactively investing in searching for and testing alternate solutions rather than reactively doing so in the face of unexpected events.
Vanilla Steel allows businesses to efficiently manage their diversification by providing access to a diverse range of suppliers. Effectively, you can talk to 300 suppliers at the same time. This enables businesses to strategically diversify their supplier base when needed through the platform, reducing dependence on a single source and mitigating supply chain risks.
Long-Term and Spot Contracts:
Having a mix of spot and long-term contracts, can mitigate potential risks associated with market fluctuations and uncertainties. Indeed, spot contracts enable market participants to take advantage of immediate opportunities and react swiftly to changing market conditions. They provide flexibility, allowing buyers and sellers to capitalize on favorable price movements or sudden shifts in demand. By engaging in spot contracts, businesses can adjust their purchasing or selling strategies based on real-time market conditions, optimizing their operations.
Vanilla Steel, as a digital procurement infrastructure for the steel industry, plays a pivotal role in fostering diversification and supporting the discovery of new suppliers when a buyer has an urgent need that needs to be answered with spot contracts and/or excess material. Serving as a centralized hub where buyers and sellers can connect and trade various metal commodities. Vanilla Steel provides further options for steel market participants in building the right ratio of spot vs framework contracts in a defined market environment.
Additional Mitigation Strategy via derivatives contract
Price Risk Insurance - Tools for the Bullwhip Effect:
Commodity derivatives exchanges rely on public steel indices like Argus North European Hot Rolled Coil and Platts CFR Turkey Scrap to settle cash-based derivatives. While derivatives might appear perplexing or risky, they function as insurance policies that protect your business from adverse steel price movements.
Similar to how we secure insurance for our buildings, contents, and various risks, there are now insurance policies available to shield against steel price fluctuations. These policies, for a reasonable premium, can provide coverage for a significant portion (around 80-95%) of the risk.
Finally, derivatives can be a valuable tool for managing your business and reducing exposure to the negative effects of significant price fluctuations. With the potential to provide coverage of around 80-95% for steel negative price movements, it's worth carefully considering as a means to mitigate risks associated with large price swings.
Concluding Remarks
Ripple Effects of the Bullwhip Effect:
In addition to the direct risks associated with the bullwhip effect, there are also ripple effects that need to be taken into consideration. These indirect risks stem from the initial disruption and can further amplify the impact throughout the supply chain. For example, when demand fluctuates significantly, it can lead to increased transportation costs as companies rush to expedite shipments or find alternative means of transportation. Moreover, excessive demand variability may strain relationships with customers and suppliers, leading to potential breakdowns in trust and cooperation. These ripple effects can have long-lasting consequences, affecting overall supply chain performance and market competitiveness.
Effectively recognizing and addressing the ripple effects of the bullwhip effect requires a proactive and holistic approach. It involves ongoing monitoring of market dynamics, supply chain performance, and customer behavior. By continuously evaluating and adapting strategies in response to changing conditions, organizations can mitigate the ripple effects and reduce the likelihood of the bullwhip effect occurring in the first place.
The bullwhip effect could pose significant challenges within the European steel industry, given the low inventory levels, lead time uncertainties, and price fluctuations characterizing the current market environment. However, a thorough understanding of market dynamics, the implementation of appropriate mitigation strategies, and leveraging innovative technological tools available such as marketplaces, enable industry players to minimize the risk of disruption. By integrating these tools into a comprehensive risk mitigation matrix, players can make informed decisions, by acting strategically, and avoiding potential future disruptions while securing competitive advantage
