The Bullwhip Effect: Will it Hit the Paper Industry?
So, as we looked at in our first blog, there are some small signs of improvement for the paper supply chain, but the situation remains challenging. One specific scenario that could complicate things is what’s known as the bullwhip effect.
The bullwhip effect occurs when demand signals lead to changes in supply. Through links in a supply chain, each small change of demand creates a possibility for overcorrection. Ultimately, this can lead to excess product, excess production, inaccurate forecasting, and inconsistent inventories. In short, more of the same challenge that paper has been facing for awhile now.
What’s different now? Why is the bullwhip effect possibly coming into play? Ironically, the improving outlook is the very reason to be on the watch. As bottlenecks in the supply chain loosen, those same demand signals could lead to ripple effects throughout.
What can cause the bullwhip effect? Three main factors for paper are consumer spending, container costs, and van load-to-truck ratio. So how are those looking?
Consumer spending is shifting back to historical norms, though it’s not quite there yet. Services have risen back to near pre-Covid levels while spending on goods has slowed. Container costs are falling, though also still not back to pre-Covid levels. Carrier reliability and availability are close to 2020 levels.
This means that suppliers and manufacturers have been adjusting as well, potentially increasing their output—and increasing available supply. The question, then, is if these changes match actual demand or if they’re in response to perceived demand. And this is where we potentially get into the bullwhip.
For our currently challenged paper industry where users are searching everywhere paper, it can look like this. An end user is seeking a printed job and may send their quote to a few different printers. Those few different printers send their demand signal to a few distributors and they send it to a few manufacturers and all of a sudden that one printed job ends up as 10 or 15 different printed jobs, grossly exaggerating the actual demand.
When supply was readily available, this scenario was less likely to occur. Now that everyone is searching for paper, it feels like a change in demand. The code readers, e.g. paper buyers, are trying to decipher what portion of the current demand signals are real and what portion are just duplicates.
When supply was constrained, it mattered less. Now that supply is showing signs of loosening, largely due to imports, it becomes critically important not to react to all of the demand signals, else we may fall victim to the bullwhip effect ultimately further destabilizing the unstable supply chain.
The problem is that demand signals aren’t entirely clear because of low inventory. Domestic manufacturers are still constrained. Offshore supply is still battling unknown lead times and unpredictability. As a result, shifts in demand could be misinterpreted, which could lead to inaccurate supply, which could create increases in instability.
Now, this isn’t guaranteed. It might not happen. But considering the lack of clarity in the supply chain currently, it’s a real risk. So here are some ways you can be careful to avoid it.
Get closer to your sources of demand and understand what’s happening. Are these demand signals real? Or is the bullwhip effect starting to multiply them? When you can figure this out with confidence, you can increase your confidence in meeting your paper sourcing needs.
Have clear metrics on performance and supply. If you have established guardrails, you can truly know how things are changing and how that affects your own behavior. In particular, look for consumer spending to level out, rather than the ups and downs of the past few years. This should help with stability and clarity.
Use tested, proven supply chains. This can be a balance of both domestic and import sources. As mentioned before, domestic supply chains remove the variability of ocean logistics and can be more predictable. But there are plenty of durable offshore supply chains insulated from the challenges, we talked about options for these in our first webinar back in 2021. As paper supply loosens, you might be able to have input into your source of—and then have a clearer picture of demand. You could even build your own inventory in the categories you need. Taking control of your own inventory can free you from the shifts and changes of the supply chain.
Minimize lead times. Any way that you can cut down on how long you’re waiting for your supply gives you more stability and certainty about your paper sourcing.
Have a trusted partner. It can take a lot of work to get a clear picture of the paper supply chain. With a partner who knows what the landscape is, you can rely on their insight instead of doing the legwork yourself.
The bullwhip effect is a potential challenge, but there’s no reason to panic. For one, it’s not guaranteed. For another, you have things you can do to avoid it for your own paper needs. As always, look for ways that you can reduce reliance on unpredictable sources—and for a partner who can help you know what’s going on.