Briggs Thompson | 4 months ago
Articles

The Bullwhip Effect on the Energy Industry

The Bullwhip Effect

Energy companies operate in dynamic and complex environments that face constant challenges, especially in terms of supply and demand. Countries heavily impacted by the pandemic have restricted trade or closed borders for long periods of time, causing a huge disruption in supply chains. At the same time, buyer behavior has been dramatically disrupted due to the ripple effect caused by COVID-19.
In the energy industry, intensification of demand fluctuations from downstream to upstream in the supply chain has led to what Jay Forrester coined "the bullwhip effect." This is when small changes in demand cause wavering and increasing impacts in production, capacity, and inventory throughout the supply chain.
This bullwhip effect can lead to tremendous inefficiencies in planning, inventory management, and logistics. It frequently results in a buildup of excess inventory, and when we experience a downturn, the result is a sharp reduction in revenue and a potential loss of profit. Poor customer service, misguided capacity plans, and missed production schedules are all additional impacts of the bullwhip effect. (Lee et al. 1997a)
In his article "Counteracting the Supply Chain Bullwhip Effect," Vinod Raghothamarao regards, "it is estimated that the bullwhip effect costs the oil industry about $2.8 billion per year. Equipment and component suppliers bear even more of this cost than oil companies."
This bullwhip effect has caused the following negative effects for equipment and component suppliers:
  • Buildup of excess inventory, tying up capital
  • Excessive capacity investments (pre-pandemic), resulting in a low or negative return on investment
  • Operators postponing or cancelling orders due to the impact of the pandemic, causing large backlogs
Prior to and immediately after the recent pandemic, the industry experienced a sharp increase and decrease in demand, which resulted in excess inventory. Once again, companies had to analyze their supply chain models and determine where they could improve efficiency and reduce cost.


What Can Energy Companies and Their Equipment Suppliers Do?

With shorter cycles in our new global market, managing the supply chain and inventory control is an even more crucial factor in developing a profitable and sustainable business.
Due to the bullwhip effect, many companies are trying to hold little or no surplus materials, known as zero inventory. Many industries are implementing zero inventory as a cost-saving management model. The end goal of “zero inventory” management is to hold little or no inventory to lower costs, increase productivity, improve efficiency, and prevent surplus materials from being outdated, eliminating risks such as falling prices and damage. The closer a business can get to zero inventory, the greater cost savings, improved cash flow, carrying cost reductions, and inventory waste there is from maintaining bulk surplus materials.
  • Toyota is one of the most well-known examples of companies using this method. When a client places an order, Toyota only receives raw materials in the factory when it is ready to start building the automobile. This process minimizes inventory holding costs. By making their factories run lean, the burden of carrying raw materials with inventory is placed on their suppliers.
  • Despite Tesla's growth, the company cannot independently enjoy the same economies of scale as large auto manufacturers. Tesla takes ownership of its supply chain, keeps minimal inventory, and essentially manufactures on demand. This practice helps Tesla have more capital available because it isn’t tied up with surplus inventory.
  • The Boeing Company: Beginning in the mid-1990s, Boeing applied JIT (just in time) across the enterprise to work more closely with suppliers, remove redundancies, reduce costs, and improve product quality. Boeing continues to transform itself into an integrator of large parts and systems and implements lean manufacturing principles. The company relies heavily on its supply base to meet customer demand.
It is unlikely that most businesses can actually achieve zero inventory at all times. Plainly, because of uncertainty and project fluctuations in which it is not feasible. Extra stock is necessary for emergencies, late delivery, and natural disasters. Yet, carrying zero inventory will undoubtedly result in gaps in the supply chain. New technologies allow better inventory control and provide alternatives to managing surplus stock. PipeSearch is a great solution to fill these needs as they arise reduce inventory amounts.
To alleviate some of the impact associated with the Bullwhip effect, we have developed a digitally integrated platform, PipeSearch. Through PipeSearch, businesses are now able to gain access to the global cra OCTG inventories of operating companies and also have the ability to dispose of their idle assets.
PipeSearch identifies and analyses opportunities, immediately linking global supply and demand. The innovative platform assists with reducing inventory and leads to increased efficiencies in the supply chain, resulting in a faster, more flexible, and sustainable process. Please click here to view our full product guide.


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