McDonald’s Corporation Case Study solution: McDonald's Strategic issues, McDonald's Corporation’s Core competencies, McDonald's Corporation’s VRIO Framework, McDonald Corporation’s’ business model and its revenue streams, McDonald's PESTEL analysis to analyze impact on the company’s ability to sustain a competitive advantage

McDonald’s Corporation Case Study 

TASK ONE

After reading the case study McDonald’s Corporation, prepare a report on the attractiveness of the fast food industry from the perspective of McDonald’s Corporation, an American fast food company founded in California, United States, best known for its hamburgers, cheeseburgers, French fries, soft drinks, wraps, and desserts now faces the challenges of increased competition. You should prepare your answer in a report format and comment on:

·         The strategic issues that McDonald needs to address

·         The core competencies of McDonald

·         The business model of McDonald? Also, discuss on the various strategies/techniques how McDonald earns money? 

TASK TWO 

Your task is to analyze McDonald Corporation’s external environment and prepare:

·         The trends in McDonald’s’ external environment that are likely to have the greatest impact on the company’s ability to sustain a competitive advantage?

McDonald’s Corporation Case Study solution

The strategic issues that McDonald needs to address:

·        Providing product that balances quality, speed, and affordability. Complaints about speed of service have “increased significantly” in recent years, with the McDonald’s service experience described as “chaotic.”

·         Innovating the menu without creating unnecessary menu scope creep.

·         Responding to competitive threats and other quick-service restaurants such as Wendy’s, Burger king, and Yum! Brands’ Taco Bell.  without losing the company’s core identity. McDonald’s is roughly twice the size of its next largest global competitor (all three Yum! Brands combined), but has slightly fewer outlets. It controls almost half of the U.S. hamburger market, which is more than three times larger than the market share held by either Wendy’s or Burger king.

·         Prevention of complacency, in spite of many years of relative success.

·         Defining a clear vision of what it wants to be and a plan for how to get there.

·         Resolution of the case that the National labor Relations Board’s (NlRB) general counsel has filed against it claiming that the company has enough control over franchise operations to be considered a joint employer.

·         Resolution of serious staffing issues if it is to improve customer loyalty. An internal survey results one out of every five customer complaints was about “rude or unprofessional employees.

·         Increasing its appeal to millennials. Millenials are consistently choosing “fresh and healthy” over “fast and convenient” and “McDonald’s is having trouble convincing them it can be both. McDonald’s has to find interesting and engaging ways to share that information with them, not old-fashioned corporate lecturing.

·         Improving public perceptions of the McDonald’s brand. In July 2014, the Big Mac earned the dubious distinction of being America’s worst hamburger, placing last out of 21 in a study by Consumer Reports. McDonald’s also ranked lowest among peers in the 2015 American Customer Satisfaction Index. Fast food restaurants overall dropped 3.8 percent, but McDonald’s fell by six percent from 2014, holding firm in the last spot.

·         Becoming more “culinary inspired” and to simplify food labels by reducing the number of preservatives. There are still 19 ingredients in the French fries McDonald’s serves in the United States, compared to just five in Great Britain.

The core competencies of McDonald Corporation’s

Core competencies of McDonald’s can be analyses using VRIO framework.

Value:

Various resources and capabilities that add value and make it competent in market include:

·         McDonald’s has a strong brand image all around the globe. Branding helps it to generate huge revenue and promote its marketing efforts more efficiently.

·         McDonald’s continuously follows an aggressive technology upgrade to allow Starbucks-like interactivity to both smooth out operational waiting times and improve the customer experience.

·         As a direct competitive response to the “better burger chains,” McDonald’s is offering “Build Your Own” tablets where customers design their own sandwich from over 30 choices of meats, toppings, and buns. This presents an interesting conundrum for a quick-serve restaurant that generates roughly two-thirds of its revenue from drive-through customers.

·         To increase its appeal to millennials, McDonald’s has hired Google executive to lead McDonald’s “Experience of the Future,” which includes an improved social media presence, development of a Smartphone app, and testing of mobile payment systems.

Rare

Resources and capabilities of McDonald’s which are rare include:

·         McDonald’s share has given a 56.26 % return to its shareholders in a period of two years from July 2015 to July 2017 as compared to Dow Jones index return of 21.91 % for the same period.

·         McDonald’s is roughly twice the size of its next largest global competitor (Wendy’s, Burger king, and Yum! Brands’ Taco Bell, all three combined). It controls almost half of the U.S. hamburger market, which is more than three times larger than the market share held by either Wendy’s or Burger king.

·         In addition to curtailing antibiotic use in its U.S. chicken supply, McDonald’s is now selling dairy products from growth- hormone-free cattle. The company has also pledged to examine its product ingredients and review its food preparation procedures. Its goal is to become more “culinary inspired” and to simplify food labels by reducing the number of preservatives.

·         McDonald’s is giving customers more choice in what they eat is by giving franchises more freedom to offer locally relevant menu items. Local restaurant operators can choose items from the company’s global pipeline and adjust them as needed to suit local tastes. Managers will also be granted more freedom to run their own promotions to increase store traffic.

Costly to intimate

List of capabilities and resources of McDonald’s which are costly to intimate include:

·         In 2017, McDonald’s operated a total 37,000 restaurants globally, with 14,300 of them in the U.S. One of Easterbrook’s first major moves was to propose all-day breakfast in all U.S. restaurants, the company’s biggest initiative in six years.

·         McDonald’s is present in more than 120 countries which enables its ability to maintain the business in most efficient manner.

·         In China and Hong kong, the company recently sold an 80 percent stake in their 1,750 restaurants to Citic (state-owned investment group) and the U.S. private equity firm, Carlyle. They are currently looking for these partners to open an additional 1,500 stores in China, Hong kong, and korea.

Organized to capture Value

Resources and capabilities of McDonald’s which are organized in a structured way tp add value to organisation include:

·         McDonald’s has strong supply chain management embedded with advanced technology to bridge the gap in the system and serve the customers to the best.

·         To free up space for  new offerings, the company has planned to phase out underperforming features such as the snack wrap and reduce the number of extra value meals. McDonald’s menu has swollen to over 120 items. A greater variety of menu options helps to draw new customers into stores.

·         The company has launched a video series entitled “Our Food, Your Questions,” demonstrating how McDonald’s food items are made. The company has responded to 40,000 questions and that the increased transparency has been well received. In June 2015, McDonald’s has hired Robert Gibbs, former White House Press Secretary under President Obama, to serve as executive vice president and global chief communications officer, and Silvia lagnado, previously with Bacardi ltd, to serve as head of global marketing to take over the company’s media affairs.

·         The company grants employees the ability to accrue up to five days of paid vacation annually after one year of employment.

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McDonald's Corporation’s’ business model and its revenue streams

McDonald’s management philosophy is three-legged stool:

One leg is the parent corporation,

The second leg is the franchisees, and

The third is McDonald’s suppliers.

It has built an ever-larger network of store owners and an integrated supply-chain management system. Many new menu items, such as the Big Mac and Egg McMuffin, have been developed by the franchisees. It encouraged local owners to be entrepreneurial as long as they maintain the company’s four main principles: quality, service, cleanliness, and value. Because of the volume of McDonald’s business, it found many supply partners willing to adhere to his high standards.

McDonald’s both owns and operates its own restaurants, as well as, franchisees them to others. The large majority of restaurants are franchised (85 percent) and McDonald’s makes money by leveraging its product, fast food, to franchisees that have to lease properties, often at large mark-ups that are owned by McDonald's. McDonald's runs a franchising business model under which it trades access to its brand, its operating infrastructure, and its resources to restaurant operators for a hefty price. These entrepreneurs pay an initial fee at the start of their franchise. They also send in an ongoing royalty that's based on a percentage of their sales. Finally, franchisees pay McDonald's rent for the property that, by the way, can't drop below a certain rate and is set on 20-year terms.

There are three primary franchise ownership structures:

 1) Conventional franchisee,

2) Developmental license, and

 3) Affiliates.

Under a conventional franchise agreement, the company typically owns the land and building, and leases the location to the franchisee. The franchisee pays for “equipment, signs, seating and décor.” As the equipment depreciates or new facilities or food preparation processes are required, the franchisee is expected to reinvest in the business. McDonald’s also co-invests into specific strategic initiatives to motivate franchisees to adopt changes. Franchisees pay rent and royalties based on a percentage of sales, with specific minimum rent payments and initial fees paid upon opening a new restaurant or acquiring a new franchise. The typical franchisee lease is 20 years.

The specific conditions of the franchise agreement vary on the owner’s experience, credit capacity, and the local legal environment. Franchisees can vary significantly in size.

The largest franchisee has a developmental license for 2,200 restaurants across latin America and the Caribbean. On the other end of the spectrum, some franchisees own and operate a single location.

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The trends in McDonald’s’ external environment that are likely to have the greatest impact on the company’s ability to sustain a competitive advantage

McDonald’s external environment can be analysed using PESTEL analysis frameworks that have the greatest impact on its ability to sustain a competitive advantage.

Political

The turnover in fast food industry is very fast due to high stress and less pay. Activists lobby for a larger pay raise. The National labor Relations Board’s (NlRB) general counsel has filed a suit claiming that McDonald’s has enough control over franchise operations to be considered a joint employer. McDonald’s raise pay to at least $1 more per hour than the local minimum wage will be enough to attract and retain motivated workers. The company also granted employees the ability to accrue up to five days of paid vacation annually after one year of employment.  

Economical

The unemployment rate has been cut in half from its 2009 peak at 10.0 percent to just 5.1 percent in 2015, and per capita real disposable income is near record highs. For the first time ever, American spending on dining out exceeded grocery sales in April 2015. According to the Restaurant Association, millennials tend to favor quick service, deli, and pizza joints over more traditional casual and high-end dining; ethnic foods are also viewed as new and interesting. McDonald’s is giving customers more choice in what they eat is by giving franchises more freedom to offer locally relevant menu items. McDonald’s has customised its products where customers design their own sandwich from over 30 choices of meats, toppings, and buns.

Social

Obesity-related health care expenses in the United States total $663 billion annually. Beef still comprises the highest proportion (58 percent) of meat consumed in the United States, but health-conscious consumers are increasingly shifting toward poultry and other lean meats. Concerns over the increase in antibiotic-resistant bacteria have led to calls for the elimination of sub therapeutic antibiotic use in meat animals. McDonald’s has stopped selling chicken products from birds treated with antibiotics important to human health. Besides ending the use of antibiotics in the chickens used, McDonald’s also decided to remove high-fructose corn syrup from McDonald’s hamburger buns. It also laid out a 10-year plan to only use suppliers that keep chickens cage free. McDonald’s also offers dairy products from growth- hormone-free cattle. The company has also pledged to examine its product ingredients and review its food preparation procedures.

Technological

To attract millennial, McDonald’s has improved its social media presence, developed a smart phone app, and mobile payment systems. With its major move to propose all-day breakfast in all U.S. All kitchens are now equipped with separate grills for cooking eggs and burgers, rolling carts and utensils to use just with eggs (to prevent contamination), and new toasters so that they can prepare both buns and muffins at the same time (they toast at different temperatures). Advance technological adoption in supply chain management and franchise system makes it much ahead of its customers. McDonalds uses latest technologies for service and food delivery. McDonald’s continuous effort in technological upgradation in its supply chain and customer relationship management gives it an edge to achieve competitive advantage in market.

Environmental

Severe drought led to increase in price of beef which forced farmers to turn to more expensive forms of feed such as hay and corn, to ship cattle to greener pastures in the north, or to cull their herds through sales or sending heifers to the butcher instead of breeding them. The resulting price increases for supplies ranging from bread to eggs to meat are squeezing already tight operating margins.McDonald’s is maintaining its price by reducing its cost at other operational activities to gat a competitive advantage in the market.

Legal

To support healthier food choices, The Patient Protection and Affordable Care Act stipulated that calorie counts must be displayed on all food service menus of chains with at least 20 units and that restaurants must provide additional nutritional information upon request. These trends place considerable pressure on a fast food company that depends on hamburgers for the main portion of its income. McDonald’s reduced its Happy Meal calorie count by 20 percent by adding apples and halving the amount of french fries. McDonald’s has reduced the sodium content of its food by 15 percent, and plans to make further reductions in calories, sugars, saturated fats, and portion sizes by 2020. There are so many health related laws that can affect fast food businesses. McDonalds operates in more than 100 countries and has to remain cautious about compliance so as to not become a target of law.

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References

·         McDonald’s, “Annual report, 2016, ” last modified March 1, 2017,http://bit.ly/2qXPprQ.

·         “National Economic Trends,” Economic Research, accessed October 2017,https://research.stlouisfed.org/ datatrends/net/page3.php.

·         Bethkowitt,“Inside McDonald’sBoldDecision toGo CageFree,”Fortune, lastmodified August 18, 2016, http://fortune.com/mcdonalds-cage-free/.

·         “Big Mac’s Makeover,” Economist.

·         Julie Jargon, “McDonald’s to Pare Menu, Review Ingredients,” Wall Street Journal, last modified December 10, 2014, https://www.wsj.com/articles/mcdonalds-planning-new-menu-with-fewer-items-1418230599.

·         Stephanie Strom, “McDonald’s Seeks its Fast-Food Soul,” New York Times, March 7, 2015, https://www.nytimes. com/2015/03/08/business/mcdonalds-seeks-its-fast-food-soul.html?_r=0.

·         Joshua Brown, “McDonald’s Fixes its Marketing, Chipotle Fixes its Product,” Fortune, last modified January 21, 2015, http://fortune.com/2015/01/21/mcdonalds-chipotle-integrity-trust/.

·         Mary Bowerman, “What’s America’s Favorite Fast-Food Restaurant?” USA Today, last modified July 1, 2015, https://www.usatoday.com/story/money/2015/07/01/ chick-fila--america-favorite-restaurant-mcdonalds-consumer-survey/29554303/

·         Jargon, “McDonald’s to Pare Menu, Review Ingredients,” Wall Street Journal.

·         Strom, “McDonald’s Seeks its Fast-Food Soul,” New York Times.

·         Jargon, “McDonald’s Faces ‘Millennial’ Challenge,” Wall Street Journal.

·         Beth Kowitt, “Fallen Arches: Can McDonald’s Get its Mojo Back?” Fortune, last modified November 12, 2014, http://fortune.com/2014/11/12/can-mcdonalds-get-its-mojo-back/.

·         Dean, Brat, and Gasparro, “McDonald’s CEO is Out As Sales Decline,” Wall Street Journal.

·         “When the Chips are Down,” Economist, last modified July 22, 2010, http://www.economist.com/ node/16646178

·         Julie Jargon, “McDonald’s Tackles Repair of ‘Broken’ Service,” Wall Street Journal, last modified April 10, 2013, https://www.wsj.com/articles/SB10001424127887324010704578414901710175648.

·         Jargon, “McDonald’s Tackles Repair of ‘Broken’ Service,” Wall Street Journal

·         “McDonald’s Agrees Chinese Franchise Sale,” BBC News, last modified January 9, 2017, http://bbc.in/2frmkRk.

·         The VRIO framework   Jay B. Barney and William S. Hesterly  Source: Barney, J. B. and Hesterly, W.S.  (2010)  Strategic Management and  Competitive Advantage: Concepts and Cases,  third  edition, Pearson Education.

·         Anon, (2015). PESTEL analysis of the macro-environment. [online] Available at: https://frrl.files.wordpress.com/2010/04/pestlanalysis.pdf [Accessed 2 Dec. 2015].

 

 

Countering the Dreaded Supply Chain Bullwhip Effect in a COVID-19 World supply chain case study solution

 

Case: Countering the Dreaded Supply Chain Bullwhip Effect in a COVID-19 World

Case Study Questions

1. “Jenny Reese points out in Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” Explain the bullwhip effect using this example. Give a description of events that you suspect will happen through the supply chain of toilet papers when such an event happens. 

2. Identify two other commodities which have witnessed an event of panic buying during the ongoing COVID-19 pandemic. Do you think a bullwhip effect can be expected in their cases? Justify your answer. 

3. “Building bridges with other supply chain partners is critical to preventing the bullwhip effect.” Read from the case study and explain how the given statement prevent bullwhip effect scenarios.

Case Study - Countering the Dreaded Supply Chain Bullwhip Effect in a COVID-19 World

By shifting from a forecast-driven ordering system to one that enables high levels of visibility and information-sharing, companies can effectively avoid the dreaded “bullwhip effect” in their supply chains.

The “Bullwhip Effect”

A distribution channel phenomenon in which inaccurate forecasts quickly turn into supply chain inefficiencies, the “bullwhip effect” refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

With COVID-19 taking its toll on supply chains around the world, more companies will experience this detrimental impact, which was originally identified back in the 1960s and then weaved into supply chain vernacular in the 1990s.

That’s when Hau Lee of Stanford University told a story about Volvo to illustrate the bullwhip effect’s impact on the supply chain.

Suffering a glut in “green” cars at the time, Volvo’s sales and marketing developed a program to move its excess inventory.

The program helped raise interest in the cars, but Volvo’s manufacturing department was unaware of the campaign and wound up reading the increase in sales as an indication of a growing demand for green cars. In response, it ramped up production, thus adding to the glut and creating a bigger issue for the car manufacturer.

“A supply chain is a complex group of companies that move goods from raw materials suppliers to finished goods retailers,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain.

“These companies work together when meeting consumer demand for a product; supply chains allow companies to focus on their specific processes to maintain maximum probability. Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

What Causes the Bullwhip to Snap?

According to Vitez, the bullwhip effect surfaces when changes in customer demand push organizations to order more goods to meet the new demand.

From there, the bullwhip effect flows up the supply chain - from the retailer to the distributor to the manufacturer and right through to the raw materials supplier. In many cases, the problem can be traced back to forecasting errors.

For example, when companies introduce new products, they estimate the demand for goods based on current market conditions.

“Most companies in the supply chain order more than they can sell, attempting to prevent shortages and lost sales of goods,” Vitez writes, noting that this excess inventory begins to increase or decrease during the normal market fluctuations of supply and demand.

“In the bullwhip effect, demand for items amplifies up a supply chain like the crack of a whip. Imagine a bullwhip - a tiny, swift flick at the whip’s handle results in an uncontrolled, widely snapping motion at its tip,” Amy White describes in The Causes and Impact of the Bullwhip Effect on Supply Chains.

“Similarly, a simple action such as a manager ordering products at a store can result in unpredictable effects at the top of the supply chain like a manufacturer or wholesaler.”

This variable and unpredictable demand leads to significant supply chain inefficiencies that include (but aren’t limited to), buying and storing excessive inventory, lost revenues, ineffective transportation, missed production schedules, out-of-stock products, poor customer service, and higher costs for consumers.

Addressing the COVID-19 Bullwhip

In the wake of the COVID-19 health crisis, images of empty store shelves have triggered a few things: even more panic buying, a social media frenzy of hoarder shaming, and even gang activity linked to toilet paper theft in Hong Kong.

“For many supply chain leaders, this presents the enormous and potentially costly challenge of dealing with the bullwhip effect” Jenny Reese Senior Manager, Solutions Marketing at Kinaxis

“For many supply chain leaders, this presents the enormous and potentially costly challenge of dealing with the bullwhip effect,” Jenny Reese points out in Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?

“When major swings in inventory occur from panic buying and hoarding, the impact of this sudden demand is magnified as it moves upstream in the supply chain (similar to the way a bullwhip’s thong amplifies in a wave as it moves away from the handle),” Reese writes, noting that little or no visibility into demand patterns and limited understanding of demand drivers are the primary culprits in this scenario (of course, COVID-19 came with little early warning, hence the paper goods shortage).

“How long can this boom in freight volumes last?” FreightWaves’ Daniel Pickett asks. “I have to imagine we are seeing a one-time pull of inventory as pantries, garages, and freezers are filled. Inevitably, the shelves at home will be full, and we will see a ‘demand hangover’ in grocery retail and trucking.”

Building Bridges with Partners

For companies that want to avoid or counter the bullwhip effect within their own supply chains, the answer lies in accurate, real-time demand information across the supply chain.

To achieve that, companies must shift from a forecast-driven ordering system to measures that enable information-sharing with the supply chain partners and provide complete visibility of the actual customer demand.

Using real-time inventory and shipment information, companies can effectively minimize the risk of disruption while moving more inventory at a predictable, reliable cadence.

In How to reduce the bullwhip effect, George Lawton tells companies to educate themselves on the causes of the bullwhip effect, build better trust across supply chain partnerships, consolidate supply chain data (i.e., aggregate efforts across suppliers), and gain an understanding about partner processes. “Building bridges with other supply chain partners is critical to preventing the bullwhip effect.”

Case Study Solutions

1. “Jenny Reese points out in Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” Explain the bullwhip effect using this example. Give a description of events that you suspect will happen through the supply chain of toilet papers when such an event happens.

A small change in downstream demand at consumer level causes significant change in upstream demand closer to manufacturer. This phenomenon in supply chain refers to bullwhip effect where a small change in consumer demand causes a big change in inventory of each participant and this change tends to become bigger and bigger as one moves upstream from inventory of finished goods to inventory of raw materials in supply chain system leading to supply chain inefficiencies¹. Bullwhip effect spurs due to inadequate demand forecasting, unexpected change in demand of customers and buying patterns as experienced during COVID 19 crisis as in case of toilet paper and other commodities.

Assuming one toilet roll paper required by one person per week and counting four members in a family leading to 4 toilet roll paper per week per family is general demand of toilet roll paper universally and in case one buys 100 rolls of toilet paper due to Covid 19 pandemic which S/ he generally does not buy in normal situation will impact supply chain of toilet roll paper adversely and hinder the process of forecasting actual demand in the market thus increasing overall cost, reducing profitability, stock out and even excessive inventory and huge volatility in supply and demand of toilet roll papers. Initially it will trigger retailer to place more number of units to be ordered to its wholesaler than usual order units and in turn wholesaler will demand more number of units from distributor and this will force distributor to demand an increase in production of units from producers. ² It will causes massive miscommunication among participants of supply chain as the demand for products increase and decrease exponentially in a short amount of time. ³ It will result in a volatile and unbalanced manufacturing environment where participants of supply chain will struggle to intelligently predict demand as a result of panic buying behavior. ⁴ As suppliers are fulfilling the demand of yesterday, the demand of today could be completely different from that of tomorrow. Retailers have to limit on number of units of toilet paper given to one customer at one time. The customer will face issue of stock outs in retail outlets. The retailer will lose sales and customer service will be deteriorated.⁵ Wholesalers and Distributors will be messed up in determining who should get how much in this shortage, and manufacturers will be unable to increase production instantly and overwhelmed with sudden and unanticipated spikes in demand.

In case people buys 100 toilet roll paper due to panic buying and situation prevails for few days  demand will increase abruptly and retailers will order more quantity. Sales will go high for few days while industry will supply what it could. When retailers will give new orders to all suppliers of toilet roll papers they will recreate new demand forecasting based on past days sales. Since all retailers will be ordering at the same time, they will order more units to wholesalers and wholesalers will follow the same pattern and order more units from their distributors and distributors will be demanding more units from producers. Thus, toilet roll paper producers will also increase their orders from their raw material suppliers and increase their production. However, since toilet paper usage at home did not significantly increase during this period, sales will decrease tremendously. By this moment retailers will realize the new sales level of toilet roll papers and thus cancel or reduce their most of open orders thus inventory matching at new sell out level. Same will be done by wholesalers and distributors at their end. Manufacturers of toilet roll papers will struggle finding new buyers for their finished products once orders will be cancelled form distributors’ end. They will also have to revise their entire production schedule, MRP, headcount, etc. Producers will also cancel their surplus orders from their raw material suppliers who were also preparing for an increased demand thus creating a chaos in whole supply chain system. Thus bullwhip effect will generate huge losses to all participants of supply chain in terms of stock out , increase in holding cost, excessive inventory investment, ineffective capacity planning & production scheduling , transportation cost, poor customer services and loss in revenues. ⁶

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2.Identify two other commodities which have witnessed an event of panic buying during the ongoing COVID-19 pandemic. Do you think a bullwhip effect can be expected in their cases? Justify your answer.

During Covid 19 outbreak, panic buying has been seen for grocery items, pharmacy and hygiene products such as sanitizers, face / surgical masks and disinfectants. In U.S., Sales of rice have been increased by 50 % and canned meat by 40 %. Sales for peanut butter, pasta, beans and bottled water have increased significantly as a result of panic buying during ongoing Covid crisis. Online purchase of cold, flu and cough products have increased by 198 % and online purchase of non perishable products such as canned goods have been increased by 69 % in US.⁷ This event of panic buying is unsustainable and causes scarcity in the market creating inaccessibility of necessary commodities for those who are in need.

This type of surge in demand and change in buying pattern impacted supply chain adversely and gave rise to phenomenon called bullwhip effect in supply chain system of necessity products, grocery items and pharmacies products and other commodities where stockpiling has been done by customers due to fear of stock out. The demand shocks and volatility created by COVID-19 have caused extreme bull whip effects on products taken into consideration, that resulted in an unpredictable and unstable manufacturing environment where suppliers struggle to intelligently predict demand as a result of panicked buyer behavior. Panic buying forces supply chain participants to increase demand of such products from suppliers and suppliers to increase production capacity to meet such demand which was not there before. Small changes in demand creates wider demand changes at upstream level in supply chain resulting in inability to provide products to go downstream to retailers and meet demands of customers. Bullwhip has rippled up and down supply chain of grocery, pharmacy and hygiene products whose demand has been intensified due to panic buying. Many times demand due to panic buying does not reflect actual consumption.⁸ For example; increase in demand of surgical mask is mix of increase in consumption and fear of stock out however demand for rice is an example of panic buying only. No one is consuming more rice so increase in demand does not reflect increase in consumption of rice. Consumption of many products remained constant but due to temporary increased demand, supply has been increased leading to surplus of such products in market and searching customers for excessive surplus products in the market by suppliers.  During March and April in Singapore, eggs were missing in supermarkets and online stores but in month of June distributors had thrown away more than 250000 eggs due to oversupply. This movement from deficit to surplus is a classical example of bullwhip effect where inadequate forecast and little or no visibility of demand in a volatile market by supply chain participants led to face situation of surplus or excessive stocks and suffer such loss.⁹ Bullwhip effect caused supply chain disruptions of commodities taken into consideration due to panic buying and inefficiency of supply chain participants in predicting adequate demand to combat impact of bullwhip.

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3.“Building bridges with other supply chain partners is critical to preventing the bullwhip effect.” Read from the case study and explain how the given statement prevent bullwhip effect scenarios.

Demand forecasting and sales estimation are usually done separately by participants of supply chain. When retailers notice a slight increase in demand of a certain product, they order extra units in case the small upturn in sales indicates a trend.  When wholesalers receive the order from retailers and distributors from wholesalers and see an uptrend in demand, they make their own forecasts which create chaos because they are not based on real time sales figure. When producers get the orders and analyse it, perceived increase in demand becomes more exaggerated leading to bullwhip effect. In order to avoid this situation, retailers must share information on demand pattern of products to its upstream partners so that participants of upstream chain get necessary data for predicting accurate demand of products future and adjust inventory on the basis of real time demand information and thus avoid losses and counter bullwhip. Participants of supply chain must have full visibility in projected demand on real time basis so that they can secure inventory for building safety stocks. Clear picture on demand and supply of products will help supply chain system to manage demand signals more accurately and promptly, ensures faster response to customers and smoothen effects of demand variation and thus overcoming impact of bullwhip in supply chain system.¹⁰
Instead of batching orders at certain times of month or year which is less time consuming and cheaper, manufacturers should focus on receiving steady stream of orders which will reflect actual day by day demand of products. Higher administrative cost involved in this system can be reduced by shifting from manual ordering system to software based ordering system and transportation costs may be  reduced by collaborating with other suppliers to consolidate loads to achieve economies of scale in shipment and transportation cost. ¹¹ Managers should also work to understand demand patterns throughout all stages of the supply chain by sharing information and collaborating with other managers of different supply chain participants. All participants of supply chain should know what the final customer needs, and are aware of the outstanding inventory of their suppliers and customers. There must be effective communication and sharing of information between internal departments and throughout supply chain system to avoid discrepancies in inventory management, ordering and shipment. Communication with customers is utmost important to have real time information on demand of products and thus match need of customers in contingencies easily with no stock outs or inventory surplus.

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References:

1. “What is Bullwhip effect” retrieved from https://ibf.org/knowledge/glossary/bullwhip-effect-42.

2. Michael Ignatiadis, Head of Supply Chain & Logistics Solutions (July 10, 2020) Too many eggs: Supply chain shocks arise from COVID-19 retrieved from https://www.jll.co.in/en/trends-and-insights/investor/too-many-eggs-covid-19-turns-focus-on-the-bullwhip-effect

3. Mike Hockett (Jul 16th, 2020) The Pandemic's Bullwhip Effect on Food & Beverage Inventory retrieved from https://www.foodmanufacturing.com/supply-chain/article/21140181/the-pandemics-bullwhip-effect-on-food-manufacturers-inventory.

4. Mahesh Rajasekharan (June 8, 2020), The COVID-19 Supply Chain Impact – Avoiding the Bullwhip Effect retrieved from  https://www.sdcexec.com/sourcing-procurement/article/21134023/cleo-the-covid19-supply-chain-impact-avoiding-the-bullwhip-effect.

5. Jenny Reese (March 24, 2020) Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper retrieved from Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper.

6. Tiago Horvath. LATAM Supply Chain Development Manager at Nestlé Purina Latam (April 20, 2020) retrieved from https://www.linkedin.com/pulse/great-lockdown-supply-chain-bullwhip-effect-tiago-horvath/?articleId=6657742452385996800.

7. Shweta Sarma (April 2, 2020). The impact of Panic Buying on the Retail Supply Chain retrieved from https://blog.locus.sh/impact-of-panic-buying-on-the-retail-supply-chain/.

8. Sam Wood (16 March 2020). The damage panic buying does to supply chains and retailers retrieved from kent.ac.uk/news/society/24684/expert-comment-the-damage-panic-buying-does-to-supply-chains-and-retailers.

9. Michael Ignatiadis, Head of Supply Chain & Logistics Solutions (July 10, 2020) Too many eggs: Supply chain shocks arise from COVID-19 retrieved from https://www.jll.co.in/en/trends-and-insights/investor/too-many-eggs-covid-19-turns-focus-on-the-bullwhip-effect

10. TRACC (17 April 2020). Demand variability: 5 action steps to take in a time of crisis retrieved from https://traccsolution.com/blog/demand-variability/.

11. Whang and Lee (1995): Eliminating the Bullwhip Effect in Supply Chains retrieved from https://www.gsb.stanford.edu/insights/whang-lee-eliminating-bullwhip-effect-supply-chains