When the "bullwhip" effect strikes the supply chain

The "bullwhip effect" is the equivalent of the butterfly effect applied to logistics: minor causes resulting in major effects. Or put more concretely: poor awareness of actual customer demand translates into costly stock overestimations along the entire supply chain. Greater transparency and better communication can soften the impact of this "bullwhip".

In supply chain management, the "bullwhip effect"is a typical occurrence that originates in a disconnect between customer demand and production. It is characterised by an artificial amplification of real demand for a given product all the way along the supply chain.

Domino movements

What does this mean in practice? Several links make up the supply chain, from the sales outlet to the manufacturer, moving through all the other intermediaries. When the outlet – which is in direct contact with customers – notices a rise in consumer demand, it tends to overestimate its real needs when ordering stock to ensure it never lets its customers down. In response to this variation in quantity, the intermediate supplier will be tempted to do exactly the same in relation to its own provider: order more than necessary to make sure it can cover itself. And so it continues, right up to the manufacturer.

Costly overestimations

The outcome is that every link in the chain has procured itself a stock "safety margin" which artificially inflates true consumer demand, resulting in significant costs for each link of the chain. These include an excessive increase in stock levels and a reduction in levels of service, ultimately causing a decline in the company's profitability. On the whole, these successive overestimations are justified by a desire to avoid product shortages, to be able to meet customer demand, and to potentially benefit from bulk purchase discounts (applied when large quantities are ordered).

Causes of the "bullwhip"

The fluctuations increase as the distance from the end customer grows. Thus, the "bullwhip effect" is the product of various factors: the extent to which information becomes distorted, an absence of transparency, failures in communication along the supply chain, long lead times (the time that elapses between the start and end of a process), as well as an excessive disconnect between production and actual customer demand. While all sectors are affected, the issue is more frequently observed in those whose production systems are more rigid and lack flexibility. Some companies are also more at risk than others: these are companies that must cope with significant fluctuations in demand, or are highly reliant on their suppliers.

How to "whip" communication within the supply chain

There are several solutions that can limit the bullwhip effect, for example: improve transparency, the quality of communication and information sharing across all actors involved in the supply chain, apply the principle of "lean manufacturing" (less rigidity and greater flexibility of production), put in place forecasting systems that better understand market realities, avoid the incentive to bulk buy by restricting batch sizes, while also optimising transportation costs and stabilising prices, etc. The goal of all of this is to minimise uncertainty within the supply chain, and thus enable the effective synchronisation of supply chain activities between the companies involved.



The art of negotiating payment terms with suppliers

Cash management is an SME's frontline weapon, and payment terms are a key means of keeping it under control – providing companies proactively open negotiations with their suppliers. But this solution remains underutilised by entrepreneurs

Cash flow difficulties are the number one cause of company bankruptcy in Belgium. Business owners face a constant battle to stay in control and maintain the balance of their inflows and outflows. Negotiating payment terms is one of the levers that can be employed: shortening them for customers while extending them for suppliers. In Belgium, the statutory deadline between companies is 30 days. Yet the reality can be different, since either trading partner may deviate from the rule. Where one of the parties is in a dominant position, the other is often obliged to accept the conditions it imposes... meaning its payment term becomes longer. Everything is negotiable, however, even with "big" suppliers, as long as you formalise the situation and ensure you protect your business relationship.

Who is your supplier?

They say information is power, and there is some truth in this. Indeed, the more you know about your "opponent", the more you will be able to turn the tables. How are the company's finances, and what is its cash position? Is it experiencing difficulties? Where is it placed on the market, particularly in relation to its competitors? What is your dependency ratio in relation to this partner? How does it make payments, and what is its purchase history? The answers to these questions will allow you to take up better positions in the negotiations, and find the best angle to launch an attack that catches the other side by surprise. Specialised websites, data banks, word of mouth (the competition): all means are justified in order to find out more!

What do you want to gain?

And a resulting question: what are you willing to put on the table to achieve your objective? In other words, you need to be properly prepared and establish a strategy regarding what you are willing to concede (and how much this will cost you) and what you absolutely want to gain in return. Remember that the other party has presumably not requested anything, and potentially has little to gain. Therefore, you cannot arrive empty-handed. Are you willing to order larger volumes in order to extend your payment terms? Can you envisage a long-term contractual commitment? Could you contemplate paying more in return for spreading your debits further? Imagine you are playing poker: clearly, you should keep your cards close to your chest. Wait for the right time to show your negotiating partner that you are prepared to make concessions.

How can you negotiate successfully?

The art of negotiating is a difficult skill. However well prepared you are, keep the following principles in mind:

  • Even if you have brought a proposal to the table, listen to the other side and pay attention to detail so that you can react quickly.
  • Do not be frightened of bearing your teeth a little, even if you are concerned about spoiling the business relationship with your supplier. Stand your ground and mention what the competition can offer you, for example.
  • You must control how you communicate, so that you avoid giving the impression that you have cash management problems. Emphasise that payment delays do not help anyone, and that it would be better to agree on a reasonable and sustainable schedule.
  • If your business relationship is established, mention your positive partnership and your desire to see this continue.
  • During discussions, regularly refer to how far you have come and your shared progress to date. This positive tone will be well received.
  • If the negotiations stall, try to resolve the difficulty by pulling out a trump card, for example (i.e. a concession).
  • Remember: a good agreement is balanced, and leaves neither party feeling wronged. So do not be too greedy: the outcome must be worthwhile.
  • Are you happy with the situation? Move to finalise the deal, either by accepting what is on offer or by finally opting for a fair compromise.


Supply chains: moving beyond sales to create value through services

What if the profit of major manufacturing groups was linked to the maturity of the supply chain services they offer? This is the suggestion of a PwC study of European manufacturing companies.

In a recent study that questioned major manufacturers (notably in the automotive sector) on the subject of the "service supply chain", the consultancy firm PwC identified a significant correlation between the maturity of their services offering and their financial performance. What are "supply chain services"? This concept designates the full range of services offered to customers: from sales and the after-sales service, to active customer assistance and troubleshooting. At a time when pressures are increasing on prices, costs and margins, large manufacturers are constantly looking for new strategies that will allow them to remain competitive.

Evaluating an organisation's degree of maturity

It is therefore no coincidence that some companies are turning to innovative models – with additional encouragement from the rise of the sharing economy that places value on usage rather than possession – creating an increasingly collaborative, client-focused supply chain enhanced by services that add value. However, this evolution requires them to adapt and undergo a transformation. To evaluate the maturity in this respect of the companies it surveyed, PwC devised a matrix showing five key elements and five stages to complete in order to move from a product-oriented organisation to one focused on its customers (a "service leader"). The matrix also identifies points for improvement and action needed to make the step up.

The five key elements of the service supply chain are as follows:

  1. Development of a genuine services strategy: to maximise the benefits and potential of the services offering, it is imperative that companies integrate it into their value creation model. This implies that they must understand their customers, define what is and is not offered, and set out their price structure and targets. Yet only 10% of those questioned seem to have grasped this.

  2. Transition from a product-centric organisation to one focused on its customers, in particular by reinventing the company's operation and procedures, etc. This means making "services" an independent segment within the company, in the same way as "sales". But only 12% of the companies surveyed have reached this stage of maturity.

  3. Optimal management of services on the ground, for example by improved understanding of customer needs, simpler access to technical and maintenance services, and by using technology for the purposes of tracking, follow-up, etc.

  4. A proactive approach to the supply of replacement parts: the survey found only 4% of industrial firms used predictive models (coupled with machine learning) to anticipate the demand for replacement parts. This means the approach taken to what is a major segment – services offered – remains reactive and reliant on customer requests.

  5. Confidence in the technological tools: 76% of those surveyed do not exploit the data available to make continuous improvements to their systems, and only 17% share information with their customers. While technological progress continues to accelerate, it is crucial for companies to put their faith in these tools in order to evaluate their operations and offer the best possible range of services.

Five stages of growth to stay competitive

The PwC evaluation model also allows companies to visualise the stage they have reached in their journey towards offering a mature provision of supply chain services: from a "product-centric" to a "customer-centric" organisation. The consultancy firm concludes its survey by stating that "a great deal remains to be done", even for the most mature manufacturing groups. To remain competitive, all companies must establish an optimal, comprehensive range of supply chain services that adds value, especially by placing their trust in technological advances and the progress of the shared economy. In this respect, the early birds are highly likely to be those that catch the worm.



What does the future hold for the "last mile"?

Making a purchase has never been easier. But delivering the parcel will never be as quick as the information exchange. This context puts more pressure than ever before on the "last mile"!

As e-commerce has exploded, customer demands have grown incessantly. Having reduced prices, the pressure is now on the performance of services. "Immediate" delivery has become a real challenge which hauliers seem to have taken on board. This is because the number of parcels needing to be distributed in urban centres could double in the next 5 years. Added to this are inescapable environmental challenges. More than ever before, a true revolution of the "last mile" – meaning the distance between the customer's door and products in storage on the outskirts of cities – is underway: between a better grip on mobility and shared logistics, some dream of seeing an army of delivery robots emerge, while others continue to believe that the human touch will see a revival in this "last miel"…

Better-adapted transportation methods

From a logistics perspective, the challenge is evident: adapting to meet the demands of a new type of customer, while taking account of environmental issues and restrictions imposed by cities: densification, rampant congestion, outdated infrastructure, noise pollution, air pollution, regulations, etc. A true dilemma for haulage companies. Faced with this situation, professionals in the sector have set about improving performance at every step in the supply chain: rationalising production, optimising flows, robotising and automating infrastructure and operations, increasing sorting rates, etc. However, this progress only makes sense if the "last mile" ceases to be a weak link in the chain. To this end, several aspects stand out as a priority, notably switching to gentler, less ecologically harmful modes of transport. It is therefore no accident that throngs of "green" lorries, delivery tricycles, bicycles, electric scooters and even Rollerblades are filling cities. This development is vital, but it does not go far enough…

The city of the future? A roofless hub

In parallel, transport companies are redoubling their efforts to propose distribution solutions which are adapted to suit customers' everyday reality: delivery by appointment, increased number of handover points, provision of deposit boxes, growth of pick-up points, etc. Despite this progress, there is still a need to rethink all circuits to bring products and demand closer together, in particular due to a denser logistics network in cities. Urban mini-hubs, smaller in size but larger in number. A way to optimise flows, reduce movements, adapt the offering in real time, etc. It is a path which leads to shared logistics. This refers to the ability to multiply combinations and synergies: between players of all sizes, modes of delivery, distribution and collection points, etc. The aim? To be able to determine optimal delivery for a given parcel according to the location and availability of the product, the geographical position of the end customer, the required deadline, etc.

Robots and humans

Clearly technological progress has a key role to play, notably in the now inescapable presence of human factors in the "last mile". "Why not robotise to improve performance?" ask some stakeholders. While no one is surprised by self-driving cars any longer, and with an expectation that mail drones are on the way (with what legislation?), the Chinese company Jingdong relies on cyborg delivery drivers on four wheels to distribute its parcels on university campuses in Beijing. Launched by the giant behind the Skype messaging service, Startship is an android on six wheels from this same family, based on the concept "zero cost, zero waiting time and zero environmental impact". However, faced with this increasing robotisation, some are convinced that humans must remain at the centre of the "last kilometre" as a decisive part of the customer experience and a vector in the relationship of trust with the consumer. A vision "personified" which puts innovation at the service of the human delivery agent, rather than in his or her place.



Cash flow dipped? Prioritise your payments.

All companies experience highs and lows, especially in terms of liquidity. However, even if you are struggling with cash flow, you must continue to honour your contractual commitments. When it comes to settling with your creditors, it is in your best interest to group them considering two factors: possible fines and your strategic needs.

Several events can temporarily trigger cash-flow problems: a large unexpected payment, a contract which you were banking on falling through or a big customer being late in paying. Above all, it is important not to "play dead" when you find yourself in this situation. It is important to remember that you are also dealing with your creditors and some will not "forgive" you for any late payments. Stay in control to prevent this one-off event from becoming a bigger problem.

Priority n° 1: your tax and social security debts

This may seem obvious, but your overriding priority must be the State, i.e. your commitment to paying VAT, social security and tax. That is because you can quickly be caught up in a snowball effect if you miss payment deadlines, with your debts spiralling out of control. Be aware of hefty surcharges, fines and default interest. Indeed, if your company does not respect its tax and social obligations, you will soon find that public organisations have rather dissuasive recovery methods in place. 

Beware of the penalties

For example, if you are late in paying your social security contributions, you will be subject to an increase of 10% of the amount due, with default interest of 7% per annum. Please also be aware that the NSSO can seize your company funds and that the tax authorities have the right to seize your bank accounts, to contact your customers to recover debt, or to hold you responsible as a manager under joint and several liability.

An accessible solution: payment facilities

In order to avoid this, there are many options available to you in terms of establishing a repayment schedule with these public institutions. Your company should ensure it takes advantage of these. Again, the more proactive you are, the easier it will be to negotiate a payment facility. The first step is to contact the organisation in question and propose a realistic repayment schedule. Even though the conditions vary, you will usually have to make a first payment before spreading the balance over a longer or shorter period. Even if you are fined for late payment, you may, under certain conditions, be entitled to a reduction or an exemption if you adhere to the conditions of contract.

Priority n° 2: your key creditors

After addressing your situation with the State, you must turn your attention to your strategic partners, i.e. those who have a decisive impact on the smooth running of your business on the basis that, if you tarnish the business relationship with your main suppliers, the situation could go from bad to worse. After a first screening to identify the most urgent bills and priority creditors, draw up a plan of action in line with your current and short-term cash-flow situation. Identify the debts you can pay immediately and in full. For the others, the right approach is to contact your partner.

Clear and controlled communication

Your goal should be threefold: first, demonstrate to your creditor that you are proactive in dealing with your cash-flow problem and that you care about your business partners. Then you must confirm that your situation is temporary and circumstantial. Finally, keep in mind what you want to achieve, make a reasonable proposal and be prepared to negotiate a satisfactory solution for both parties. For example, you can ask for a monthly payment plan in return for financial compensation (default payment interest, etc.), a formal commitment to long-term collaboration or an increase in order volume.

In any case, in order to stay afloat, you will understand you have to: act quickly, communicate clearly and negotiate a staggered payment plan.

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