Get Ready for the “Bullwhip”
A really interesting article by Timothy Aeppel about Caterpillar and the “Bullwhip effect” appeared in the WSJ recently. The bullwhip effect occurs when “small increases in demand cause a big snap in the need for parts and materials further down the supply chain.”
In the article, Jim Owens, Cat’s CEO, talked about growth it expects this year for itself and its suppliers. Cat will need to increase its production by 10% to 15% even if demand for equipment is flat. According to Owens, “the inventory burn-off is over.” The increased production will be driven by the need to restock dealers who cut inventory last year. Under this scenario, suppliers will need to increase their production by 30% to 40% because they are restocking their own shelves, Caterpillar’s and the dealers.
Under a modest growth scenario, many suppliers to Caterpillar will need to more than double their shipments to Caterpillar.
Manufacturers need to make sure that their channel programs are ready for the bullwhip. Many suppliers base their discount structures and rebate programs on growth. For many companies, rebate payouts in 2009 were very low or almost non-existent. In 2010, we can expect significant growth and payouts, simply from the bullwhip.
