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Lockdown exit strategy dangers: The post-crisis supply chain dimensions of Covid-19

Posted on 16th April 2020 at 11:20am

How the lockdown exit will be implemented once the peak of the Covid-19 crisis is over, is a key question for political and economic decision-makers. The major risk is that it will severely destabilise the functioning of supply chains owing to a rapid recovery in consumption. Only a gradual lockdown exit strategy would make it possible to avoid the ‘bullwhip effect’, as Gilles Paché explains.

In March 2020, when it was clear that Covid-19 would become a pandemic, many observers presented lockdown as one of the most effective measures to slow the diffusion of the virus (Iacobucci, 2020). Indeed, epidemiology and virology specialists stressed the highly contagious nature of the new coronavirus, with a predictable explosion of cases linked to multiple social contacts between people (at work, in the family, during leisure and shopping activities, etc).

Very quickly, after China, political authorities in Europe referred to the notion of social distancing (or physical distancing) between people to avoid the exponential spread of the virus and the risk of overwhelming the health system with an increasing number of patients in acute respiratory distress. Unfortunately, it appeared that social distancing was not enough to prevent a wave of contamination, which began to sweep away the health systems of Italy and Spain. One after another, several European countries therefore took the radical decision to lock down, in other words isolate people at home. Table 1 shows the six main European countries that have chosen a lockdown strategy, and the main features of the strategy.

Table 1. Lockdown strategies in Europe

As might be expected, the Covid-19 crisis, and the political decision to isolate the population, is having a very significant impact on household consumption, and consequently on the sales of a large number of non-food businesses. As far as L’Oréal is concerned, a five per cent drop in sales has already been recorded for the first quarter of 2020, while LVMH, over the same period, reports a drop of 10 to 20 per cent. For some sectors, we are event talking about a collapse from one year to the next, with a decline in sales that should be around 30 per cent for tablets, and more than 50 per cent for textiles and clothing. More generally, for the eurozone, the IHS Markit composite PMI index of services and manufacturing fell from 51.6 in February 2020 to 29.7 in March 2020, the lowest level since the index was introduced (a level below 50 indicates that a majority of companies have decreased activity in the past month) (Giles and Romei, 2020). This is a direct result of the lockdown strategy announced in Europe country after country.

The question that arises is obviously that of the post-crisis period, when the political authorities will decide to stop the lockdown. This is a delicate decision, as major health issues are at stake, with a possible second wave of contamination. But the stakes are at least as high at the economic level because the end of such a major global lockdown is a unique experience never before experienced in the capitalist system.

As many European experts underline, notably Mirlicourtois (2020) of Xerfi Canal, the recovery of consumption will certainly be exceptional during the post-crisis period, with frenetic consumers regaining their freedom of movement or simply buying products whose purchase has been postponed. Economies, and especially supply chains, may then face a major threat, known as the ‘bullwhip effect’.

Fundamentals of the bullwhip effect

Jay W Forrester (1918-2016), one of the greatest academicians in logistics management, conceptualised the bullwhip effect in the late 1950s as part of his model of industrial dynamics in a Harvard Business Review paper (Forrester, 1958). The reasoning is based on the idea that small fluctuations in demand at retail level lead to larger fluctuations at wholesale level, then at manufacturing level, and finally at suppliers’ level, from downstream to upstream in the supply chain.

Jay W Forrester uses the image of a whip to explain his model. When a person holding the whip makes a slight wrist movement, the relatively small initial movement is amplified to the point where it causes a violent reaction at the end of the whip.

The bullwhip effect usually finds application in explaining how supply chains work. Let’s suppose, for example, that a retailer typically keeps 80 shirts in stock in its store. As it normally sells 20 shirts a day, it replenishes this amount from the manufacturer. But when, on a given day, the retailer sells 40 shirts one might question a change in the rhythm of demand. It then reacts by ordering 60 shirts in anticipation of a further increase in demand. In turn, the manufacturer produces 200 shirts, instead of the usual 100, to avoid potential stock shortages. As Jay W Forrester explains, in the end, the increased demand at the store level is amplified throughout the supply chain, having extremely high levels when it reaches suppliers (see Figure 1).

Figure 1. Graphical representation of the bullwhip effect

Wang and Disney (2016) underline that Procter & Gamble is one of the first companies to formalise the bullwhip effect in manufacturing. As early as the early 1990s, the company’s logistics teams were surprised by the high variability in demand for diapers from large retailers like Walmart, even though the baby population does not vary significantly over short periods of time, and a majority of babies are unlikely to synchronize their diarrhoea. Procter & Gamble’s investigations show that small variations in demand from stores increase significantly as one moves away from the buying behaviour of baby parents and up the supply chain. Thus, cellulose suppliers are regularly victims of successive requests from manufacturers that are impossible to satisfy, followed by slowdowns and cancellations of orders. The conclusion: stop and go is a major threat to any supply chain.

The danger of a massive and generalised lockdown exit strategy

The question remains as to the link between the bullwhip effect and the lockdown exit strategy that will be chosen after the Covid-19 crisis. This link is explicit, and for this reason, let us imagine that a massive and generalised lockdown exit strategy is chosen, after contradictory debates between politicians, scientists and economic decision-makers. The result would then be a massive consumerism of an entire population whose mobility and consumption have been impeded for several weeks, or perhaps months. We can mechanically expect a total destabilisation  or disruption (Kesley, 2019)  of supply chains at three levels, from downstream to upstream (see Figure 2) under the pressure of the exceptional recovery in consumption mentioned above. These include:

  • Physical stores, as well as virtual stores (websites), are likely to run out of stock quickly unless they anticipate the movement by generating significant security overstocks as soon as a massive and generalised end-of-lockdown is announced, an unlikely solution given the slowdown in production activity during the Covid-19 pandemic.
  • Manufacturers will then be faced with a wave of orders that they will have the greatest difficulty in responding to, since it will be impossible to increase their industrial capacity by 30 or 40 per cent instantaneously, unless they resort to massive capacity sub-contracting, assuming sub-contractors, particularly SMEs, have survived the Covid-19 pandemic.
  • Lastly, suppliers of materials and components, who work for a large number of manufacturers at the same time, will no doubt have to make commercial trade-offs as to which orders should be given priority, and in turn, face an explosion of precautionary purchases that manufacturers will make in anticipation of an even higher wave, as a result of the bullwhip effect.

Figure 2. Wave reaction after the Covid-19 crisis

The wave reaction is not original. After each period of slowdown in consumption, for example after a climatic event (such as a cold and harsh winter) or a social event (strikes lasting several weeks), consumption peaks occur. However, these peaks remain limited because the events have had a reduced intensity and have not called into question the value system of individuals.

In the case of 2020 lockdown decisions, the situation is totally different. This is a long period of radical change, which is also characterised by major psychological anxieties. Covid-19 will indeed have constituted a pandemic perceived as a strong traumatic event, directly and durably confronting individuals with death, or at least a threat of death. As Baudrillard’s work (1976/2017) underlines, consuming and accumulating goods is a way of staving off death and asserting the power of life. It would therefore not be surprising if the end-of-lockdown is accompanied by an explosion of consumption that has not been experienced since World War II.

Communication around the gradual lockdown exit strategy

While it is unlikely that the political authorities will have an in-depth vision of Jay W Forrester’s model of the bullwhip effect, there is no doubt that they are already anticipating the profound destabilisation of supply chains that a massive and generalised lockdown exit strategy would generate, for example in terms of out-of-stock in stores, which would be difficult to accept after a long period of ‘de-consumerism’.

From a logistical point of view, a gradual lockdown exit strategy is therefore the only feasible option to allow the increase in demand to be smoothed out as much as possible. From a medical point of view, it is also the only way to avoid a second wave of contamination that could be particularly deadly, overwhelming again the healthcare system (Di Domenico et al, 2020). Modelling carried out in April 2020 by researchers from the University of Hong Kong on the case of Wuhan (China) indicates that this second wave is largely possible in the event of a massive and generalised lockdown exit (Leung et al, 2020).

It will, of course, be necessary to communicate effectively on the stakes of the gradual lockdown exit strategy in order to avoid a lack of understanding and frustration on the part of individuals who will remain, for some time, deprived of the newfound freedom to move and consume. The debates on the legitimacy of this or that category of people, or of this or that region, to benefit first from a lockdown exit strategy began in France.

Tensions and clashes, sources of fractures within society, are already raging in blogs, social networks and the media. To avoid them, the political authorities will have to communicate and explain the choices in the most convincing way. But communication must also be co-ordinated between European countries to avoid cacophony and divergent treatment of populations that are sometimes only a few dozen kilometres apart (Bennhold, 2020). This is a major challenge for the social acceptance and logistical success of the gradual lockdown exit strategy.

References

  • Baudrillard, J (1976/2017): Symbolic exchange and death, Thousand Oaks (CA), Sage.
  • Bennhold, K (2020): Some of Europe, “walking a tightrope”, will loosen coronavirus restrictions, The New York Times, April 8.
  • Di Domenico, L, Pullano, G, Sabbatini, C, Boëlle, P-Y, Colizza, V (2020): Expected impact of lockdown in Ile-de-France and possible exit strategies, EPIcx lab Report No 9, April 12, Paris: INSERM.
  • Forrester, J (1958): Industrial dynamics: a major breakthrough for decision makers, Harvard Business Review, 36(4), 37-66.
  • Giles, C, Romei, V (2020): Economic activity crashes across Europe after coronavirus lockdowns, Financial Times, April 3.
  • Iacobucci, G (2020): Covid-19: UK lockdown is “crucial” to saving lives, say doctors and scientists, British Medical Journal, 368, March 24, doi.org/10.1136/bmj.m1204
  • Kelsey, R (2019): Supply chains: global trends, Crisis Response Journal, 14(3), 90-91.
  • Leung, K, Wu, J, Liu, D, Leung, G (2020): First-wave COVID-19 transmissibility and severity in China outside Hubei after control measures, and second-wave scenario planning: a modelling impact assessment, The Lancet, April 8. doi.org/10.1016/ S0140-6736(20)30746-7
  • Mirlicourtois, A, (2020): L’effondrement de la distribution: et la suite? Paris: Xerfi Canal.
  • Wang, X, Disney, S, (2016): The bullwhip effect: progress, trends and directions, European Journal of Operational Research, 250(3), 691-701, doi.org/10.1016/j.ejor.2015.07.022 

Author

Gilles Paché is Professor of Retailing and Supply Chain Management at Aix-Marseille University in France. He has more than 450 publications in the forms of journal papers, books, edited books, edited proceedings, edited special issues, book chapters, conference papers and reports. A Member of the Research Center on Transport and Logistics (CRET-LOG) and Director of the University Press of Aix-Marseille, his major interests are supply chain management, humanitarian logistics and retail operations management

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