I’ve been intrigued by the comparisons made to highway traffic behavior and supply chains (see Carlos Daganzo, et al., on the “bullwhip effect”).

A recent article in the Wall Street Journal, on hiccups in supply chains caused by recent economic turmoil, contained a number of implicit, if unstated, comparisons to highway traffic.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive.

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain — from retailers all the way back to makers of factory machinery — shows that, at almost every stage, companies were flying blind as they cut.

The parallel here is a group of cars traveling at high speeds, and close following distances, on the highway — an inherently unstable regime. If one car hits the brakes, the succeeding car, not fully aware from the weak signal how much the vehicle ahead is actually braking (or, for example, if a car’s view of the traffic ahead is blocked by an SUV — for we often make our braking decisions by what drivers further up the chain are doing — the car driver’s “clarity” of the highway supply-chain ahead has been reduced), also hits the brakes — perhaps more than necessary — which amplifies up the chain, often in an erratic fashion. One driver’s underreaction may even penalize another driver six or seven cars up the chain.

And so it is with supply chains:

In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers’ deep cuts made it tough to keep shelves stocked. Suppliers “all decided to build a lot less,” says Best Buy merchandizing chief Michael Vitelli.

As the contraction raced down the supply chain, its effects became amplified. Rick Tsai, CEO of chip manufacturer Taiwan Semiconductor Manufacturing Co., has said that, in last year’s final quarter, consumer purchases of electronics gear in the U.S. fell 8% from the prior year. But product shipments fell 10%, and shipments of the chips that go into the gear dropped 20%.

Everyone “braked” more than they had to, thus consuming in essence Best Buy’s travel potential.

There was another interesting parallel, in light of a potential economic recovery, and an opening of the supply-chain spigot.

Still, “It’s easier to turn the switch off than turn it back on,” says David Pederson, Zoran’s vice president of corporate marketing.

This has its highway equivalent in the fact, as noted by Dirk Helbing and others, that it takes longer to emerge from a congested state than it does to enter one.

This entry was posted on Thursday, May 21st, 2009 at 8:47 am and is filed under Traffic Engineering, Traffic Wonkery, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.