Tuesday, September 15, 2009

Crack that whip!

Today's released data on Housing Commencements for Australia shows a remarkable pattern. The chart below which tracks construction starts for both South Australia and Australia exhibits the classic "bullwhip" features first documented in the supply chain literature.

If we are not attuned to the system dynamics, we might think that short term exogenous events are what determine the behaviour found here. Things like the mining boom, the global financial crisis, migration patterns, for example are beyond our control. We might point to these events and ascribe to them greater significance than we should.

What the bullwhip effect literature tells us is that the variations found in supply chains are more often than not the result of internal forces at play.

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