The outbreak and spread of COVID-19 has changed how we live, and as a result how we shop. Panic-buying behavior and stockpiling caused by uncertainty and prolonged shelter in place regulations have had one consistent impact on grocery stores: empty shelves.
Consumer behavior has rapidly changed as a result of the virus, with customers now choosing to buy medical supplies, groceries and non-perishables, in bulk. This shift has fueled wide-ranging consequences within supply chains, leading to what is commonly known as “The Bullwhip Effect,” which results in substantial inventory issues and potential revenue losses for brands in the long-term.
What is “The Bullwhip Effect”?
First coined by MIT professor Jay Forrester, “The Bullwhip Effect” describes a phenomenon in which inventory levels undergo increasingly larger fluctuations up the supply chain in response to a shift in consumer demand. What starts out as a small change in demand at the retail level leads to an even more substantial variation and uncertainty in supply, demand and lead time further up the chain.
Simplified, the Bullwhip Effect is an inventory disruption that runs all the way through a supply chain. It can be caused by variations in:
- Forecasting: Demand forecasting is an essential part of planning a supply chain, with each stage adjusting its demand based on the orders of downstream customers. A supply chain is made up of interconnected stages. If consumers suddenly buy more of one particular product, retailers will adjust inventory orders to keep up with demand. This pressures the rest of the supply chain, ultimately leading to inventory shortages at every stage. However, when consumer demand falls again, every stage of the supply chain will then find itself with an excess inventory problem.
- Order batching: In an effort to take advantage of transportation or price reductions, members of the supply chain will undertake forward buying, ordering large quantities in one go rather than several small orders throughout a month – causing demand to become inconsistent and hard to predict.
- Over-discounting: Running loads of sales and promotions results in a boom and bust type cycle, with periods of high demand being quickly followed by periods of low demand. These fluctuations in demand at the retail level are then amplified through every stage of the supply chain.
COVID-19: Instigating “The Bullwhip Effect”
The empty shelves we are currently seeing are an indication of an approaching bullwhip effect. Consumers have reacted to the virus by stocking up on essential CPG goods, leading to shortages of essentials like toilet paper and hand soap. Supply chains have had to ramp up production to cope with the unprecedented increase in demand. However, as retailers place larger orders, so do wholesalers, suppliers, manufacturers and so on, with orders and demand being magnified the higher you move up the chain.
The current inventory shortages are worsened by COVID-19 social restrictions and health measures. Under normal circumstances, a sudden increase in demand would still force every stage of a supply chain to work harder and deplete existing inventory levels. However, with current import restrictions in place to stop the spread of the virus, sourcing international materials to replenish inventory levels has become a challenge. Consequently, the CPG industry is experiencing substantial inventory shortages resulting in a lag in restock times for stores.
Implications of The Bullwhip Effect on Inventory Levels
As a response to panic-buying, supply chains are scrambling to meet increased demand by ramping up orders and production to try and keep shelves stocked . However this reactive response is likely to cause long term excess inventory problems along the entire supply chain.
Ultimately, the most dangerous result of the bullwhip effect is ending up with excess inventory when consumer demand decreases. Right now, businesses are seeing demand go up, but actual consumption is more or less staying the same. Even if stores are currently faced with inventory shortages, there will come a point where consumer demand falls again simply because no one needs to buy any more. After all, who needs to buy a 10-pack of toilet roll when you have a 3-month supply in the cupboard? As Hitendra Chaturvedi of W.P. Carey School of Business describes “Now you have a situation where panic demand caused the system to churn more stock which has no buyer,” With no buyer, supply chains will find themselves forced to hold on to large volumes of excess inventory – which, after factoring in long-term warehousing and personnel costs coupled with decreased revenue generation from low demand, will amount to losses to the bottom line.
Ultimately, the bullwhip effect has exposed vulnerabilities within existing supply chains. Right now, what brands are seeing on a large scale is the importance of having an agile supply chain to cope with surprise disruptions. With supply and demand uncertain and the global market volatile, proactive management of a digital supply chain is more important than ever to protect inventory levels and avoid long term revenue losses. To do this, supply chains need to become more responsive – starting with a digital transformation.
By leveraging technology, businesses will be able to combat The Bullwhip Effect. The right digital solutions will allow full transparency up and down the supply chain – with every stage being informed of inventory performance, enabling them to proactively adapt to fluctuations in demand. It will also allow inventory to be analyzed, providing data-driven insights into how best to move it on. This means that should a supply chain be faced with excess inventory, brands will be able to make strategic and informed decisions on how best to utilize their inventory to benefit their bottom line.
Mitigating the risks of The Bullwhip Effect relies on having a responsive, digital supply chain in place. INTURN is an enterprise software solution that offers brands full visibility into their inventory. Leverage our technology to streamline workflows and efficiently optimize and manage inventory to recover margins. Learn More.