The Bullwhip Effect in Retail is Whipping Back Around
With excess inventory soon becoming the new problem, proper inventory data control and promotions will lessen the hurt when demand slows.
During the uncertain period at the beginning of the COVID-19 pandemic, frenzied consumer shopping at both brick-and-mortar and click-and-mortar retailers began fueling an economic phenomenon known as the “Bullwhip Effect.” Professor Jay Forrester from MIT is credited with first characterizing the Bullwhip Effect in the early 1960s to describe how changes in one end of the supply chain (for example, temporary excess point-of-sale purchases of paper towels) can have an outsized impact further up the chain as retailers, distributors, manufacturers, and raw materials producers adjust to perceived excess future demand and create more inventory, leading to outsized and inappropriate purchasing at the higher ends of the supply chain.
The Bullwhip Effect, unfortunately, has two parts. After stockpiling outsized inventory during periods of increased demand, manufacturers find themselves crunched again as decreased consumer spending leaves them with overly full warehouses and less orders coming in. Meanwhile, distributors and retailers may have excess original inventory from the first half of the bullwhip that’s not meeting shifting consumer demand.
This is where we find ourselves now in 2022: panic buying is over, supply chains are still strained, and excess inventory is potentially about to crunch manufacturers, distributors, and retailers (again). Tackling this uncertain future — especially for retailers — will require sharper and clearer insights into their supply chain data, as well as their consumers. It’s even more critical now to maintain tight data oversight into inventory, ordering habits, and consumer information.
Looking back — and forward
The past 10-plus years of buying habits have created oceans of interesting and compelling consumer behavior data for retailers to take advantage of. As consumer behavior shifts inexorably toward digital and online purchases, creating and maintaining effective order management processes and an inventory system of record all but require the direct flow of consumer data to order management systems.
Taking advantage of this consumer purchasing data is not simple if your orders, inventory, and shipping don’t communicate seamlessly. Retailers who push for accuracy of data along their supply chain and create single records of truth for order IDs — rather than disparately managed systems — will see simplified fulfillment processes, smoother last-mile operations, and reduced inventory overhead.
Many of our clients have found that implementing or expanding an end-to-end Enterprise Resource Planning (ERP) system — such as Microsoft Dynamics 365 ERP — gives them a leg up in terms of their ability to respond to fluctuations in consumer behavior. This is especially true in situations where retailers can hold greater varieties of SKUs. By knowing more quickly with an integrated ERP if upstream orders actually need to be flexed up based on store breakdowns or historical orders, retailers reduce the chance of excess bullwhip inventory eating up valuable warehouse or truckload space.
This allows retailers to:
- Rapidly identify and segment out anomaly orders
- Create reporting around tracking orders from key customers in near real-time
- Determine optimal order batch sizing is possible without creating spaghetti ETL (Extract, Transform, Load)
Whatever pain may be involved in getting onto an ERP initially, the long-term benefits far outweigh any short-term discomfort.
Intelligent solutions
Even with a solid ERP system, the anticipated crunch to manufacturers as a result of the Bullwhip Effect — and decreased economic demand because of higher interest rates and consumer fatigue — will eventually lead to situations where retailers (and their distributors) will be holding onto excess inventory that isn’t in demand. Being able to work with that inventory intelligently, rather than having to write it off, will be the hallmark of a single data record of truth. Knowing detailed shopping patterns can help retailers move last-mile inventory to where it needs to be to maximize sales in areas where demand may not have flagged. Smarter, targeted couponing or deal-bundling for prized customers is possible to create potential one-off, outsized orders that eats into any excess inventory.
Retail companies that take bold action to centralize with an enterprise ERP will find themselves holding less excess inventory, reporting more accurately, and creating better experiences for their customers. The coming decrease in consumer demand can be better weathered, especially as manufacturers feel the lasting pinch of the Bullwhip Effect.
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