Understanding the Bullwhip Effect and Avoiding Excess Inventory

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Even a slight change in ordering behavior at the consumer level can lead to a much bigger impact up the supply chain. No matter where your business is in that chain, you may notice significant changes in buying behavior as retailers place smaller orders. That can, in turn, make it much more likely that you will end up with excess inventory on hand. 

Understanding the bullwhip effect can help you avoid the hazards of excess inventory. 

What is the Bullwhip Effect?

The bullwhip effect occurs when small changes in demand at the retail level, like a shift in overall consumer buying habits, lead to larger-scale changes as it moves up the supply chain to manufacturing. 

Retailers, when they observe changes in consumer buying behavior, may quickly change their ordering habits to reflect that change in demand. Retailers, especially those with tight profit margins, do not want to end up with excess inventory, so they avoid ordering things that will not fit their current view of consumer needs.

Their suppliers may then, in turn, shift their ordering habits. They may assume that, if retailers are ordering less now, they will continue to shrink those orders in the future. 

By the time the order reaches the initial manufacturer, it may lead to much smaller orders and considerable inventory challenges, since the manufacturer may end up with excess inventory on hand that will not actually be wanted by consumers. 

Unfortunately, the bullwhip effect may amplify inefficiencies across the supply chain because it takes a long time for manufacturers to respond to a shift in demand at the consumer level.  Those changes can slow down production significantly or lead to unexpected inventory excesses. 

Avoiding Excess Inventory

There are several strategies your business can use to avoid excess inventory and increase your ability to manage inventory successfully, minimizing the bullwhip effect and improving consumer satisfaction.

1. Pay careful attention to long-term trends in purchasing, not just immediate trends, and shifts.

Many things can lead to a small or temporary shift in consumer purchasing patterns. At every stage of the supply chain, it’s important to keep an eye on those trends in consumer purchasing so that you can plan to adjust purchasing or production habits. 

A good inventory management system can make it easier to keep up with those changes in consumer buying behavior and predict patterns so that you can move forward with your plans. Demand forecasting can take long-term trends as well as short-term needs into consideration.

2. Keep an eye on supplier inventory.

The bullwhip effect means that there is often a delay between how retailers deal with orders and how suppliers manage those similar fluctuations in inventory. As a retailer, you may need to know what inventory your suppliers have on hand. In some cases, your suppliers may start selling off excess inventory just as you need to increase orders again, or they may have excess inventory on hand, which means you might be able to work out a deal for your own purchases. Your inventory management system and clear communication through the supply chain can make it easier to keep up with that changing demand. 

3. Pay attention to safety inventory.

Early warning systems can help give you a better idea of when your safety inventory might be dipping below comfortable levels, especially if you’ve noticed a recent increase in buying behavior. Too much safety inventory can be a problem when buying slows, but too little can be an equally serious problem as buying increases again. Keep an eye on your safety inventory and other inventory needs and adjust expectations when necessary. 

4. Know your suppliers’ minimums and pay attention to changes in those critical amounts.

Often, suppliers will set specific minimums that you must reach to place an order. As your customers’ buying behavior changes, particularly as customers decrease their orders of certain key goods, you may find it more difficult to reach those minimums. Make sure you know what all your suppliers’ minimums are and are prepared for how to reach them so that you can ensure smooth purchases. 

If supplier minimums allow, you may want to place smaller orders more frequently to keep up with changes in consumer demand. Smaller, more frequent orders allow you to adapt to smaller changes in what your consumers really need, which can, in turn, make it easier for you to avoid excess inventory or inventory shortages. 

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5. Look for ways to reduce the length of your supply chain.

The longer your supply chain, the more the bullwhip effect can resonate. If you can shorten your supply chain, including removing unnecessary steps between the manufacturer and the retailer. You may, for example, be able to buy directly from the manufacturer, or you may be able to have your manufacturer ship directly to end consumers. By taking those steps to reduce the size of your supply chain, you may find that it’s easier to keep that bullwhip effect from having a larger-scale impact on your business. 

6. Pay attention to your pricing.

Sometimes, shifts in demand may come about because of your overall pricing. For example, consumers may be more likely to buy when you put an item on sale. By offering regular low prices, rather than extensive sales, you may increase the odds that consumers will buy that product regularly instead of seeing periods of considerable fluctuating demand. 

7. Implement the right backorder metrics.

Having the right backorder metrics in place can make a significant difference. Backorders can have a substantial impact on consumer purchasing. When those backorders clear, it can impact their future purchases. Having lengthy delays on backorders, including inaccurately predicted shipping times, can also cause changes in consumer buying behavior. By paying attention to your backorders and those associated metrics, you can keep a closer eye on your inventory needs. 

Stock IQ Can Help with Forecasting

Demand forecasting is critical to successfully managing your supply chain and avoiding the risks associated with the bullwhip effect. At StockIQ, we aim to help our customers manage their supply chains and keep a closer eye on inventory. Contact us today to learn more about what we can do for your brand.

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