Shippers who’ve been rushing to avoid stockouts by importing large quantities of goods face a question of whether they’re going overboard as demand shows signs of ebbing.
A precipitous drop in consumer confidence and a slowdown in spending are raising the risk that shippers who’ve been scrambling to build inventories will wind up with far too much of it.
After two years of surging demand for goods and low inventories, shippers may be caught flat-footed amid shifts in consumer spending and forced to sell extra merchandise at a steep discount.
This “bullwhip effect” resulting from the fear of stockouts, inventory buildup, and subsequent stabilization of demand is amplified throughout supply chains, “with orders to suppliers furthest away from the point of sale far removed from the realistic views of consumer demand,” warned University of Tennessee professors in an editorial last year.
“ The bullwhip effect takes hold in supply chains because long lead times are required to build capacity and significantly increase output,” they wrote. “By the time companies reach peak capacity, demand may have stabilized at lower levels, leaving firms with excessive inventory.”
Shippers’ natural response to the widespread pandemic-era shortages and scarcities has been to load up on inventory and try to avoid stockouts as home-bound consumers shifted their spending to goods from services. Many purchased larger-than-usual orders well ahead of schedule, lest the products get stuck outside a clogged port for weeks.
But as inflation takes a bite out of shoppers’ budgets and consumers shift spending away from goods and toward services, that rush to build up inventory could leave shippers with excess merchandise.
Inventories returning to pre-pandemic norms as demand cools
The ratio of retail inventories to sales — excluding cars and auto parts, which are especially low in stock due to the semiconductor shortage — fell to historic lows during the pandemic. But it’s been creeping up to pre-pandemic norms.
Retailers held enough inventory to cover 1.15 months of sales in April, according to the U.S. Census Bureau. That’s still below inventory levels that could cover 1.22 to 1.30 months of sales every April in the decade leading up to the pandemic, but well above inventory for 1.05 months of sales in April of 2021.
(Source : Fred & U.S. Census Bureau)
Businesses are seeing fewer shortages, a Federal Reserve report suggests. The number of mentions of the word “shortage” in the Fed’s Beige Book, a survey of business contacts released eight times per year, is down to its lowest level since January 2021, Bloomberg notes.
Shoppers, meanwhile, are hitting the brakes. Consumer spending rose only 0.2% in May from the previous month and 0.6% sequentially in April after a 1.2% increase in March. Taking inflation into account, spending fell 0.4% from April to May, according to the U.S. Bureau of Economic Analysis.
And consumers’ pessimistic outlooks indicate spending may decline further. An index of consumer sentiment from the University of Michigan fell 37.1% in July from the previous year, and its index of consumer expectations fell 40.1% annually, according to preliminary data.
Inventory levels measured by the Logistics Managers’ Index (LMI) remain elevated, and the index’s authors expect a large number of ships heading from Shanghai to Southern California ports may lead to more inventory growth in the next few months.
(Source : Logistics Manager's Index, June 2022)
What Shippers Can Do
The holiday busy season is approaching, so it’s perfectly normal to order more this time of year than the spring and late winter. But toeing the line between too much and too little may be more difficult this time around.
“While lightening the inventory load would certainly be helpful,” wrote the authors of the LMI in their June report, “firms should be careful not to overcorrect by cancelling too many orders, as the bullwhip can swing towards both overstock and understock in fairly quick succession".
Communication between sales and logistics teams and externally with suppliers is key to avoiding drastically overstocking if consumer demand plummets.
In a series of case studies, a Walden University researcher found that “supply chain leaders used various collaboration strategies to influence network partner agreements and information sharing policies to build trust among their network partners, which reduced the bullwhip effect.”
“I recommend that supply chain leaders use effective communication strategies to mitigate the adverse implication of the bullwhip effect,” the researcher wrote.
Real-time data, visibility, dashboards, forecasting, and control towers provided by supply chain management software and technology companies can also help shippers to react to swings in demand with the most up-to-date information, especially if it is shared widely among teams within the shipper.
Cutting down on delivery times and nimbly managing inventory—for instance, by limiting merchandise to the best sellers or importing in smaller batches or over shorter product cycles—can also help shippers minimize the bullwhip effect.