Retailers are making the supply-chain crises even worse by over-ordering, causing a 'bullwhip effect' that distorts demand
Stoked by fears of empty shelves during the holidays, retailers are ordering too many things too early, distorting demand throughout the supply chain.
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- Retailers are panic-buying as the supply-chain crisis stokes fears of holiday shortages.
- But this natural instinct to over-order is shooting retailers in the foot, experts told Insider.
- It's causing a "bullwhip effect" to ripple through the supply chain, making the crisis even worse.
Retailers are panic-buying for the holidays as the supply-chain crisis stokes fears of empty shelves during their most profitable season of the year.
While over-ordering may be the natural human instinct, it actually ends up shooting retailers in the foot, experts told Insider.
"If people think the banks are going to collapse, they go to the ATM and take out all the money, causing them to collapse," Dr. Tinglong Dai, a professor of operations management and business analytics at Johns Hopkins University, told Insider.
"The same goes for supply chains," he said. "When people expect there's going to be shortages for this holiday season, they increase their orders ... which led to a dramatic increase in shipping to the US. That's why we see so many containers in our ports."
He said this "self-fulfilling" process is intensified by the bullwhip effect, a phenomenon that causes supply-chain inefficiencies such as lengthy wait times and excess inventory due to distorted demand.
"It's the industrial equivalent of stores running out of toilet paper," Ted Stank, faculty director of the Global Supply Chain Institute at the University of Tennessee at Knoxville, told Insider.
When retailers panic and order more, and earlier, than they usually would, it signals to manufacturers that consumer demand is increasing, even if it's not. Manufacturers react by increasing their orders from suppliers, inflating demand even more as it moves up the supply chain.
"Eventually, a very small change in consumer behavior can translate into great disturbances to the supply chain," Dai said.
Unlike the banking industry, which has regulations in place to prevent "bank panic" scenarios, the supply chain lacks any kind of central authority to limit how many units are ordered by retailers in a given timeframe.
One solution to the bullwhip effect is communication between companies, both experts told Insider. However, retailers are hesitant to share important business data like demand metrics, making collaboration a rarity in the industry.
"We really need the bigger players such as the Walmart and Costco and Target to become role models for others and avoid a bigger crisis from happening," Dai said. "The worst is yet to come."
While Dai and Stank both agreed that shortages in the US will continue to get worse, they said it will be less of an emergency and more of an inconvenience for shoppers.
"We've become very spoiled consumers," Stank said. "I think we're going to have to kind of go back in time a few decades ... we might not get things as quickly as we become accustomed to, but we'll be able to get them."