ECON100 CONCEPT OF THE DAY: BULLWHIP EFFECT
Intro: As part of our dual mandate to rebrand the dismal science’s moniker into the ‘decision’ making science as well as to lower the barrier to understand and access economic concepts without a formal economics degree, we’re rolling out a definition of the day (or week) to further these goals. Today’s concept of the day (or week) is the Bullwhip effect.
WTF is THE BULLWHIP EFFECT?
The Bullwhip effect is outlined in the book Industrial Dynamics by legendary MIT computer scientist and forefather of the field of systems dynamics, Jay Forrester. The effect describes how small errors in forecasted demand made by retailers, or any other node in the supply chain, creates gaps between supply and demand that get amplified as they reverberate up or down the supply chain, creating increasingly larger distortions leading to market shortages or surpluses. Generally, these are recognized as buildups (or drawdowns) in inventories.
WHY SHOULD YOU CARE ABOUT THE BULLWHIP EFFECT?
Because the Bullwhip effect tells us that despite being well over 24 months into the initial pandemic-related shortages of 2020, things will get worse before they get better. It also explains why, according to the latest Census Bureau release, wholesalers and retailers have accumulated record levels of inventory at a combined $1.6 trillion. The $740 billion stashed in inventory is a jump of 21% from last year and it continues to increase pressure on retailers to start sales earlier and with deeper discounts¹. Retailers are caught managing a difficult balancing act as they must preserve their limited storage- their scarce resource- meanwhile preparing to clear older inventory to avoid a bottleneck with incoming new merchandise. It’s the proverbial rock and hard place as inflation roils the economy and shoppers are spending a larger part of their budget on essentials. In some cases shipments are months behind, and even out of season. In a economic press release by the Bureau of Labor Statistics the Consumer Expenditures Survey shows an increase of 22.3% in apparel and services from 2020-2021. Unfortunately this is after a 23.8% drop between 2019 and 2020 ². Needless to say, for retailers, forecasting demand has become much more challenging.
OK, SO WHAT DOES THIS MEAN FOR YOU?
Specific to the electronics and apparel sector, if you use your powers of observation to scan your local retailers you will probably notice they’re offering deep discounts, adding more products to the clearance aisle, or running promotions/advertisements earlier and for longer. According to reporting done by the Wall Street Journal’s Lydia O’Neal, some discount retailers are well positioned to take advantage of current supply chain woes- by nature of their business model- to the benefit of their customers 5A. Take a trip to your local Ross, TJ Maxx, Marshall’s, or Burlington Coat Factory. See if you can spot these deals in the wild and possibly take advantage of them.
REFRENCES
- Bhattarai, Abha. “Retailers’ inventory stockpiles are at record highs, which could be bad news for the economy.” The Washington Post, The Washington Post, 10 October 2022, https://www.washingtonpost.com/business/2022/10/10/discounts-inventory-excess-retailers-economy/. Accessed 11 October 2022.
- US Census Bureau. “Advance Economic Indicators Main Page.” U.S. Census Bureau, U.S. Census Bureau, 28 September 2022, https://www.census.gov/econ/indicators/index.html. Accessed 11 October 2022.
- O’Neal, Lydia. “Discount Stores Are Awash in Merchandise Thanks to Shipping Delays.” Wall Street Journal, Dow Jones & Company, Inc, 16 March 2022, https://www.wsj.com/articles/discount-stores-are-awash-in-merchandise-thanks-to-shipping-delays-11647461661. Accessed 12 October 2022.
Check out the video below to watch the WSJ’s Jon Hilsenrath explain more about the Bullwhip Effect