Written By: Rassiq Aziz Kabir
Michael Burry – a famed investor who was one of the very few people to predict the 2008 Global Financial Crisis – recently warned investors about the Bullwhip Effect and how it might worsen the upcoming recession.
The Bullwhip effect, put simply, expresses the fact that when there is a change in demand at the level of the retailers, the demand at all other levels involved in the supply chain process, namely wholesale, distribution, manufacture etc. undergo significant alterations compared to the initial change in demand.
When the world recovered from the effects of the pandemic, demand for goods surged beyond expectation. This made the retail stores order way more than usual and now as the demand have slowed down due to rising prices retailers are forced to reduce prices to clear their piled up inventory.
Supply chain management is the processing of the line of flow of goods from raw materials to final products. A few parties are involved in the entire process, starting from individuals, firms, wholesalers, manufacturers, etc. The bullwhip effect delineates how a small change in demand can result in each party overcompensating for it with excess product, it pretty much follows its namesake bullwhip; where a small arm movement at the beginning results in a larger and uncontrollable fluctuation at the end of the whip.
A practical example of the effect can be given when a food wholesaler who sells 1000 cans of Coca Cola to a customer per week increases his supply to 2000 cans after seeing an increase in the purchase of the customer by that amount in one week, given that they didn’t run out of the product.
Featured Image Courtesy: London Premier Centre
References:
- https://www.bluecart.com/blog/bullwhip-effect-definition
- https://www.truecommerce.com/blog/bullwhip-effect-supply-chain
- https://www.investopedia.com/terms/s/scm.asp
- https://www.techtarget.com/searcherp/definition/bullwhip-effect
- https://www.ilearnlot.com/bullwhip-effect-in-supply-chain-management/53293/amp/
- https://markets.businessinsider.com/news/stocks/big-short-michael-burry-inflation-labor-shortages-supply-chain-onshoring-2022-7