The Bullwhip Reversed. Now You Have Too Much Inventory.

From Shortage to Glut in Twelve Months

A year ago the problem was scarcity. Ships waited at anchor, parts were on allocation and every buyer was ordering more than they needed to make sure they got something.

The picture has changed fast. Drewry's World Container Index, which peaked at more than $10,000 per forty-foot container in September 2021, has fallen by roughly 80 percent from that peak. In June, Target warned investors it would take a hit to its margins as it cleared excess inventory, cutting prices and cancelling orders, and other large retailers have described similar gluts. Demand that looked insatiable during the pandemic has shifted from goods to services, and the orders placed in a panic last year have arrived into a softer market.

For manufacturers, this is the bullwhip effect running in reverse.

For manufacturers, this is the bullwhip effect running in reverse. The same amplification that turned a modest increase in consumer demand into enormous upstream orders is now turning a modest slowdown into cancelled orders, excess stock and idle capacity at suppliers.

How the Bullwhip Works

The bullwhip effect describes how small changes in demand at the end of a supply chain become larger and larger swings as they move upstream. A retailer sees sales rise a little and orders a bit more to be safe. The distributor sees that larger order, adds its own safety margin and orders more still. By the time the signal reaches the manufacturer and its suppliers, a small change in consumer demand can look like a far larger swing in orders.

The amplification is worst when lead times are long and uncertain, when buyers fear shortages, and when nobody in the chain can see actual end demand. All three were true in 2021. All three are now unwinding at once, and the result is the reverse swing.

The Wrong Response Is Another Overcorrection

The temptation now is to cut everything. Freeze purchasing, cancel open orders, drive inventory down across the board. That feels prudent, and in some places it is necessary. But applied bluntly, it simply sends the next wave of the bullwhip back upstream, damages supplier relationships that were hard won during the shortage, and leaves you short again on the parts that are still genuinely constrained, because not every part has normalized.

The disciplined response is to unwind selectively, with data.

Separate Panic Buffers From Policy Buffers

Start by identifying which inventory exists because of a deliberate decision and which exists because of panic. During the shortage, many plants raised safety stocks, extended order horizons, placed duplicate orders with multiple suppliers and accepted larger minimum quantities. Some of those changes were sound policy for genuinely fragile parts. Many were not.

Go through your planning parameters, your safety stock levels, minimum order quantities and planning lead times, and compare them with their values before the disruption and with actual lead times today. Where a part's actual lead time has returned to normal but its planning parameters have not, MRP is still ordering as if the shortage were ongoing. Bring those parameters back into line, and the excess will work itself down through normal consumption rather than through emergency cancellations.

Look at Open Orders, Not Just On-Hand

The inventory on your shelves is only part of the exposure. The purchase orders placed during the shortage that have not yet arrived are often the larger problem. Review open purchase orders with long horizons against current demand, and talk to suppliers about rescheduling or reducing them now, while you still have options and before the goods ship.

Suppliers are facing the same reversal from all of their customers. A cooperative conversation that pushes out deliveries is usually better for both sides than a cancellation that arrives too late.

Share Real Demand With Your Suppliers

The structural cure for the bullwhip is visibility of actual demand. The more each link in the chain sees what the final customer is really buying, the less each link needs to guess and pad. If your largest customers will share point-of-sale or consumption data, use it. If they will not, share your own honest forecast with your critical suppliers, including your uncertainty, rather than sending orders padded for safety.

The Bottom Line

The shortage of 2021 and the glut of 2022 are the same phenomenon seen from opposite sides: a supply chain that amplifies demand signals because nobody can see true demand and everybody pads for safety. Manufacturers who come out of this well will unwind their panic buffers selectively, return planning parameters to reality, renegotiate open orders before they ship and share real demand with suppliers, instead of swinging from overbuying to overcutting.

At Cherry Street, this is the work we do. We help manufacturers find which buffers were policy and which were panic, reset the planning parameters that drive their ERP, and build the demand visibility that dampens the next swing before it starts.