When consumers struggled to find access to goods that they needed and wanted during the COVID-19 pandemic (e.g., toilet paper, office supplies, exercise equipment), the retailers that failed to keep the items in stock took the brunt of the blame—even if the fault really should have been shared throughout the supply chain. But in the face of consumer frustration and expensive stockout encounters, retailers worked to ensure sufficient supply of the key items by buying more than they anticipated selling.
Now many of those goods are readily available from upstream in the supply chain, flooding the retailers with plenty of stock. But in many cases, consumer demand for them had slowed; now that most gyms have reopened for example, people likely perceive less need to buy expensive in-home exercise equipment, which is drastically different from the powerful demand they expressed during pandemic lockdowns. Thus, due to their dedicated efforts to avoid understocking, the retailers face the new problem of overstocking. It is a classic example of a bullwhip effect, in which excessive demand forecasts lead to overproduction and inefficient supply chains.
Overstocks are especially expensive and unwieldy for retailers. They must find somewhere to store the inventory, and if they aim for a fashionable image, they need to get rid of it quickly so that they can get in new items to appeal to consumers. Such challenges are particularly pressing for large, general merchandise retailers, whose business models require them to sell seasonal products and clear them from shelves, in time to bring in new seasonal merchandise.
But even as they risk being overwhelmed by stocks of certain items, retailers struggle to maintain sufficient stocks of other products. International supply chains continue to suffer various limitations and constraints, such that retailers lack confidence that they can attain the items they need, whenever they need them. Such confidence is essential to just-in-time supply chain structures, which only procure the minimum amount of items needed, at the moment they are needed. Because such confidence does not exist—supply chains simply cannot guarantee these days that they can get the needed items to retailers on time—many retailers have adopted just-in-case approaches. They buy more than they anticipate needing, in the hope that at least some of the order will arrive, on time, to satisfy some portion of consumer demand.
Due to these conflicting states across product lines, quantitative measures that aim to signal a retailer’s health or efficiency are proving insufficient. For example, the ratio of inventory to sales normally provides a gauge of a retailer’s efficiency. If this ratio is low, it means the retailer is selling most of its inventory, which is a good thing. But today, due to the oddities and disruptions that continue to mark contemporary supply chains, retailers can earn a low inventory-to-sales ratio while still suffering both overstocks and stockouts in different sectors. They might completely sell out of some items, and would prefer to order more if they were available, but they have a massive oversupply of other items. Neither of these outcomes is efficient or desirable for retailers.
On balance, it appears that large retailers’ procurement and supply operations are out of sync with consumers’ buying behaviors. The ongoing challenge will be to determine not just how to make them match better today, but also to predict whether and how consumer demand is likely to shift again in the near future.
Discussion Question:
- What is the bullwhip effect, and why is it appearing in modern retail operations?
- Is a “just-in-case” strategy effective for large retailers? Why or why not?
- What methods could retailers use to predict future consumer demand more effectively?
Source: Liz Young, “Large Retailers Are Getting Hit Hardest by Overstocking,” The Wall Street Journal, July 8, 2022