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The Bullwhip Effect and Its Implications into the Status Quo

By Matthew Rodrigues

The bullwhip effect is a phenomenon where a slight shift between supply and demand can supply and demand between consumers and retailers can cause massive changes between retailers and their entire supply chain. This can be seen in today’s market, as right now there's a massive supply of goods that retailers have and a normal demand amongst consumers. This will mean there have to be significant markdowns on the retailer's part to get rid of inventory. This can be observed in real-time by seeing many of these retailers, in malls, for example, having “clearance sales” or “markdowns” in their products to sell them.

Cause of the Bullwhip Effect

The bullwhip effect started with the pandemic. The worldwide shelter-in-place caused by the pandemic led to a massive spike in demand. The supply was not able to keep up with demand at this time. Retailers then sent messages down their supply chain to increase production. But this effect was compounding. At each step of passing the message down, the former told the latter that they had to increase production. First, it would start with the retailer going to their wholesaler saying they needed increased production. After this, the supply and demand would stabilize, but the demand would increase and inventories would be emptied. Then the wholesaler would tell their manufacturer they needed an increase in production. The minute increase in demand would happen again after stabilization. Now the manufacturer tells the materials supplier to increase production. The cycle repeats again until reaching the highest level. Until this point, the increase in supply has always been met with an increase in demand. Not to mention the global supply chain issues during the pandemic that caused products to reach their markets extremely slowly, only driving demand. But what if the demand is not met with the corresponding supply? What if the demand decreases and returns to its normal levels? This is what has happened currently in the market. One contributing factor to this would be what people believe to be the “end” of the global pandemic and a return to normalcy. Some evidence to support it is an “end” of the pandemic issue is that items that were popular during the pandemic are now some of the same items receiving discounts. Another possible reason could be inflation. The issue is that demand is now far lower than what it used to be, in addition to being much less than the current supply. A magnification effect caused by demand has taken place on the supply chain, leaving a massive inequality between the ratio of supply and demand.

Negative Implications of the Bullwhip effect

In the short term, it may seem like a good idea for the bullwhip effect to play out. Consumers get their products at a discounted price. Retailers get to deplete their inventory and return to normal levels of product in inventory. The only issue with this is that these retailers are losing money on their products. This in turn can negatively affect revenue and decrease the price of those retailers' stocks. While it may seem good for consumers and businesses in the short term, its long-term implications like a recession could be terrible.

Other Countries’ Economical Relations:

The U.S. isn’t the only country limited to the bullwhip effect. As mentioned, the suppliers and manufacturers also play a part in the bullwhip effect and are affected as well. One country in point would be China. While they have already been affected by the damage done to their real estate market with the Evergrande Liquidity Crisis, the bullwhip effect doesn’t help. With the decrease in demand for products, there will be decreased manufacturing of those products in China. This may lead to layoffs of workers and potentially shutdowns of factories. With workers being laid off, they will have to spend less money. This only contributes to the recession, which may be reflected in China’s GDP. China is one of many countries that manufacture goods and this will likely affect other countries whose economies rely on manufacturing such as Indonesia and Cambodia.

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