Inventory ‘Bullwhip’ Risk Emerges in Latest U.S. Logistics Index
Inventory ‘Bullwhip’ Risk Emerges in Latest U.S. Logistics Index
(Bloomberg) --
The bigger-than-usual rush to stockpile products on U.S. retail shelves and in warehouses ahead of the holidays might give way to an economic hangover of sorts.
That’s one of the interpretations from the latest Logistics Managers’ Index, a monthly survey-based gauge compiled by researchers at five U.S. universities that flirted with record highs last year amid unprecedented supply-chain stress caused by the pandemic. While the latest reading for the main measure released Tuesday fell in December, it stayed for an 11th straight month above the 70 level considered to reflect significant expansion.
Unusually, inventories rose during the final month of the year, when most companies clear out merchandise during the holiday rush. The December reading for inventory levels was 61.6, compared with 56.8 a year earlier and well above the 42.3 registered in December 2019.
That’s raising concern about economic distortions that systems theorists called the “bullwhip effect,” when businesses -- often acting irrationally -- struggle to match orders with purchases. Such effects can make it harder to predict the direction of prices as companies try to realign supply with demand.
“Some supply chains may now be carrying too much inventory -- potentially a result of firms choosing the lesser of two evils and stocking up to avoid potential missed holiday sales,” the LMI report stated. “This could foreshadow a coming bullwhip effect in which supply chains over-ordered to avoid shortages and are now dealing with the burden of having too much inventory -- or too much of the wrong type of inventory -- on hand.”
When respondents were asked to predict inventory conditions 12 months from now, the average value was 81.7, a jump from November’s future prediction of 72 and well above the December level, “meaning inventory levels are expected to grow substantially over the next year.”
The survey noted that widespread shortages were largely avoided despite dire predictions of a gloomy Christmas, and that success was largely the result of “considerable stress” on supply chains to ensure year-end demand was met, according to the survey results.
“The month’s report indicates that supply chains are now dealing with the aftermath of this herculean effort,” the survey said. “This is likely to continue to strain on supply-chain capacity well into the new year, and possibly through to 2023.”
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