The Bullwhip on the American Retail Industry!
When it comes to contrarian investors, the name Michael Burry cannot be ignored! He was one of the few who didn’t just predict the US housing market crash of 2009 but also made millions by “shorting” against the US housing market. (In the movie, The Big Short, his character was played by the one & only Christian Bale.)
The movie, The Big Short, ends with Burry shutting down his fund. However, Burry’s investment journey didn’t end in 2009. He is very much active today; thanks to social media, his contrarian views have found a ready audience.
Burry has been wrong on quite a few counts. However, we cannot just ignore his doomsday predictions. Of late, he has been in the news for his comments on the American Retail Industry.
What did Burry Say?
As per Michael Burry, the US retailers, especially those catering to the lower end of the market, will face tremendous profit pressure towards the end of 2022. One of the main reasons for the same would be the Bullwhip effect.
What’s the Bullwhip Effect
The Bullwhip effect is a supply chain concept whereby the entire supply chain is jittered due to inaccurate end-market demand forecasts. It was first mentioned in Jay Forrester’s Industrial Dynamics (1961). It is thus often referred to as the Forrester effect. What happens is that an increase in demand often leads to an increase in manufacturing capacity and stockpiling of inventory. Increase in inventory drives prices down eventually, leading to lowered profits. Eventually demand gets satiated and the unsold inventory lying around needs to be liquidated. This up and down swings of demand (reminiscent of a whip) causes major losses and, at times, forcing industries and economies to fail.
Let’s try to understand the Bullwhip effect better with the help of a real example:
There is this exciting story about Volvo. So apparently, Volvo was struggling to sell Green Cars. So the marketing team came up with a promotion plan for the same. The promotion worked well, and there was a “pull” demand for the Green Cars. Unfortunately, there was a miscommunication between the different departments of Volvo. The manufacturing department wasn’t informed or aware of the promotion. They read the increase in orders as a general demand increase. As a result, they ramped up productions, eventually leading to supply excess and a messy inventory situation.
You might have noticed that there were two main contributing factors to the situation:
- There was an end demand change
- There was a lack of information transparency within the supply chain
More often than not, these are the top two reasons that work in tandem to lead to the BullWhip effect.
BullWhip on American Retail
So why is the American retail industry facing the Bullwhip effect in 2022? As per Burry, it’s due to the industry’s misreading of a short-term demand spike. Here’s how the events unfolded:
To help citizens combat the pandemic’s economic impact, the US government doled multiple rounds of stimulus to every citizen. According to most economists, while there was a bit of panic due to COVID, most folks did not need a handout. This caused an influx of disposable cash in the market. At the same time, there were moratoriums on loan repayments. This increased sales as people bought a lot of things they did not need but definitely wanted, driving prices higher for a while. There was also another factor at play. Due to the lockdowns and travel restrictions, there were not many avenues to spend.
The industry read this demand spike as a long term phenomenon. As a result, many companies piled up excess inventory. Inevitably, the spike in retail demand normalized as the economy opened up and restrictions got lifted. In the process, the retail supply chain has been left high & dry with excess inventory, which they now need to dispose of by extreme discounting!
Michael Burry predicted this chain of events. On 24th July 2022, Walmart issued a profit warning to its investors, citing a similar rationale. So it seems that Burry is on the money this time round – Again!
How Bullwhip effect impacts ecommerce retailers
While Walmart’s profit warning is newsworthy, it’s not one of the rare Bullwhip effect situations. Day in and day out, companies suffer due to the same. It’s especially evident in the ecommerce industry. Companies that sell on multiple marketplaces often notice their inventory fast depleting in specific marketplaces. If the company lacks a centralized view of the supply chain – it may end up pumping in more stock without checking for alternatives within its centralized inventory. Believe it or not, when companies approach us at Eunimart to help optimize their supply chain – quite often it is after a bullwhip strike!
At Eunimart, we have been asking questions and framing problems on behalf of brands, retailers, and supply chain companies. Our vision is to help companies not just grow revenue today but also plan for the future. We have built a full stack of AI tools to power revenue, supply chain, and distribution combined with an incredibly flexible and advanced open source platform to power the next generation of brands in the online world.