Prepare for the Bullwhip’s Sting

Rising inflation and global supply chain problems raise concerns that a recession is looming.

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Nearly two years into the disruption caused by the COVID-19 pandemic, signs are pointing to the growing risk of a global economic recession. High consumer demand, product shortages, and transportation disruptions in the second half of 2021 triggered inflation and changes to manufacturers’ order patterns, setting up the bullwhip effect — a supply chain phenomenon that can have far-reaching consequences. The ups and downs of money flows, labor patterns, inventory management, and product demand are setting the stage for what happens next — and business leaders, particularly in supply chain roles, should prepare now for the greater challenges that may lie ahead.

Roots of an Upcoming Crisis

In early 2020, COVID-19 slapped down large swaths of the global economy. Individuals’ fears and government restrictions significantly curtailed many commercial activities. Sales plummeted at restaurants, theaters, gyms, discretionary retail stores, and businesses in the travel and tourism industry; many production facilities were forced to slow operations or close. U.S. GDP plummeted 32.9% in the second quarter of 2020, and U.S. unemployment rose to a record 14.8%.1

Governments around the world responded by propping up their economies with lavish stimulus payments, unemployment benefits, paycheck protection schemes, and eviction moratoriums, while central banks worked to induce liquidity by keeping interest rates very low, among other means. While government actions certainly helped many struggling families stay afloat, many other households enjoyed a double bonus of lowered household spending plus higher income thanks to the government’s largesse. As a result, the personal savings rate quadrupled in the United States, and consumers worldwide socked away some $5.4 trillion in excess savings. That surplus of money built the foundation for the subsequent rebound, product shortages, supply chain congestion, and inflationary surge. It also likely planted the seeds for the next economic downturn.

By mid-2020, home sales, home construction, and demand for building materials rebounded quickly as many people sought new, larger suburban homes. In spring 2021, consumer spending accelerated sharply as the rollout of vaccines and decline of COVID-19 case numbers encouraged a broader reopening of the economy.

The growing boom in demand induced a scarcity of semiconductor chips, home appliances, cars, and building materials that triggered inflation for many goods and commodities. The associated increase in imports also created significant congestion at ports, docks, warehouses, and rail yards.

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References

1. G. Falk, P.D. Romero, I.A. Nicchitta, et al., “Unemployment Rates During the COVID-19 Pandemic,” PDF file (Washington, D.C.: Congressional Research Service, Aug. 20, 2021), https://crsreports.congress.gov.

2. S.M. Disney and M.R. Lambrecht, “On Replenishment Rules, Forecasting and the Bullwhip Effect in Supply Chains,” Foundations and Trends in Technology, Information and Operations Management 2, no. 1 (January 2008): 1-80.

3. Data on imports of goods and services was obtained via the U.S. Bureau of Economic Analysis’s FRED (Federal Reserve Economic Data) database at https://fred.stlouisfed.org. See analysis of the crisis in J.C. Fransoo, R. Peels, and M. Udenio’s August 2010 article, “Supply Chain Dynamics Have Major Impact on Course of Credit Crisis.”

4. R. Peels, M. Udenio, J.C. Fransoo, et al., “Responding to the Lehman Wave: Sales Forecasting and Supply Management During the Credit Crisis,” working paper 297, Beta Research School for Operations Management and Logistics, Eindhoven, Netherlands, December 2009.

5. “Restructuring for Automotive Suppliers,” Roland Berger Strategy Consultants, Business Breakfast, Budapest, Hungary, March 31, 2010.

6. Examples include Resilinc, Everstream, Infor Nexus, Preware, and others.

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