How to avoid financial disaster from the surplus supply inventory created by the bullwhip effect

March 30, 2021 – The bullwhip effect is a supply chain phenomenon that refers to increasing swings in inventory in response to panic buying on the customer demand side. The COVID-19 pandemic has created the largest bullwhip effect the healthcare supply chain has ever seen, especially for PPE like masks, gloves and gowns. Last March, hospitals and distributors dramatically increased orders.

Manufacturers responded by increasing production to meet the perceived need without understanding what the true demand was and therefore in the end will likely have over produced supply.  

The bullwhip effect flows up the supply chain from the IDN to the distributor to the manufacturer and to the raw materials supplier with the amplitude of the whip effect increasing as you move back along the supply chain. Long lead times in manufacturing and securing raw materials for these products lead to ramped up production three to four months ahead of time for what is seen as a big demand increase.

Long lead time components are procured, and manufacturers bulk up to produce more than normal supply. But once demand dissipates, the bullwhip results in a glut of product.

Twelve months after the initial panic buying associated with COVID-19 true demand has begun to expose itself, and a glut of product has resulted.  During the next three to six months, there will be a tremendous amount of excess supply of products in the marketplace.

Requests to sell excess of Level 1 gowns, finger-pulse oximeters and masks via alternate sources or on electronic exchanges are just a few examples of items that were over produced and are now filling warehouses with years’ worth of inventory.

The question becomes how will the marketplace rationalize and connect those who have a need for these products with those who have too much of these products to avoid obsolescence and maximize consumption?

The answer may include utilizing non-traditional healthcare supply lines and other industries like construction as markets or sell the product around the globe to countries that have a need for these products.

The worst thing to do for anyone with large excesses is to ignore the problem. The problem isn’t going away. Old Sears retail stores and Sam’s Clubs were leased by IDNs, distributors and manufacturers in need of space to store the large stockpiles.

Now that space is a continued expense and oftentimes there isn’t a warehouse management system in place to know what specific products are in inventory and whether the product is current or expired. All this product must be inventoried, and true demand determined prior to coming up with a plan to work through it.

In addition, an appropriate pricing strategy must be developed. Clinging to a price point that is not supported by the market means greater loss later. Also, IDNs will need to deal with the fact that much of this product was purchased with the CARES Act and if they do sell any of this product, that money might need to be returned to the government.

In any case, holding on to this unproductive inventory for substantive periods of time is a bad strategy. An example of this in your personal life is that you decide to lease a storage facility to house extra furniture you currently can’t use at your house but believe it will be of use/value to you in the coming years.

After 5 years of monthly expense, you then decide that the furniture is out of date and decide to donate it to charity recovering only pennies on the dollar for what you could have sold the furniture for 5 years ago and incurring thousands of dollars of lease expense.

Time is your enemy when it comes to excess inventory.

Another strategy IDNs might pursue when dealing with their excesses is to push the product back to their distributors.  This may work in certain situations, but distributors aren’t in the business of taking back years’ worth of demand. If they have customers that are buying the same products, they can work some of it back into play, but they can’t take on the majority of the IDNs excess by simply redistributing it through their network.

Forecasting errors made in normal times can lead to a bullwhip effect, but it is magnified during a crisis like COVID-19. Understanding the causes of the bullwhip effect is critical to preventing it.

Closing the gap between supply and demand is imperative and requires ongoing education. IDNs, distributors and manufacturers must educate themselves on the causes of the bullwhip effect in their supply chains, build better trust across partnerships, consolidate data across suppliers and build bridges to create greater supply chain resiliency.