Increased demand can trigger hidden risks for retail

April 10, 2020

The supply chain distortions retailers are experiencing won’t end when the coronavirus pandemic is over. They can even get worse due to delayed effects in the supply chains caused by ‘panic buying’ and the massive hoarding of products.

In the weeks leading to the nation-wide confinement measures taken across Europe, many retailers saw their stocks of essential products like toilet paper or pantry products running out, many being unable to replenish the shelves.

Behavior experts say that hoarding products that we rationally know won’t come into shortage, like toilet paper, is nothing more than consumers’ psychological mechanism to make them feel safe and in control by removing the risk of running out of a product.

Supply chain experts predict that these actions that lead to momentaneous high demand will affect the supply chain of many products for the months to come, well after the coronavirus crisis. After all, consumers won’t consume more of the goods during the crisis, meaning that they won’t purchase them in the short term, leading to a decrease in demand.

“There are no signs that the supply of these products will be disrupted in the short term. Neither will the consumption of toilet paper be increased due to the corona symptoms. The resulting stockpiling will, therefore, be followed by a reduction in demand.”

Robert Boute, Professor Supply Chain Management Vlerick Business School and KU Leuven

Supply chain managers lose visibility on actual consumer behavior the more we move away from the point-of-sale, responding to changes in demand with swings in inventory. The forecasting of demand can lead to the amplification of customers’ needs, generating more orders up the supply chain that would actually be necessary to respond to demands. This phenomenon is known as the ‘bullwhip effect’, as the disruption of the demand increases as we move upstream in the supply chain.

In the medium-term we will see the unpredictability of demand, says Robert Boute. This will be aggravated by the supply chain constraints many companies are facing due to national lockdowns. When companies forecast a lack of supplies, they tend to artificially increase the demand for materials. This, aligned with the reductions in production we’ve been witnessing due to government imposition, leads again to distortion of the demand patterns and escalation of the ‘bullwhip effect’. The long term consequences can be disastrous.

“The distortion of the demand pattern aggravates as we move more upstream in the supply chain to the end suppliers. They will face a highly unpredictable demand in the months to come.” – Robert Boute, Professor Supply Chain Management Vlerick Business School and KU Leuven

How retailers should react to unbalanced demand? While the bullwhip effect is historically well-known for any Supply Manager, it’s nearly impossible to control consumer mass behavior and prevent hoarding before it’s too late. The solution to deal with the effect and distortion – is to carefully manage your supply chain and how you forecast demand. Modern supply management, warehousing and delivery optimisation systems are able to generate insights and valuable analytics to detect bottlenecks of the demand, helping retailers to quickly redirect order volumes and minimise the impact of hoarding. Having visibility on consumer demand, behavior and market perspective is not easy at an unusual time like this, but it’s essential to keep the frame adjusted to the real needs of the market.