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The Bullwhip Effect – What is Ahead for eCommerce Now?

As inflation continues to rise and consumers have to adjust budgets to make ends meet, there are a few indicators that there may be hope on the horizon for consumers and challenges ahead for eCommerce businesses.

The pandemic economy has been full steam ahead for two years, and despite supply chain issues globally, many businesses have built up massive inventory levels to help better meet demand. Typically, the back-to-school season is one filled with purchases of new clothes, backpacks, laptops, but with many struggling this year to afford gas – things may look very different. 

As the economy shifts, will this be a good change for eCommerce businesses?

What is the Bullwhip Effect?

Full employment typically leads to happy shoppers and spenders, but consumers today are worried about the economy, political unrest, and their personal financial security.  According to the CEO of Freight Waves, “inflation, crashing stock markets, higher interest rates and economic uncertainty are sapping any confidence that full employment should offer.”

This pullback in purchasing is horribly timed for overstocked inventories of businesses trying to make up for the supply chain issues of the last nine months.  This unexpected shift in demand where consumers practically halt all discretionary spending, distorts the supply chain and leads to huge excess of inventory.  Large retailers have so much additional inventory on hand that they are slashing prices to make room for the higher levels of inventory estimated months ago and arriving for the upcoming fall season. 

The term bullwhip effect describes a scenario where temporary surges in retail demand are magnified and exaggerated by manufacturers and suppliers who rapidly increased production well beyond the level that can be supported by consumers.  

Eventually, it rebalances by retailers having more inventory than they can sell, and what started as a goods shortage ends as a goods surplus. 

Liquidation Mode is Next

As sales continue to decline and inventories continue to build based on orders placed months ago, liquidation will help reset everything. Many larger retailers have warned that profits will take a hit over the coming quarter as they plan to take aggressive steps to eliminate excess inventory.  

David Metzner, liquidation expert, has been in the business since the 90s and explains that the last three months have been the strongest of his career.  As eCommerce sellers and retailers find their warehouses overloaded with products they can’t sell, his business purchases the unsold goods and redirects them to discount retailers.  

This not only helps bring significant discounts to consumers, but it will help deflate the cost of skyrocketing living expenses and inflation. Business owners are also able to recoup some of the sunk costs on the overpurchased inventory and make space for the shift in trends for the upcoming fall and holiday season.  This allows suppliers to see what is trending and make educated selections based on the shift in demand.  

For example, many consumers have worked from home and purchased only athleisure clothing, but with many returning to the office and the upcoming holiday season there will be an increase in work appropriate clothes and party dresses needed.  eCommerce businesses have a unique opportunity to redirect the cash flow from the liquidated merchandise into relevant purchases for the upcoming season.

As the supply chain issues begin to decrease, eCommerce suppliers and businesses will have the opportunity to be more agile and shift according to the current demands.

Simplify with OPAL’s 4-in-1 Software Solution
EDI | Order Management | Warehouse Management | Shipping

OPAL is the innovative solution to simplify your small to mid-sized to enterprise business fulfillment needs in today’s rapidly transforming retail world.  

As the eCommerce industry navigates the bullwhip effect and pivots to liquidate excess inventory and make space for the upcoming needs of consumers, learn more about how OPAL can streamline your business to efficiently make these changes.  

To learn more about how OPAL has partnered with many to scale their business to new levels of success, click here.

Click here to book your customized demo today.  We are here to support you through this time of change and are here to help you innovate and thrive!