Source: Wall Street News
Author: Zhu Xueying
Remember the global supply chain chaos a year ago? At that time, the problem of supply gaps caused by the epidemic was rampant, and American retailers and wholesalers panicked to buy supplies to replenish their inventories, for fear that they would have nothing to sell.
However, Deutsche Bank strategist Luke Templeman predicted at the time that the “bullwhip effect” of the supply chain would hit the U.S. economy sooner or later.
What is the “bullwhip effect”?
The “bullwhip effect” occurs when a drop in end demand causes retailers to run out of stock. At this time, due to insufficient orders from retailers, wholesalers will further reduce their inventories to respond, while upstream manufacturers will further slow down production due to the impact on the decline in demand.
And this situation will eventually be broken to a certain extent.
With the recovery of terminal demand, retailers will quickly order goods to replenish their warehouses. Usually, the quantity ordered will exceed the actual demand, which will lead to supply shortages for wholesalers and upstream manufacturers, thus causing the price of terminal products to rise and further stimulating production. .
In the end, the output of goods will far exceed the final demand, resulting in a decline in product prices. Supply and demand will continue to pull the process back and forth until equilibrium is reached.
Since May last year, American retailers and wholesalers have begun to experience a “bullwhip effect” in inventory management.
Specifically, retailers kept inventories at relatively stable levels and higher than wholesalers’ inventories at the time. After the supply chain from Asia was hit by the new crown epidemic, retailers began to panic and increased orders to replenish inventory. Subsequently, the control of the epidemic led to a collapse in demand and a decline in inventories.
At the beginning of the “bullwhip effect”, Templeman said:
With retailers’ inventory levels falling to multi-decade lows, many businesses may not have enough inventory to meet customer demand as the economy recovers and pent-up demand unleashes. Not least because retailers rely more on just-in-time supply chains than they have in decades.
This also explains why a historic round of inflation broke out in May last year, as inventory collapse and supply chain congestion made it difficult for retailers and wholesalers to replenish their inventories, which led to rising prices of end-use commodities.
However, the situation reversed a year later.
As shown in JPMorgan’s latest Supply Chain Congestion Monitor, the number of ships calling at and approaching Los Angeles and Long Beach peaked in January and has now returned to levels seen in the early days of the pandemic.
And these all reflect a key problem, that is, the “bullwhip effect” is coming to an end: the sharp decline in the inventory-to-sales ratio has reversed sharply, and the supply has been quickly smoothed when the economy suddenly cooled. Meanwhile, prices for “core” products plummeted almost overnight, while prices for non-core products (food and energy) skyrocketed.
The freight technology company pointed out this when interpreting the double thunderstorms of Walmart and Target on Friday:
Furniture, household goods and appliances, building materials and garden equipment, and a category known as “other general merchandise” including Walmart and Target all reported higher inventory-to-sales ratios, according to government data analyzed by Michigan. .
How high is it? Arguably the highest level since the global financial crisis.
As the freight wave continues, “changes are happening fast. As of November, the inventory-to-sales ratio was still at pre-pandemic levels,” said Jason Miller, a logistics professor at Michigan State University’s Eli Broad School of Business. But since then, the inventory-to-sales ratio has skyrocketed.
Miller said he expects retailer orders to “cool” and while inflation-adjusted sales remain unchanged, retailers want to reduce existing inventory. He also expects retailers to roll out discount programs to quickly deplete inventory.
In short, retailers are scrambling to reduce inventory amid a huge demand shock, which will lead directly to a recession in the trucking industry. That could lead to a decline in freight volumes in the coming months and even quarters, Deutsche Bank transport analyst Amit Mehrotra said in a report on Tuesday.
Of course, not every commodity will decline. For example, the “bullwhip effect” of commodities will take longer to gradually manifest, and may last for several years, and their upward cycle has just begun.
However, prices for other commodities, such as those sold by Volvo, are about to fall off a cliff, possibly not seen since the financial crisis. After all, retailers have started voluntarily destocking, something they haven’t seen in more than a decade.
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