It’s been two years since the Covid-19 pandemic led to worldwide shortages of materials, but why hasn’t the supply chain bounced back yet?

After the pandemic caused ports to close and majorly restricted trade, the world experienced an unprecedented supply chain crisis. Every day, it seems there’s another shortage brought up in the news. Recently, a global chip shortage caused a cascade of events for a wide variety of products, even resulting in the automobile industry losing approximately $110 billion in revenue

With 2022 fast approaching, the global supply chain crisis is still ongoing and with the holiday season around the corner—it’s only going to get worse. Retailers will likely start to panic-order products in an attempt to keep their shelves stocked to meet the increased holiday demand.

While this may get products into the hands of their customers in the short term, this only leads to further stress in the supply chain. Overordering is one of the main reasons why the global supply crisis persists.

In this article, we examine what overordering is and how it leads to supply chain issues, like the bullwhip effect. We’ll also take a look at instances wherein overordering affected the supply of essential items and how we can seek to prevent it going forward. 

What is Overordering & How Does it Work? 

Overordering occurs when consumers, retailers, or manufacturers place large orders for products or components that result in strain on the supply chain. In some cases, these large quantities aren’t necessarily justified and negatively disrupt supply chains, impacting more than one industry.

We saw the overordering phenomenon early in the pandemic with the global toilet paper shortage. 

When the pandemic first hit the US in March 2020, consumers started panic buying and stocking up on toilet paper. A massive strain on the distribution of toilet paper happened because of this. As a result, more than half of all grocery stores (and even online retailers) in the US went completely out of stock in April—just one month later. 

What led to the shortage wasn’t a disruption in the supply chain. In fact, all toilet manufacturers were fully functional during the shortage. Instead, the main cause of the scarcity was consumers who started  panic buying. Since retailers keep only a couple of weeks’ worth of products in their inventories, they could not keep up with the demand coming from customer hoarding.

What then happened is a vicious cycle between customers and retailers. People saw empty shelves of toilet paper, so they believed there was a lack of toilet paper. Then, they would panic buy even more from other supermarkets, and the shortage continues. This cycle is referred to as the Bullwhip Effect. 

The Bullwhip Effect and How it Relates to the Supply Chain Crisis

An illustration of the bullwhip effect

Source: Medium

The bullwhip effect is an economic phenomenon that describes how demands at the consumer level have increasing repercussions as it moves up the supply chain. Every stage of the supply chain is related and disrupted at one stage will affect others.

Take the global semiconductor shortage as an example. The pandemic led to an increase in remote work which led to an increased need for computers. Suppliers had to meet the new demand for computer components. At the same time, when the travel restrictions were lifted, there was a sudden increase in demand for cars. That industry also required semiconductors during their production. The suppliers, therefore, should have considered other industries might also need them. In an attempt to meet one surge, suppliers neglected others.

The primary cause of the bullwhip effect is the lack of transparency and communication between suppliers, distributors, and retailers. Without that communication, it’s hard to accurately predict demand. Of course, even in the best circumstances, it’s not easy to forecast demand—but the pandemic clearly made the problem worse.

Sudden changes to consumer buying habits, like overordering, can cause a massive strain on the raw material supplier level of the supply chain. As a result, many industries are affected as well as every level of the supply chain, from the consumer to the factory.

But some think that overordering isn’t the only cause of the global supply chain crisis. There is some debate about the practice of Just-in-Time Inventory, but we’ll explain why that is not the case. 

How to Respond to Overordering in Your Supply Chain

While you can’t necessarily prevent consumers from stockpiling your products, you can create an agile supply chain to react quickly to unexpected disruptions. Since the pandemic, every business is seeking new ways to function and maintain their inventory, and in today’s landscape—it’s more important than ever.  

Here are some tips to create an agile and decentralized supply chain for your own business: 

1. Have A Supply Chain Emergecny Plan

It’s always best to plan ahead when possible. Manufacturers and retailers alike should draft a contingency plan to mitigate and manage risks. That way, you’ll be confident and more capable of dealing with any material shortages, delays, and other disruptions. It’s also wise to create an emergency team that will respond to any disruptions swiftly and successfully. 

2. Do A Supply Chain Vulnerability Audit

Every business should do risk analysis on their supply chain to identify weak points. A vulnerability audit is vital in helping you prepare for when things go awry. As we saw earlier in the case of semiconductors, it was a weak point for car manufacturers, but they didn’t see the problem until it was too late.

3. Be Flexible with Your Strategies

Traditional procurement strategies are not going to cut it these days. One way to be more agile is by taking a modular approach with your procurement teams. Instead of one large, monolithic project with one team, you can break it down into smaller projects.

Once you break it down, you can have smaller teams taking on smaller chunks. By creating diverse teams, you also get a more knowledgeable group with different backgrounds which leads to more creative, and innovative solutions to problems that arise. 

4. Diversify Your Supply Chain

Many businesses experienced serious delays on factory shipments from China at the start of the pandemic. This just shows how important it is to have a supplier in different locations. And many businesses are already making the switch. In the U.S., companies started working with Cambodia and Vietnam, importing 28% and 26% more goods from each country. 

5. Segment & Prioritize Demands

When you do face high demands, it’s important to segment your buyers. That way, you can easily see what takes priority. For example, one product facing shortages last year was Personal Protective Equipment (PPE). If you were involved in selling PPE and other medical equipment in 2020 as a retailer, then hospitals and medical facilities would be more important.

6. Communicate with Your Suppliers

Finally, it’s always best to be transparent with your suppliers. When overordering occurs, you need to work together to find a solution because the supply chain is interconnected and to manage it—we all need to work together. 

Retailers and Suppliers can Address Overordering Together 

Overordering stems from over-estimating product demand, but more importantly—poor communications between suppliers and retailers. And so, to solve it we need to address these issues by working collaboratively. 

While we covered some tips to help you combat the flood of overordering, that’s just one step. The supply chain crisis is not going to resolve itself soon and with the holidays upcoming—we shouldn’t expect it to. But it’s hard to operate when suppliers aren’t always informed.

If you’re looking for ways to improve your supply chain, you need to invest in agile technology and work with sourcing providers that know what they’re doing. At Good for Life, we’ve created a platform that makes communicating with your suppliers easier and more transparent.

Contact us today to create a resilient and agile supply chain in a way that is good for business, good for customers, and good for life.