As delays and disruptions become the norm, companies strive to avoid future shortages by overbuying and holding inventories locally, rather than relying on an increasingly fragmented just-in-time supply chain. Others are spending huge sums to overhaul supply chains. For example, Intel has said it will build a $20 billion chip manufacturing base in Ohio to ease supply chain shortages.
What Ellram says is phantom demand exacerbates problems across the supply chain: People tend to overorder when delivery times for essential items are long. Someone might put the deposit on the couch of three retailers, see which comes first, and cancel the other two orders. “Manufacturers are getting false signals about real demand,” she said.
Others believe that the pandemic has come to an end. “Retailers looking to bounce back went out and ordered a lot of inventory,” said Enda Breslin of ShipBob, a global distribution company.
But there’s a bigger problem: the world is changing. Pandemic restrictions have eased — retailers forget that spending on merchandise is only part of it, all of which have created headaches over the past year for businesses trying to prepare for a demand pattern similar to the summer of 2020 and avoid disaster. Summer 2021 – while realizing that summer 2022 is nothing like the two. “That’s what retailers and manufacturers are grappling with,” Levinson said. “A lot of them are hoarding inventory because they don’t want to have empty shelves and disappoint customers.” Now they have too much.
A quick fix to the mess is to break the cycle of feasts and famines – but that’s easier said than done. The economy is a mess, consumer spending is unpredictable, and the war in Ukraine continues. “We can’t afford so much instability,” Ellram said. The pendulum will remain unbalanced, but over- or under-ordering will gradually slow as companies moderate their overreaction to real-world economic and social changes, she said. However, a global recession remains a big unknown.
That means the problems of the past two years are likely to reverberate for a while, albeit at lower levels than before. Breslin said that if the closure of the Suez Canal and the chip shortage were a perfect storm, the situation the world is facing now is an entirely different one. “Fuel prices have gone up,” he said. “Inflation has gone up. People just don’t have as much discretionary spending, which means retailers have to start discounting.” Companies with rapidly depleting summer inventories face a conundrum: Spending money in a tight warehouse market for next year use, or suffer a profit hit and sell for little or no profit. Another equally unpleasant option is to dump stock on the secondary market, where big discounters like TJ Maxx would snap it up and sell it at a low price.
The problem is especially acute because of the way big companies buy. Smaller retailers order less inventory more frequently with shorter lead times. But the sheer volume of items sold by big box retailers means that their orders with manufacturers are placed in advance, forcing them to forecast demand based on less reliable information.
Faced with large inventories in warehouses, retailers may cut orders—perhaps too much, leading to undersupply, and then offset that by overordering, repeating the cycle with a smaller margin of error. “The definition of insanity for a big man is to keep doing the same thing, expecting a different outcome,” Breslin said. “They are destined to continue to do so.”