How to avoid the bullwhip effect on inventories

11 November 2022

Issues with inventory management have hit the balance sheets of companies including Nike and Asos to tune of billions of pounds – but help may be at hand.

A report by Gartner has identified four things organisations should be doing to avoid a bullwhip effect caused by increased purchasing activity sparked by long lead times.

Supply chain disruptions have led to lengthening lead times across the world – leading to excess inventory and sudden backlogs – but a proactive backorder strategy can maximise earnings and better serve customers, said Gartner.

In October Nike said it had excess inventory worth $9.7bn as a result of increased purchasing in response to long lead times, while Asos said it was writing off up to £130m of stock.

sudden clearing of port disruption took the market by surprise, leaving retailers with excess inventory built up when ports were clogged and delivery times soared.

Meanwhile, separate research has found inventory mismanagement is leading to $163bn worth of supply chain waste due to expiry or overproduction.

Claudia Clemens, senior director analyst with the Gartner Supply Chain practice, said: “Disruption has become the new norm for supply chains. Especially during the competitive holiday shopping season, brands that go out of stock risk losing a consumer to a different brand.

“By having a proactive backorder strategy in place, supply chain leaders can maximise their potential earnings and better serve consumers in the digital marketplace.”

To build a backorder strategy Gartner recommends four actions:

1. Identifying relevant consumer products

Items may be “backorderable” or “substitutable”. Knowing which is which would help avoid inflating orders unnecessarily, when alternatives can be purchased instead. Categorising these online would also enable customers to continue purchasing up to a defined quantity for future delivery. 

Clemens explained some products make better backorder candidates and some were better substituted. This should be defined based on product lifecycle, reliability of supply, lead times and the risk/benefit of holding inventory on hand versus make-to-order.

2. Implementing backorder metrics

Without metrics and visibility, unanticipated demand can lead to the bullwhip effect, poor allocation, capacity misalignment and friction across functions.

“Often backorders have been viewed as ‘shadow’ transactions within the ‘real’ supply chain. An order is pending but can get lost amid the daily, more defined, more visible operations. It is critical to have tracking in place to understand, for example, if volumes are growing and how long to continue to take backorders, if any backorders are past due, and how accurate promised delivery dates are,” said Clemens.

3. Involving other functions

To truly optimise backordering, procurement should engage with internal and external partners. These include customer service, warehouse and logistics, sales and marketing, and fulfilment within the company, as well as suppliers and consumers. This should start in the planning process, when categorising products. From there it can become an ongoing topic to help flag unknown risks.

4. Building backorders into the playbook

Reactive approaches to being out-of-stock lead to inconsistent performance and excess inventories. This damages the customer experience especially when more and more expect a unified purchasing experience. Incorporating backorders into supply chain playbooks can improve overall execution and enable new insights and capabilities. 

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Insight Executive Group
London (Central), London (Greater)
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Insight Executive Group
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