Bullwhip Effect

Column #352     June 3, 2022

Pull your hat down!

Bronc busters and bull riders know all about pulling their hats down. It’s always a top priority when you’re in for a rough ride. Of course the critters the rodeo cowboys ride do their best to shake the rider off by rocking them back and forth. The cowboy does his best to keep his body upright so his head isn’t snapping back and forth. Once he loses his poise, he’s launched skyward which quickly ends with a hard landing.

There are many examples of the bullwhip effect. All of us as kids, at least those of us in the older generations, used to play Crack the Whip. The whip is a line of kids holding hands. The player at the head of the whip runs around in random directions with all the kids in tow. The tail end of the line of kids follows but, since the end swings in a larger arc with far greater speed than the kid running in the lead, the challenge for the kids on the tail end is to hold on without falling down.¹

The phrase “bullwhip effect” has a specific meaning in the business world. Most businesses are impacted by it including those of us in the online meat bushiness. In fact, during the past 27 months we’ve been hit really hard by the bullwhip effect. Here’s how it happened.

The bullwhip effect is a demand distortion that travels down the supply chain from the retailers, to the wholesaler, then to the manufacturers, and eventually even to the commodity producers. It’s usually caused by abrupt changes in sales at the retail level.²

Retail businesses, and the businesses that service them, are always struggling with the cash to inventory teeter totter. When inventories increase, cash in the bank decreases and vice versa. In our meat business, when inventories swell, our cash moves from the bank to the freezer. Since we can’t pay bills with frozen hamburger, it’s quite important that enough cash always remains to service current payables. If not, the business is toast. When sales jump and inventories drop, that may put cash in the bank, but not having sufficient inventory can lead to poor customer relations due to unfulfilled orders and unavailable products. Overall these swings can be expensive for a business. This then is an ongoing predicament.

Think back to late February 2020 when the COVID-19 plague was first called a pandemic. It was sometime in mid March when people started to suspect that possible shutdowns could restrict the supply of essentials such as toilet paper and food. In the last two weeks of March our business exploded and our inventories were stripped bare. That was great for sales, but that didn’t leave anything to sell. That sales surge started a bullwhip effect that is still impacting us today!³

In our speciality meat business, we just can’t call up a wholesaler and order in whatever we need. We have to raise the critters and then have them custom processed. That takes time and requires that we reserve processing time at our meat processor. As sales exploded in March 2020 we immediately reacted by reserving more processing space with our meat processor. We weren’t alone because from that moment on he has been booked solid for more than 12 months. Then, since we work with quite a few livestock people who grow critters for us, we asked them to try and gear up so that we could meet our meat processor’s new capacity limits. As you can imagine, even though we reacted quickly, achieving the goals of increasing supply works in slow motion.

The surge of demand negatively impacted not only our inventories and cash positions, but it caused problems for our meat processor. Its old rancher customers, who would normally call a month ahead to process an animal for their home use, now had to wait over a year. That caused hurt feelings. The processor also had to hire new people, add equipment, and try to fit more processing in a restricted space. Our livestock producers, who were trying to gear up their production, had to increase their investment in critters and facilities. In the case of beef and buffalo, they have a two-year time horizon for expansion! Obviously multi year pushes can’t provide results overnight.

As governments decreed business and school closures, the Federal government started handing out money to people who were laid off. It also sent money to people who were working. Those of us who needed additional workers caused a surge in demand for new hires all across the country. To get people off the couch, wages had to increase to compete with the government largess. Then the demand for a shrinking supply of raw materials caused prices to increase. As pandemic fear mongering and free money continued, the situation only got worse as our speciality meat industry, from retailer to the rancher, strived to meet the sharp increase in demand.

By early June 2020 the upward spike in sales was over and sales slacked off. Yet the decisions to ramp up supply had been made. So, as sales moderated, everyone in the meat trade starting seeing their inventories increase. The bullwhip was starting to snap!

As inventories surged higher, cash in the till disappeared and freezers were barely large enough to hold all the inventory. Many of the newly hired extra hands, which cost extra to train, were not really motivated workers so not only did they cost more when they did show up, but they produced less. Most were laughed at by their friends for working for less than what the government was giving their friends not to work.

Naturally, as sales tapered off everything had to slow down. Poor workers quit and were not replaced. Livestock processing had to be cut back to balance the inventories. The bullwhip swung back the other way. Then after a couple of months of reduced demand, the cutbacks were found to be excessive as inventories got too low. For 24 months these swings continued as fear mongering by the MSM, the Federal government, and oligarchs continued month and month.

After sales peaked in the March 2020 surge, they didn’t drop back to what they were prior to March 2020. So we can’t complain. But costs soared and the extra costs eliminated the margin from additional sales in order to breakeven. For example, employees needed more cash just get to work. Our shipping costs, livestock cost, and miscellaneous costs all increased. So now we’re still suffering from the bullwhip effect while being hit with soaring price inflation.

These days all businesses are facing the same bullwhip challenges that were caused by government bureaucrats, politicians, the MSM, and oligarchs. Those entities proved to us that they know either nothing about business or their motives are totally selfish and not geared for the betterment of all Americans. The COVID response was totally wrong in nearly all aspects. Tony Fauci was a charlatan. Science was ignored. The printing of money to hand out to people so they stayed home was total insanity. The increase in government regulations makes all businesses reluctant to take on new projects. In addition, every dictate coming from our current leaders causes more pain and uncertainty rather than less. It seems the government keeps generating a bullwhip effect on all businesses with every policy decision it makes. It’s so bad it seems intentional. No set of people can be this dumb, can they?^{4 5}

This begs the question about how the inflation fight will be resolved. For decades the Federal government promoted more debt piled on more debt. The growth of debt has been a stimulant for business conditions. Businesses geared up to meet the annual  needs of consumers who spent all their savings and borrowed 20% more. What happens in the year to come if consumers grow concerned or are laid off? If that happens, then in total maybe the consuming public wants to save 5% of its income and not borrow another dime. That would result in a 20.8% decline in sales to consumers. That would be a major depression like the 24.7% set back in GNP from 1929 to 1932. That would be a gigantic bullwhip effect on commerce.⁶

Are you prepared for more bullwhip effects in the coming years?

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

Don't miss these links for additional reading:

1. Crack the Whip from Wikipedia

2. How the Bullwhip Effect Impacts the Supply Chain from Ohio University

3. Covid-19 Pandemic Timeline Fast Facts by CNN Editorial Research

4. The Real Anthony Fauci: Bill Gates, Big Pharma, and the Global War on Democracy and Public Health by Robert F. Kennedy Jr.

5. Where Do You Stand? by Ted Slanker

6. Bullwhip Effect Ends With A Bang: Why Prices Are About To Fall Off A Cliff