A Counterintuitive Way to Keep Shelves Stocked and Prices Down
Skip to content
Operations Oct 4, 2018

A Counterintuitive Way to Keep Shelves Stocked and Prices Down

New research suggests how to improve supply-chain efficiency and avoid “inventory runs.”

Inventory manager stands before his stock room.

Riley Mann

Based on the research of

Robert L. Bray

Yuliang Yao

Yongrui Duan

Jiazhen Huo

Ask your local liquor store how much of a certain beer they sell, and you will likely get similar answers from week to week.

“They might sell twelve six-packs one week, then eleven, then twelve, then thirteen,” says Robert Bray, an associate professor of operations at Kellogg.

But ask the brewer who makes that beer how much they ship weekly, and the story gets more complicated. It would be normal for a brewer to be responding to orders to ship 500 cases of beer for three weeks straight and then zero the next week, Bray says. “The brewer is going to see really volatile changes.”

This phenomenon, which happens in all kinds of industries, is what experts call the “bullwhip effect.” As demand moves up the supply chain, from consumers to stores to suppliers, it becomes more and more unpredictable—just as a tiny flick of the hand morphs into a wild, forceful smack as it travels down the length of a bullwhip.

But the bullwhip effect is not merely a concern for retail managers and suppliers. When suppliers and distributors are unable to predict demand, the supply chain becomes less efficient.

“And who’s ultimately going to pay for that? The consumer,” says Bray, since those inefficiencies are passed on to shoppers in the form of higher prices and sometimes product shortages.

But what causes the bullwhip effect—and can at least some of the price hikes and shortages be alleviated?

A new study by Bray, along with Lehigh University’s Yuliang Yao and Tongji University’s Yongrui Duan and Jiazhen Huo, tested one theory behind the effect.

Analyzing data from a major Chinese grocery chain, the team found the first-ever hard evidence of what they call “inventory runs.” When retailers see that a supplier is on the verge of running out of an item, they order excessive amounts of that item in hopes of keeping their shelves well stocked—in the same way that customers of a failing bank mount a “bank run” to get their money out before the bank becomes insolvent.

By the researchers’ estimate, these inventory runs are responsible for 11 percent of the bullwhip effect. But there is a simple way for suppliers to keep these runs from destabilizing their business. If they hide their inventory levels from retailers, then they can prevent runs, enabling them to better estimate demand for their wholesale goods.

“This is something we can fix,” Bray says.

Understanding the Bullwhip Effect

In the world of supply chains, everyone is trying to predict the future.

“I order inventory today because I think I’m going to be able to sell it tomorrow,” Bray says. “So the more volatile the environment, the harder it is to place economic bets.”

To see just how disruptive this volatility can be for a supplier, Bray says, imagine that you are the manager of a car factory who receives zero orders one month and 500 the next. “One month you have to furlough all your workers and shut down the factory, and the next month you have to pay overtime,” he explains. “You’d rather it be stable—250 each month.”

Bray became fascinated with the bullwhip effect as a PhD student at Stanford, taking courses from Hau Lee, who first theorized the phenomenon in 1997. (“He’d bring an actual bullwhip and snap it in class,” Bray recalls.)

Lee’s groundbreaking paper theorized four different factors that might be driving the bullwhip effect. The most powerful factor was what is called “batching”—the fact that while liquor stores can sell individual six-packs of beer, warehouses only sell them by the pallet-load. As such, each store might go months without placing an order as they work through their pallets, but then suddenly need a truck-load of beer.

“When the distribution center looks like it’s about to stock out, the stores all increase their order quantities. They’re like, ‘Oh man, the distribution center’s about to run out of deodorant—I better order a lot more before it runs out.’”

However, batching was not the whole story. Lee had theorized that something called “ration gaming” might also contribute to the bullwhip problem. Ration gaming is the idea that stores could amplify their orders in periods of scarcity to increase their likelihood of getting some product before the supplier runs out.

Yet in two decades of studying the bullwhip effect, no researcher had ever discovered empirical evidence that ration gaming was actually happening. “There have been people who have looked for it, but nobody has found it,” Bray says.

Bray wanted to keep looking. “The data required to demonstrate the existence of ration gaming is hard to come by,” he says. But when he got access to one of the most comprehensive supply-chain samples ever studied, he thought, “I thought I might have a fighting chance of finding it.”

Why Managers Game the System

The researchers procured extremely detailed data on the sixth-largest supermarket chain in China. The data included three years of daily orders of more than 3,000 products from 73 retail stores, all of which got their products from a single distribution center in Shanghai.

Importantly, each store manager placed her store’s order on a computer system that also let her see the current inventory in the distribution center’s warehouse, meaning she could incorporate that information when deciding how much of a product to order.

“And what we show is, there are these inventory runs,” Bray says. “When the distribution center looks like it’s about to stock out, the stores all increase their order quantities. They’re like, ‘Oh man, the distribution center’s about to run out of deodorant—I better order a lot more before it runs out.’”

The researchers also showed that these inventory runs were significantly contributing to the bullwhip effect for this chain. Using statistical techniques, they simulated what would have happened if the stores had not been able to see the inventory level of the distribution center.

In that scenario, the distribution center would have seen 11 percent less fluctuation in its day-to-day orders.

These inventory runs make things harder for suppliers and potentially drive up prices for consumers. So why did the store managers, who place the daily orders, consistently orchestrate them?

Bray emphasizes that the managers were acting completely rationally. After all, when supplies dipped to their lowest levels, only 36 percent of stores had their orders fulfilled, in first-come, first-served order—and these supply shortages regularly lasted for a week or longer. That means that stores that did not commit inventory runs, or that did so too late, risked running out of a hot product.

And since a manager’s pay is partially based on her store’s sales and profits, empty shelves mean she is leaving money on the table.

“We interviewed the store managers,” Bray says. “They had no sense of shame about this. It didn’t even occur to them to be circumspect. They’re just thinking, ‘My job is to manage this store. I would be shirking my duty if I wasn’t keeping track of the distribution center’s inventory level.’”

Improving Supply-Chain Efficiency

The supplier bears the brunt of these inventory runs, seeing surging demand when supply is at its lowest, which makes it all the more difficult to predict how much product the store managers will want from week to week.

As Bray puts it: “They kick them when they’re down.”

But there is a simple solution to this problem: suppliers can stop sharing their inventories with retailers. “If I hide this data, they don’t know when I’m down,” he says.

Bray notes what an unusual prescription this is. When it comes to supply chains, or economics in general, sharing information typically leads to better, more efficient outcomes for everyone.

“I think this might be the very first paper that comes up with a cost for showing information in the supply chain,” he says.

For the most part, stores and suppliers have learned to live with the bullwhip effect. After all, much of the problem is rooted in batching—and, despite the problems that come with high-volume orders, it just does not make economic sense for suppliers to ship their products in smaller numbers.

But in a world where predicting the future is the name of the game, it matters that a full 11 percent of the bullwhip effect is due to inventory runs, which can be prevented.

“That other 89 percent, there’s nothing you can do about it,” Bray says. “This is the 11 percent you can actually do something about.”

About the Writer
Jake J. Smith is a research editor of Kellogg Insight.
About the Research
Bray, Robert L., Yuliang Yao, Yongrui Duan, and Jiazhen Huo. Forthcoming. “Ration Gaming and the Bullwhip Effect.” Operations Research.
Most Popular This Week
  1. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  2. Don’t Wait to Be Asked: Lead
    A roadmap for increasing your influence at work.
    An employee leads by jumping from the bleachers and joining the action.
  3. How (Not) to Change Someone’s Mind
    Psychologists have found two persuasion tactics that work. But put them together and the magic is lost.
    A woman on a street talks through a large megaphone.
  4. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  5. How Autocracies Unravel
    Over time, leaders grow more repressive and cling to yes-men—a cycle that’s playing out today in Putin’s Russia.
    autocrat leaning over battle map surrounded by yes-men.
  6. Knowing Your Boss’s Salary Can Make You Work Harder—or Slack Off
    Your level of motivation depends on whether you have a fair shot at getting promoted yourself.
    person climbin ladder with missing rungs toward rich boss surrounded by money bags on platform
  7. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  8. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  9. It’s Performance Review Time. Which Ranking System Is Best for Your Team?
    A look at the benefits and downsides of two different approaches.
    An employee builds a staircase for his boss.
  10. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  11. Four Strategies for Cultivating Strong Leaders Internally
    A retired brigadier general explains how companies can prioritize talent development.
    Companies should adopt intentional leadership strategies since developing leaders internally is critical to success.
  12. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  13. Take 5: Not So Fast!
    A little patience can lead to better ideas, stronger organizations, and more-ethical conduct at work.
  14. Too Much Cross Talk. Too Little Creativity. How to Fix the Worst Parts of a Virtual Meeting.
    Six tools from an unlikely place—improv comedy—to use on your next Zoom call.
    meeting participants improv
  15. Take 5: How to Be Prepared for Important Career Moments
    Expert advice on getting ready to network, negotiate, or make your case to the CEO.
    How to be prepared
  16. Why Do Long Wars Happen?
    War is a highly inefficient way of dividing contested resources—yet conflicts endure when there are powerful incentives to feign strength.
    long line of soldiers marching single file through a field
  17. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  18. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  19. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
More in Leadership & Careers Leadership