Supply chain panic is creating a vicious cycle of shortages

As the rhetoric of a “supply chain crisis” ramps up, companies are over-ordering and placing orders earlier than usual to ensure goods keep flowing out the door, which causes further disruptions, notes Eric Oak, supply chain analyst for S&P Global Market Intelligence.

If a company is 80% sure it will get enough goods to keep its manufacturing facility open, it might not order 100% of what it needs, Oak says, as an example. But this company, which is expecting 80% of its goods to arrive, might instead over-order 120% of what they need, so at least 96% arrives. “The manufacturer is more likely to boost the raw material orders to make sure that their plant stays open,” creating a cyclical effect in supply chain disruptions, Oak tells Fortune.

Early over-ordering creates a bullwhip effect, he says, as one company increases its order volumes, or orders sooner than expected, making its suppliers do the same. Suppliers of suppliers will all increase their own volumes, creating a trickle-down effect of more disruption.

And in an already tight market, a small swing in consumer demand—which may come from panic-buying that arises after reading about mangled supply chains—may result in singular large order volumes one month, which just makes things worse, Oak says, calling it “a problem of transparency.”

Inflation has a similar role to play. As companies fear the prospect of prices rising in future, they also might be inclined to order more today, pushing prices still higher. “If everybody thinks inflation will happen, it’s likely to happen,” says Oak, who says both inflation and supply chains have the same self-fulfilling nature.

As of now supply chain congestion sees no end in sight. After two years of pandemic-related supply and demand constrictions, 77% of the world’s ports are experiencing abnormally long turnaround traffic, according to Bloomberg, with ships anchored off the coast of U.S. and Chinese ports waiting to be processed.

Some argue the focus on just-in-time manufacturing—a company strategy to maintain the bare minimum of stock in factories to save on space and costs—may be at the heart of the problem. And if there are any winners in the supply chain crisis, according to Oak, they will be the companies that thought ahead. “Companies that didn’t plan for, or adapt to this kind of new superlong lead time supply-chain environment might be left with goods on boats,” Oak says.

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