Pricing bullwhip

The recent sharp rise in inflation would only be temporary, according to economists, but supply chain professionals know better. The container shortage plus lack of shipping capacity has caused freight transport prices to skyrocket worldwide. Rapid growth in market demand has driven up prices of raw materials and components. And on top of that, fuel prices have gone through the roof.

In contrast to many economists, supply chain professionals have long sensed that all these issues are unlikely to be resolved quickly. Needless to say, things are further complicated by the after-effects of the coronavirus pandemic, which vary enormously by industry and by region.

Consumers are already starting to feel the impact of higher inflation. Many everyday products have already become significantly more expensive, and some products have even disappeared from supermarket shelves. For example, Dutch grocery retailer Albert Heijn (AH) and Nestlé are caught up in a price dispute over KitKat, Maggi and some of the Swiss multinational’s other branded products. AH refuses to accept Nestlé’s proposed price increases of more than 20%.

Several grocery retailers are accusing brand manufacturers of disproportionately passing on the higher supply chain costs to their customers. This is a pricing bullwhip: each link in the chain – from raw material to the finished product – adds an extra percentage to the price to boost its own profit margin.

Deadlock

To break this deadlock between retailers and brand manufacturers, both sides need to come to the table. After all, the only way to avoid bullwhips in the supply chain is by sharing information about the expected demand from end to end. This prevents individual links in the chain from erring on the side of caution and adjusting their planning slightly more than necessary. However, most grocery retailers are unwilling to share detailed POS data with manufacturers.

Meanwhile, on the supply side, manufacturers should regularly provide their supermarket customers with a breakdown of the cost increases. The various bullwhip effects can only be avoided through greater transparency about demand, supply and costs. The need for this is currently being further heightened by the mounting call for true pricing for meat (which is sold too cheaply in supermarkets) and meat substitutes (which are regarded as too expensive).

Martijn Lofvers, Chief Trendwatcher Supply Chain Media
martijn.lofvers@supplychainmedia.nl