Customers seem to be quite heavy on inventory (as is my employer). This has made for a significant slowdown in sales orders for the last number of months.
– Machinery company, ISM Manufacturing Survey May 2023
In terms of inventory, we're in good shape. In-stock is improving and excess inventory keeps coming down. We see it in the numbers, and I'm seeing it on store and club visits.
– Walmart CEO Doug McMillon (The Transcript)
One thing investors were concerned about in 2020 was the potential for a large bullwhip effect. This is when due to disruptions in supply chains or a (temporary) jump in demand for a product further along the supply chain, companies decide to over-order product, either mistakenly expecting demand to continue or in the belief that they will likely only receive a fraction of the ordered amount due to the disruptions. As a result of this incomplete information, the impact of those orders is then amplified along the supply chain, like a bullwhip. When things change, some entity along that supply chain often gets stuck with excess stock that needs to be liquidated.
In this Economics Weekly, we examine the current inventory situation—with supply chains now clearing but demand slowing, companies are getting a better sense of stock levels and of how much is too much.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.