Is circularity a solution to the bullwhip?

How a more circular approach to product design and go-to-market strategies could help address the supply and demand mismatch of the post-pandemic bullwhip effect.

Earlier this year, my colleague Rob Barrett wrote a missive to the Bullwhip Effect bemoaning its return to the supply chain management profession. Post-pandemic, many of our clients are struggling with its long-term effects—the oversupply, stranded inventory, clogged distribution channels, and canceled orders that have resulted from companies chasing demand and overordering to meet consumer demand over the last three years. Now, retailers and direct-to-consumer manufacturers are facing stranded inventory, struggling with the challenging decisions of whether to discount, donate, or destroy inventory.

But what if there was a different way to think about stranded inventory, not as a liability on the balance sheet but as an opportunity to develop new capabilities, reach new customers, and generate new revenue streams?

The concepts of the circular economy are not new to the corporate world but are causing many to rethink their business models and supply chains as companies face increasing cost pressures, supply insecurity, and increasing regulations for plastics, waste, and greenhouse gas emissions reductions. Oversupply situations offer a perfect opportunity to apply circular thinking to address the glut while also reducing waste and associated emissions.

For example, we work with many consumer products companies that are built on wildly successful models of obsolescence. These firms are leaders in the rapid design and launch of new products—most of which are manufactured from scratch using virgin raw materials. But given the amounts of excess inventory currently clogging ports and distribution centers globally, is there an opportunity to turn those fast product design capabilities towards remanufacturing? Remanufacturing, in which a previously ‘finished’ product is rebuilt using a combination of reused, repaired, and new parts, is common in industrial applications such as automotive and heavy industrial equipment, due to the cost of buying new in those segments. The idea is starting to spread to other sectors though, particularly in apparel where some retailers are taking back and repairing used clothing for resale. But in segments where last year’s designs won’t sell, is there an opportunity to ‘remanufacture’ excess inventory into new designs to avoid a writedown or negative brand impact?

Similarly, we often hear from clients that they are struggling to manage their supplier relationships because excess inventory has led them to cancel orders, pushing the negative economic and environmental impacts up the value chain. At the same time though, many industries such as consumer electronics and heavy agricultural equipment are under regulatory and stakeholder pressure to improve the ‘right to repair’. Innovative companies are using these pressures to develop new revenue streams focused on offering consumers the instructions and parts to the repair their products. While these offerings may cannibalize some new sales, they can also open new consumer segments who can now more easily justify the high upfront costs of products by knowing that an extended product lifetime is now possible through repair. There is also research underway to explore whether improved repairability increases consumer loyalty and the customer lifetime value and can decrease customer acquisition costs over time. So, rather than canceling those orders of different parts due to oversupply of the final product, is there an opportunity to sell those parts directly to consumers to facilitate product repair?

The concept of circularity offers an opportunity to shift our thinking that value is only created by getting products to end consumers to a new view that value is inherent in products and parts themselves—and should be managed through value chain accordingly. Perhaps excess inventory is just a new opportunity to create value, and lessen our environmental impacts?