Review Clients’ Inventory Values: The Impact of the Bullwhip Effect on Insurance

Review Clients’ Inventory Values: The Impact of the Bullwhip Effect on Insurance

It wasn’t too long ago we were all racing to the markets to stock up on toilet paper, paper towels, and sanitizing and cleaning products, among other consumer goods. The supply for these items during the height of the pandemic was scarce, made even worse by mass hoarding of goods and materials. And while these particular items are now readily available, there are continued supply-chain strains across various industries, with companies continuing to bulk-buy certain materials and goods to meet anticipated consumer demand.

It’s Known as the Bullwhip Effect

According to Master Class, the bullwhip effect occurs when customer demand shifts at the retail level, causing stores to overreact and drastically change their demand forecast. One retailer’s incorrect demand forecasting can cause the supply chain to produce more or less of a good or material than necessary.

This small action at the end of the supply-chain causes distributors further back in the chain to drastically change their own orders, potentially causing disruptions, over-or under-stocking, delayed lead times, shortages, and a decrease in profitability for all parties involved.

This effect comes from the idea that a simple flick of the wrist can cause a bullwhip to oscillate wildly as it stretches out.

Talk to Clients Regularly About Inventory Levels

The bullwhip effect has far-reaching implications as businesses rush to fill orders while also replenishing warehouse shelves. It affects everyone, from retailers to industrial companies that supply all the various raw materials required to produce more goods. Which companies are the first to emerge from the slump and begin growing again is determined by how they respond to market shifts.

The bullwhip effect phenomenon also impacts the inventory values one insures. For example, contractors who stockpile materials (such as lumber, doors, and windows) in order to get more jobs and meet their deadlines may have much more inventory than they typically have had in the past.  If they don’t advise their insurance agents of the increased values in their inventory, in the event of a loss, the consequences could be devastating.

Clients may have also leased additional warehouse space or opened a new warehouse to store the supply increase. Without the proper reporting of inventory values, should a fire or other catastrophic event occur that damages their goods, clients will not be covered fully for a loss as they expected. 

It’s critical, therefore, that those insurance agents check in regularly with clients to discuss their inventory levels and ensure that coverage amounts reflect those levels. It’s simply not enough to perform an annual review in today’s challenging supply-chain environment.

Clients should also ensure their increased inventory and facilities are well protected against loss with sprinkler systems and smoke alarms, water detectors, and security devices such as cameras to protect against property damage and theft. Discuss an insured’s risk management strategies and safety measures to make sure the proper measures are in place.