The “narrative trap” of price increase logic

For those familiar with supply chain management, the term "bullwhip effect" is well known. In a supply chain, minor fluctuations at the downstream level (retail) become greatly magnified through each information layer, resulting in large fluctuations upstream (manufacturers, suppliers), which ultimately leads to inventory bottlenecks or stockouts across the entire supply chain. For example, a slight year-on-year change in household appliance shipments can turn into massive fluctuations through several tiers—wholesalers, exporters, manufacturers—and by the time it reaches upstream parts manufacturers and further upstream copper or steel enterprises, the fluctuation is even larger.Why does the supply chain experience the bullwhip effect? The reason is somewhat similar to the game of “Telephone,” where information gets distorted as it passes from person to person. Many products have lengthy supply chains—for instance, steel. Only a small proportion is sold directly from steel mills to end users; most sales go through various levels of agents/distributors within the distribution network, often with strong regional characteristics. This leads every participant to maintain “safety inventory.” As a result, the sum of inventories held throughout the industry chain is often several times the actual end-user demand.When commodity analysts compile supply and demand balance sheets, they often assume “no major change in supply chain inventory” as a premise. But in reality, total inventory volatility is several times greater than actual downstream demand fluctuations, causing prices to overshoot during rallies and exaggerate declines during downturns.This also leads to the common mentality of “buying on the rise, not on the fall.” When prices increase, inventory values rise, and traders are naturally more willing to hoard stock, which further amplifies real demand; when prices fall, all channels are destocking, reflecting as a “plunge” in manufacturers’ demand, which is actually not as severe as it appears.Recently, Meta’s sale of computing power triggered a global correction in the AI sector. Part of this is also due to the “bullwhip effect.” However, unlike traditional industries, there are still some differences in how various segments of the high-tech industry supply chain are affected. In tomorrow’s (Wednesday) live stream at 11:30 AM (UTC+8), we’ll discuss these topics. Everyone is welcome to join the session by making a reservation.