Is there an Artificial Increase in Shipping Demand?

Feb 10, 2023 | Supply Chain Problems, Transportation and Supply Chain News

It’s a delicate balance. Given the pandemic-powered disruptions facing the global supply chain—slowdowns, lockdowns, and manufacturing shortages, for starters—shipping and logistics companies were forced to reimagine the way they do business. And during that period, many organizations were pushed to, in some cases, sail empty and half-empty ships or create false demand with scarcity tactics in order to move merchandise and drive up demand.

While the global supply chain has heavily recovered since COVID-19 this practice “artificial demand” continues to be a relatively common strategy. The impact and potential consequences, though, need to be reconsidered and re-evaluated in light of the current market conditions—most recently inflation, the war in Ukraine, and increasing gas prices, all driving the cost of goods.

Understanding Artificial Demand

Typically carriers aim to send fewer ships, each at or approaching maximum capacity and in doing so are able to cancel or hault additional shipments in what is referred to in the industry as “blank sailing”. With this strategy, processes are more efficient, inventory is predictable, and prices stay consistent. During peak COVID-19, though, inventory shortages, overstocking, and sharp declines in demand pushed carriers to optimize spending and rapidly adjust supply.

As a result, artificial demand became more and more the norm. Carriers deliberately reduced tonnage, sending ships at a less-than-optimal capacity. Sending lower-than-anticipated inventory, in many cases, drove up demand by heavily leveraging scarcity tactics and boosted the costs of those shortage goods and products. While this practice of artificial demand may seem like an attractive solution for a retailer or organization seeking to unload inventory or maintain a healthy pipeline, it’s important to remember the laws of cause and effect. Case in point, on the other end of the artificial demand spectrum there’s also the Bullwhip Effect. When retail levels increase slightly, brands and manufacturers often see that jump as a sign of what’s to come—that the current 10% increase in demand, for example, could actually signal an eventual 20% spike. To prepare, organizations often respond by increasing inventory for anticipated high-demand goods and products.

Often, though, the Bullwhip Effect leads to aggressive forecast updates, order batching, rationing, and price fluctuations. This, then, drives more customer demand distortion—no longer are organizations responding to a potential trend but, instead, reacting to less-than-reliable projections emerging from the disorganization. At that point, though, the impact is already felt through the supply chain.

The Unintended Consequences of Artificial Demand

Granted, artificial demand and the Bullwhip Effect aren’t new to the shipping and logistics industry—and it certainly wasn’t a COVID-19 phenomenon. Carriers have always had the ability and motivation to adjust supply in response to market conditions—or, in some cases, simply to maximize short-term profits: reduced supplies means higher costs for products and materials and increased prices at retail. At the same time, artificial demand can have a ripple effect across the supply chain that many don’t consider and when you add inflation and global politics into the mix, predicting supply and demand behaviors to maintain profitability at your organization becomes exceedingly complex. Without predictable inventory quantities—or a sense of what’s truly needed in the marketplace—it’s virtually impossible for businesses to accurately predict the cost of their goods and services. Manufacturers waiting on parts, for example, can’t properly quote final pricing to customers who, then, can’t price at the retail level.

And when products do hit retail shelves? With this sense of scarcity, consumer confidence often declines as sale and resale values skyrocket. This can lead to decreased investment and a decrease in overall economic activity.

Strategies for Optimizing the Supply Chain in the Face of Artificial Demand

So, how can companies mitigate risk and more reliably predict supply and demand trends? With artificial demand an ongoing reality, many businesses are focused on optimizing their own supply chains—specifically, improving efficiencies and reducing costs through next-level inventory management systems, streamlined processes, and improved communications with suppliers and carriers. Others are opting for alternative supply chain models, such as just-in-time (JIT) or consignment inventory, reducing their dependence on the shipping market and helping better manage costs over time. In addition, many leading retailers are hiring external consultants to gather intel on everything from warehouse data trends to holiday month comparisons to inflation metrics and look for correlations or patterns among various data points in the hope it will reveal a market opportunity.

Alternatively or in conjunction with these strategies, many global-leading organizations are tapping OL-USA to help mitigate the risk surrounding artificial demand. A trusted partner like OL-USA can help businesses navigate the market and find the most cost-effective solutions for their supply chain needs. This can include identifying alternative shipping routes, negotiating better pricing, and leveraging technology to optimize supply chain operations

While we’ve emerged from peak pandemic challenges, the shipping and logistics industry will continue to face challenges and shifts in market conditions, including artificial demand. However, by working with a trusted partner and taking steps to optimize their supply chain, businesses can weather these challenges and remain competitive in the fast-evolving global market.

Sign up for The Saturday Shipper

It’s a weekly newsletter that breaks down all of what’s happening in the shipping industry. We promise to only send it out once on Saturdays!

Take me there!

Beyond Cost Cutting: Maximizing Value with 3PL Excellence

In today's dynamic landscape of modern supply chain management, the choreography of seamless operations has elevated Third-Party Logistics (3PL) to a pivotal role. It stands as a guiding light for businesses navigating the complexities of supply chain intricacies,...

The Last-Mile Dilemma-3PL Strategies for Timely Holiday Deliveries

Solving the Last-Mile Puzzle: 3PL Strategies for Timely Holiday Deliveries  In the intricate dance of holiday logistics, the spotlight invariably falls on the often-overlooked hero: last-mile delivery. As the festive season unfolds, the significance of this final...

Navigating the Regulatory Seas: A 3PL’s Guide to Compliance in Logistics 

Charting the Regulatory Maze in Logistics  Embarking on the journey through the logistics industry is akin to navigating a dense and intricate regulatory maze. The landscape is a tapestry woven with diverse regulations, each thread contributing to the complex fabric...

Beyond Storage: Unleashing the Power of 3PL Warehousing Solutions

In the intricate dance of modern commerce, businesses find themselves navigating an ever-evolving labyrinth of supply chain intricacies. As the demands on these supply chains become more complex, one silent hero emerges to shoulder a significant burden – warehousing....

Cold Chain Logistics

In the diverse landscape of industries, one unifying factor reigns supreme: the unwavering commitment to product quality. Whether we're talking about life-saving pharmaceuticals, gourmet food, or cutting-edge biotech, the common thread that binds them is the...

Maximizing Efficiency: The Key Benefits of Partnering with a 3PL Provider 

In the fast-paced world of e-commerce and supply chain management, businesses today grapple with increasingly complex challenges. The imperative to meet customer demands, streamline operations, and maintain competitiveness is more crucial than ever. This is where...

ESG Goals in the Shipping Industry: Where Do We Go From Here?

In the dynamic and ever-evolving landscape of modern commerce, the concept of ESG, which encapsulates Environmental, Social, and Governance principles, has emerged as a potent force shaping the future of the shipping industry. It's not merely a buzzword or a fleeting...

High Value Cargo

High-value cargo: it's not just freight; it's the lifeblood of your business. From delicate electronics to precious metals, these treasures command not only substantial monetary value but also a substantial level of responsibility. The stakes are high, and the margin...

Preserving Freshness and Ensuring Compliance

In the bustling world of the food and beverage industry, two imperatives reign supreme: freshness and compliance. These pillars, essential to the industry's very core, dictate not only its success but also the well-being of consumers. As we embark on this exploration,...

Unlocking the Power of Inventory Optimization

In the complex world of supply chain management, few factors hold as much sway over a business's success as the effective management of inventory. Picture it as the beating heart of your operations—a finely tuned balance between supply and demand that can mean the...