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The amazing influence of inventory on the economy

corresponding

ROBERT PEELS
Flostock, Horsten 1, 5612 AX, Eindhoven, The Netherlands

Abstract

A close understanding of the mechanisms behind stock building in supply chains is necessary to explain the volatility of economies, according to Dutch analyst Robert Peels. The importance of such insights became clear after the 2008 Lehman bankruptcy disrupted Western economies for years. Macro-economic analysis models featuring the length of the supply chain as an additional dimension are available nowadays to understand the effect of stock policies on demand.


HIGH VOLATILITY IN PRODUCTION

High levels of volatility in industrial production and consumption are characteristic of recent economic trends and typically each country is going through a different curve of industrial production (figure 1). Although the pattern jumps up and down between industrial production and consumption – the two ends of a supply chain - both are inter-related: spending in end-consumer markets determines the level of demand upstream for industrial products. Macro-economists assume that the difference between the top and bottom of the supply chain is simply passive stock building or destocking. In this article I will explain how macro-economists miss an important insight by ignoring the causal effect of fluctuating inventory levels in their analyses (1).

FLOSTOCK AND THE LEHMAN WAVE
A Dutch research team consisting of Jan Fransoo and Maxi Udenio of Eindhoven University of Technology, and the article’s author, Robert Peels (then employed by Royal DSM), discovered that demand volatility caused a bullwhip effect throughout the supply chain. This effect, coined the Lehman Wave, was triggered by the ban ...




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