Copyright by Vlerick Leuven Gent Management School – 2011 The financial crisis and the bullwhip effect Robert Boute a , Ann Noblesse b & Marc Lambrecht b a Operations & Technology Management Center, Vlerick Leuven Gent Management School and Research Fellow Research Center for Operations Management, Faculty of Business & Economics, K.U.Leuven. Robert.boute@vlerick.com b Research Center for Operations Management, Faculty of Business & Economics, K.U.Leuven. ann.noblesse@econ.kuleuven.be, marc.lambrecht@econ.kuleuven.be The financial crisis, triggered by the bankruptcy of Lehman Brothers in September 2008, resulted in a spectacular dip in industrial production in 2009 and into 2010. However, over the same period, retail sales remained fairly constant. In this paper, the authors argue that the shockwave throughout the industrial world was caused by the inventory policy adopted by manufacturing companies: due to the de- stocking and re-stocking practices, real demand was distorted along the value chain. The authors urge close monitoring of, and insight into, the real state of consumer demand to ensure the sustainability of the current economic recovery. The economic recession in 2008-2010 caused significant turmoil in the business world – especially in the manufacturing sector. When tracking the index of retail sales against the indexes of industrial production and industry sales (National Institute of Statistics) over the period from 3Q 2008 to 3Q 2010, the authors find that the index of retail sales remained fairly constant (average of 98.5) over the period, while the index of industrial production ran considerably lower (hitting a low of 85 in 2Q 2009). Clear evidence that industrial firms over-reacted to relatively small fluctuations in retail sales. When the authors also track the percentage change in value added in the industrial sector in 2009 (compared to the corresponding period in 2008) and the percentage change in final consumer consumption (source National Bank Belgium, 2010), the figures show that consumer sales dropped marginally, whereas industrial production dropped dramatically. But why was the over-reaction so dramatic and why did it happen so quickly?