The technique, a type of vendor-managed inventory, works to minimize what businesses call the “bullwhip effect,” the free market’s kissing cousin to Stalinism’s shortage problem. First identified in 1961, the bullwhip effect describes the phenomenon of increasingly wild swings in mismatched inventories against product demand the further one moves along the supply chain toward the producer, ultimately extending to the company’s extraction of raw materials. Therein, any slight change in customer demand reveals a discord between what the store has and what the customers want, meaning there is either too much stock or too little.

To illustrate the bullwhip effect, let’s consider the “too-little” case (although the phenomenon works identically in either scenario). The store readjusts its orders from the distributor to meet the increase in customer demand. But by this time, the distributor has already bought a certain amount of supply from the wholesaler, and so it has to readjust its own orders from the wholesaler—and so on, through to the manufacturer and the producer of the raw materials. Because customer demand is often fickle and its prediction involves some inaccuracy, businesses will carry an inventory buffer called “safety stock.” Moving up the chain, each node will observe greater fluctuations, and thus greater requirements for safety stock. One analysis performed in the 1990s assessed the scale of the problem to be considerable: a fluctuation at the customer end of just 5 percent (up or down) will be interpreted by other supply chain participants as a shift in demand of up to 40 percent.