Supply Chains ran our lives quietly and without fuss, but due to the pandemic, they have gained media attention.
The pandemic has created stress on businesses and efficient supply chains. Many journalists seek to write on why we are seeing massive stock-outs for some products and not for others. The best recourse would be to directly talk to supply chain experts and practitioners who deal with global supply chains.
I am not arguing that one should really just talk only to supply chain experts. It just appears that it has been easier to call up pop-scientists who are eager to ply their popularity.
Following up on a reader’s note, I came across a famous behavioral psychologist making an argument that toilet paper shortage was due to asset “bubbles”, like the Tulip mania. (natch! I am not going to link :). To be polite, I think that such idle speculations are unscientific and hamper our understanding of supply chain problems.
Sure, it is tempting, they seem to fit everything. These stories sell well. The stories of irrational exuberance, biased behavior of customers, their herding and cascading, stockouts inducing more stockouts are delightful. However, if we were told that there are in fact tons of available inventory, it would not fit the theory, and the fact would surprise us.
Some supply chains, especially those supply chains dealing with highly predictable demand, e.g., toilet paper, are designed for “efficiency” and low-cost. Such supply chains are not flexible enough to deal with sudden volatility in demand. Add to this scenario factors such as sticky labor costs, capacity constraints, fixed costs, and delivery delays, you will indeed have a highly volatile chain in event of a demand spike. These variations result in excess inventories (major pain for firms, but unnoticed by customers), and stockouts (major pain for firms, but also major pain for customers).
An excellent article by Will Oremus on Medium captures the complexity in supply chain capacity (industrial vs. consumers), to explain the backup in toilet paper rolls. The article explains stockouts without resorting to sexy ideas like irrational herding and asset bubbles.
Remember, we that don’t need asset bubbles, etc, to explain the stockouts. Anyone who has played “the beer game” has seen this Bullwhip effect — the order variations and stockouts are huge even when demand variations are small.
In the case of toilet paper, the household demand has gone up by 40% just because people are working from home, and children are at home. Sure, some people stockpiled. If everyone did so, it would have reduced future consumption (and reduced demand by now). Instead, we are still seeing retail consumption stay high, and shelves are consistently getting emptied (and filled). Increased consumption at household level why we still see stockouts for various household products (cleaning supplies, soaps, etc) and Amazon is still seeing delivery delays for these products.
The stockouts that we see for products that we always assumed will be in stock are due to supply chain structure. I end this post with a classic article talking about the difference between flexible supply chains and efficient supply chains (paywall likely).
What’s the Right Supply Chain for Your Product?
Notes:
- Marshall Fisher. 1997. What’s the Right Supply Chain for Your Product?
- , , Information Distortion in a Supply Chain: The Bullwhip Effect. Management Science. April 2004, Vol. 50, Issue 12 Supplement, Pages 1875-1886.