COVID-19, Shortage Gaming, And The Toilet Paper Supply Chain

An overnight report from a friend in Australia about shortages of toilet paper compels me to write about the supply chain for this product. Apparently retail shortages have hit Hong Kong, Japan, and Singapore, as well as Australia. This “shortage gaming” in paper products driven by fear of the spreading COVID-19 outbreak, as well as other commodities like disinfectants and cleaners, is a nightmare for product managers, supply chain managers, and manufacturers.

First, a few words about the product, which I assume everybody is familiar with. As we know, it is relatively inexpensive (unless you are scouring the web right now trying to buy some), but it is lightweight and voluminous. That means the value density is relatively low. This is an important characteristic, because it means the transportation cost of getting it from the factory through distribution centers and into a store is high relative to its value. As a consequence, producers don’t want to ship it long distances. Most countries have domestic (or near shore) manufacturing, and the largest producers in the world – China, the U.S., Japan, Germany, Korea, Brazil, Finland, Canada, Sweden, and Italy are positioned inside large markets.

We do see shipment of wood fiber/pulp over long distances. This is because wood fiber comes from trees, and places like Canada, the Nordic Countries, Siberia, and certain countries in the southern hemisphere are important growing regions. Pulp is much denser than tissue papers, which have been expanded with air in their processing, so it makes sense to ship it.

The second important characteristic of this market is that demand is stable. It is not seasonal, and consumption should be roughly in line with the population and shouldn’t vary that much. As a consequence, manufacturers optimize their supply chains with these assumptions. I was talking to an alumnus and former student of mine last summer. She was the buyer for paper products at a large regional grocery chain, and we got to talking about the velocity with which paper products, and toilet paper specifically, moved through their distribution centers. She was amazed at the volume that moved through every day, but it was a well-oiled system designed for stable demand.

So what happens when shoppers scoop up all that toilet paper and hoard it? It sends a demand signal through the supply chain to produce more. If producers do ramp up capacity (which is hard to do instantaneously), they might eventually send more product into the distribution channel.  Meanwhile, as the crisis passes, consumers can then burn off their “pantry inventory” – and that burn down will take time, depressing demand for an extended period. This of course will lead to overstock in the stores, and signals to cut production. In our operations management class at HBS, we teach this as the bullwhip effect.

Will this actually happen in the toilet paper supply chain? I’m actually guardedly optimistic because producers know that demand is stable year-over-year, and that this is a temporary spike. If I were a plant manager, it would take a lot of convincing for me to add manufacturing capacity right now. The best thing to do is to put retailers on allocation, who would likely limit purchases so that shoppers can’t buy themselves a five year supply anymore, at least until this crisis passes.