Over the last 12 years, I’ve worked to understand the dynamics of inventory, stockouts, and supply chains. It’s helpful background for understanding all the bare shelves we are now seeing at stores across the country. Starting with the conclusion: should you be worried about making sure you have enough food? No. The bare shelves we are seeing are more due to logical changes in customer behavior than fundamental supply chain problems. I don’t think we’re running out of food or toilet paper. Here’s why we’re experiencing stockouts:
#1 You are going shopping less often – the Purchase Frequency Problem
Stay at home orders, plus a much less pleasant shopping experience, means you (and others) are going to the grocery store less frequently. As a basic example, if you used to go to the store 2x per week, you might now go 1x per week. A first glance suggests you would then buy about 2x as much food each trip, which shouldn’t impact the amount you buy very much. But that’s not actually what happens. The reason is that when we shop we are making some guesses as to how much food we will need. In order to be confident (let’s just say 90% confident) that we are going to have enough food in each situation, we need MORE than double the groceries. Let’s just say 10% more to keep the math simple. Where does that extra food go?I’m guessing some of it is in your cupboards, and some of it has gone to waste.
#2 You are less certain of replenishment so you buy more when you see it – the Toilet Paper problem
When you know that the store will have an item every time you go, your need to stock up is very limited. You just need to have enough to cover your needs plus the extra couple of days it might take you to get to the store. Once an item stocks out and you are not guaranteed supply, your math becomes very different, especially when combined with less frequent shopping. Now, instead of being able to get toilet paper on 1-2 days notice, it might be 1-2 weeks. Sales increase massively in the short term, but there is no actual underlying increase in the amount of toilet paper being used. We are in a classic hoarding situation. Once people collectively come to the conclusion they have enough toilet paper, I suspect sales will come crashing down. Which is why there is a third logical element to this:
#3 Suppliers don’t want to scale up to meet false demand
Let’s say you manufacture toilet paper. You know the actual underlying demand for toilet paper has not increased. Toilet paper doesn’t waste on people’s shelves, so there is no extra demand created by spoiling product (like there is with fresh fruit, for example). Under these circumstances, does it make sense for you to make more product to meet the short term hoarding? Likely not. Plants run best when they do the same thing every day, not when they swing from one wild extreme to another. So, in the face of this increased demand, the people running the factories are likely just thinking “let’s stay the course”. So you don’t get any extra toilet paper on the shelves…which means…more stockouts.
#4 The price mechanism is not functioning
For a variety of reasons, mostly customer relations, even though stores could sell toilet paper at twice the cost they are unlikely to do it. Furthermore, reselling markets such as eBay have banned the sale of toilet paper in most cases. Where does this leave us? There is an artificial disconnect between the price you can get toilet paper at, and the actual perceived VALUE of the good. Because people want more toilet paper at the same supply, the price should really go up. But it is being artificially held down. The natural economic result of this is a shortage. See the below simple chart.
There are a few other factors that are impacting stockouts, namely:
- Just in time inventory
- Disruption to factories (not as efficient due to split shifts and distancing)
- Some increase in demand (especially with masks, sanitizer, disinfecting wipes, gloves, etc). These represent different problems than what we are discussing here.
My best guess? Once closets are stuffed, we’ll be donating toilet paper for a while. But we’ll probably keep every pack of disinfecting wipes we can get our hands on. More on that later!