The Goods Market Conundrum and the Supply Chain Crisis Explained

by - April 10th, 2020 - Business School, Current Events, Faculty Research & Recognition

First, it was the toilet paper that caught our attention

From the consumer’s point of view, one of the biggest mysteries in the pandemic crisis is: What happened to the toilet paper? As I think about the events in the last weeks, the toilet paper shortage initially appeared an odd case, but it gave us a glimpse of what was to come. Since then, it seems like every time I turn to the news, I hear government officials and news analysts talking about yet another supply chain problem. One can safely assume this crisis has affected the flow of goods across the board.

As an Operations Management professor, director of the Jindal School’s BS in Supply Chain Management program and economist, I have been following the news cycle with curiosity. At first, I thought that customers’ perception issues and a bit of spreading social paranoia were causing temporary shortages in the markets. But, after experiencing the coronavirus crisis in the U.S. a few weeks, we can see more clearly that the problem is present. The uncertainty of the future and the unknown duration of stay-at-home orders furthers customers’ fears, feeding the unusual buying patterns.

Man walking through aisle

We face an overall disruption in the world’s supply chain

The supply chain is a network of different activities interlinked, from production to the final user. Globalization has furthered these links, connecting the chain to different parts of the world. Disruption in production in one country pushes through the supply chain of another, and it eventually reaches the end customer. This becomes apparent when we visit local stores.

If you want to understand this process, try by visualizing how each product you buy in the store follows its own path through a sequence of intermediate steps. From the beginning of its production, when we obtain raw materials, it follows its own supply chain process, its unique route. If one of those links of the chain is not working correctly or it is broken, the product gets delayed in the process of reaching your store.

The relatively good news is that most products will keep their demand expectations, and most companies with proper supply chain planning and effective inventory management systems will have products for several months between the pipeline and the inventory.

But shortages should be expected for medical supplies, that have an actual increase in demand, and for related goods like antibacterial, cleaning supplies — and toilet paper. At this point, I do not think we have reached the peak of the shortages.

The supply chain hurdle at the moment is that the product demand has shifted geographic locations. For instance, there is more demand in the suburbs than in business areas where public buildings, currently not operating, are located. Therefore, the problem is not a shortage of inventory, but a problem of product allocation and availability. Nevertheless, this is, still, a problem in the equilibrium of the markets of goods.

So, what did actually happen to the toilet paper?

Questions remain. What did really happen to the toilet paper? Why has its demand increased in such a degree compared to other products?

I believe the answers are twofold. On the one hand, the perception of the consumer — who is facing a lot of uncertainty and has no control over the market of goods — at some point, made an irrational decision to stock up on a product that has a long shelf life. This is more a behavioral approach than an economic one. The behavior became pervasive as consumers started perceiving a shortage in the supply of toilet paper, and more and more consumers started copying this behavior. Ultimately, there was a shift in demand as more and more people got caught up in this trend. So, social paranoia and aversion to risk played a part in this shortage.

On the other hand, the scarcity of this particular good could be triggered by the concentration of consumption in some areas of the cities. The shifting demand of a specific type of toilet paper over another is setting the market out of equilibrium.

To understand this dynamic, let us think for a moment that commercial-grade toilet paper that is generally used in offices and schools around the U.S. has been substituted for consumer-grade toilet paper that is bought for household use. These two types of goods are substitutes for each other, and that explains a possible surplus of commercial-grade toilet paper and a shortage of consumer-grade toilet paper.

Ultimately, consumers were not entirely wrong in their perception when they started stocking up on toilet paper early in this crisis.

Could this mean an increase in the prices of essential products?

Yes. The answer is yes, as the pressure of the markets from increasing demand and lesser supply will push the prices higher, at least in the short run. With so much uncertainty, it is difficult to forecast how the markets will behave in the long term. Making accurate predictions might not be achievable. All we can do is approach the market on a day-to-day basis.

In theory, we expect the markets to balance supply and demand and reach equilibrium after some time. Let us assume that a year from now, we will find a way to restructure our supply chains. The final question is: Will the price at equilibrium, in the future, be higher? And that is, in fact, a likely scenario.

Responsive supply chains will be able to adapt quickly to mobilize products to different locations, from various channels, from diverse vendors even within the same geographic area.

Still, rigid supply chains will find it to be more challenging to adapt and adjust their processes to the needs of the markets. From a simple point of view, as you can see, managing supply chains requires knowledge on forecasting, sourcing, contract negotiation, inventory, logistics, pricing, economics — among other areas — combined with creativity and problem-solving skills.

All in all, the supply chain problems we are facing to maintain the markets of goods in equilibrium are complex and require creativity, teamwork and effective communication. If you are intrigued by business problems that have a lasting impact in the markets, and finding the solution is exciting for you, a booming area of interest is supply chain management.

After we sort this crisis, and we get evidence of what worked and what didn’t, I am confident that the supply chain will evolve into something different, more flexible and diversified. It will fit the realities of a world post-COVID-19.

You could be part of that future; you could be part of the solution. Join our SCM program at the Naveen Jindal School of Management at UT Dallas.

A website has been launched to serve as a hub for all UT Dallas information on the coronavirus outbreak and will be updated periodically with new information as it becomes available.

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