Demand disruption and channel-based supply chain flexibility
Shared consumer experiences often characterize distinct time spans. Many of us can recall making our first online purchases during the 1990s. A decade later, that novelty phenomenon occurred again among consumers using smartphones. Decades earlier, the shared-consumer experience during the communist era of the Soviet Union was its bread lines. However, shortages do not only occur within poorly-executed centrally-planned economies. When the virus is under control, and we reflect on the consumer experience we shared during the COVID-19 pandemic, we will likely recall tales of the omnipresent toilet paper shortages – the kind of thing we used to make fun of related to the Soviet Union. The pandemic-initiated bathroom tissue scarcity has been very democratic and has affected nearly everyone. The toilet paper supply chain, from tree to loo, lacked sufficient flexibility for a large-scale demand disruption.
Figure 1 – Soviet-era bread lines and COVID-19-era toilet paper shortages
We received extensive company data from a regional grocery store chain to research the persistent toilet paper shortage and to investigate the industry’s pandemic-related inventory challenges. We also had unfettered access to managers. The company’s supermarkets span multiple states and are diverse; they service towns as small as 15,000 people and cities with more than 5 million residents. We had the opportunity to investigate a variety of supply chain challenges felt by the company’s procurement and distribution teams, their suppliers, and their supermarket managers and employees.
During the early weeks of the COVID-19 pandemic, the popular media frequently blamed consumers for toilet paper shortages. For instance, in March, the New York Times, Fox News, Time magazine, the Boston Globe and others took great liberties in shaming consumers about their toilet paper buying behavior. Nonetheless, despite the shaming, shortages persisted. According to the media’s hoarding logic, closets everywhere should be straining to contain mega packages of bathroom tissue. Early into the pandemic, panic buying certainly contributed to toilet paper stockouts. However, panic buying is a temporary phenomenon, and products suffering from panic buying alone should follow a demand pattern similar to that of bottled water.
In mid-March, at the onset of COVID-19 national awareness, bottled water purchases peaked dramatically. Consequently, that peak triggered temporary inventory shortages, and many retailers briefly stocked out. However, the stockouts did not endure. Consumption habits quickly returned to normal after consumers had stored enough bottled water to relieve fears of a perceived water shortage that did not materialize (see Figure 2). Toilet paper has not followed the pandemic demand pattern of bottled water.
Hand sanitizer illustrates a more extreme stockout issue. Around March 1st, the grocer became aware that COVID-19 was eliciting a purchasing response from consumers on the West and East Coasts. Following guidance from previous pandemic preparations, pandemics that ultimately did not affect the United States, the company scrambled to build its supply of core products. Among these were hand sanitizer and paper products. Despite their hasty preparation, the additional procured stocks were not nearly sufficient. Even with recent increased supply, sanitizer has remained critically unavailable.
At the recommendation of the Center for Disease Control, hand sanitizer has been pursued quite rationally by consumers. Other than for a couple of egregious hoarders seeking excess profit, no shaming occurred about buying hand sanitizer. Historically, supermarket sales of hand sanitizer have been slow. During January, on average, slightly more than one bottle of hand sanitizer was purchased each day from each of the supermarkets. In 2019, the grocer discontinued sales of its private-label sanitizing wipes. Demand simply was not sufficient to justify a private-label product absorbing shelf space along with wipes from Clorox and Lysol. Demand mushroomed for sanitizing products following the outbreak of COVID-19. Consumers quickly overwhelmed all available supplies of hand sanitizer and sanitizing wipes.
Weeks into the mandatory stay-at-home orders affecting most of the country, there remain persistent shortages of toilet paper at retail stores. Unlike hand sanitizer, there is enough domestic toilet paper production capacity. The illness does not require consuming substantially more toilet paper, the population of the United States has not changed dramatically throughout the COVID-19 pandemic, and paper mills across the United States are still operating. Curiously, as society implemented social distancing, a persistent toilet paper shortage evolved. Obeying the current stay-at-home orders, most of us are no longer using the restrooms at schools, restaurants, hotels, and workplaces. Regardless of the venue, individual toilet paper requirements are constant.
The supply disruption arose not because we are using or storing too much toilet paper or because the tissue industry suddenly lost the capacity to produce. The shortages have happened as a result of end consumers absorbing the procurement responsibility for nearly all the toilet paper needed in daily life. Toilet paper purchases for commercial and educational institutions have declined to near zero. Georgia-Pacific (G-P) estimates that by remaining solely at home, we must purchase 40 percent more toilet paper than when we use more varied toilet facilities.
Most toilet paper mills are optimized to produce toilet paper for only the commercial or retail channel. For example, Proctor and Gamble (P&G) manufactures only consumer-tissue products at its mills. Kimberly-Clark (K-C) is also primarily a consumer products manufacturer, but it does have a commercial division that accounts for 18 percent of its income. G-P maintains an extensive network of 14 paper mills and produces tissue for both channels.
By a large margin, P&G, K-C, and G-P produce most of the toilet paper for retailers. Clearwater Paper, Resolute Tissue, Sofidel Group, ST Paper & Tissue, South Florida Tissue Paper Company, along with other smaller businesses, primarily manufacture private-label and commercial tissue products. Roll sizes and packaging are often much larger for commercial toilet paper. Commercial toilet paper typically contains recycled content that consumers view as inferior. Retail consumer toilet paper is usually 100% virgin fiber.
Multi-channel products shipped to the distribution center
A substantial portion of grocery suppliers choose to service both retail channels and commercial channels. Just because a company produces for multiple channels, does not necessarily imply that transitioning its capacity from one to another is as simple as flipping a switch. The pandemic has exposed this complication for countless items. We took a close look at several grocery product categories and found that three particularly illustrate different degrees of channel-switching difficulty: toilet paper, spaghetti and beer.
Figure 3 -toilet paper sales
Figure 3 illustrates the grocer’s toilet paper sales for a little more than 9-weeks, spanning February 22nd through the 28th of April. A flurry of panic buying followed the World Health Organization COVID-19 “pandemic” declaration on March 11th and President Trump’s enactment of the European travel ban on the same day.
Stockouts quickly afflicted the grocer’s network. Trucks were rushed to stores to restock shelves, and within 36 hours, the distribution center was left bare of many items. Compounding the inventory challenges, within days of the pandemic declaration, governments issued stay-at-home orders that increased consumer demand for a wide variety of grocery items. The grocer’s already depleted distribution network could not rapidly meet demand. As Figure 3 illustrates, toilet paper suppliers had the greatest struggle restocking retailers’ distribution centers the first two weeks following the panic-buying of March 12th. Retail demand swelled for toilet paper and other essential commodities; empty shelves became common. When the distribution center began receiving larger shipments of toilet paper, brisk sales at the supermarkets stripped the supplies shipped to stores (see Table 1 and Figure 3).
Table 1 – Toilet paper sales by supplier
Re-purposing commercial-tissue manufacturing capacity to make consumer-grade toilet paper is an extensive process. K-C is in the process of re-purposing its commercial-tissue mill in Mobile, Alabama. Unfortunately, the process may not be complete for several months. Presently, both G-P and K-C have reallocated supplies and resources from their commercial divisions to increase production at their existing consumer-tissue mills beyond their typical maximum capacity.
Consumer tissue producers have also trimmed product variety to reduce equipment changeovers and minimize idling their mills. All are operating 24 hours per day and seven days per week. G-P claims its mills are operating at 120 percent capacity. The private label supplier manufactures nearly identical toilet paper products for all its retail customers as well as for its restaurant and hotel customers. The primary difference for the tissue manufacturer is the packaging. K-C and the private-label supplier have been able to scale their supply substantially to the grocer. P&G has also increased production, but its extensive customer obligations have restricted the toilet paper it can provide.
The grocer’s procurement team has filled much of the remaining gap between supply and demand by scavenging toilet paper from every reasonable wholesale source. They are procuring toilet paper from foodservice distributors and hotel suppliers. Although no long-term relationship exists between the grocer and G-P, some G-P products are now appearing on the grocer’s shelves.
The only constraint is that the rolls fit on residential toilet paper holders. Forty-one percent more demand has been satisfied in recent weeks than had been accommodated, on average, before the pandemic. Until very recently, a moderate quantity of toilet paper stockouts persisted in haunting the grocer’s network. We may be currently experiencing peak consumer-grade tissue production. K-C will not produce consumer toilet paper from their repurposed Mobile commercial-products mill for several months. Occasional shortages may become less common as loosened social distancing requirements and relaxed stay-at-home orders are enacted. Although both G-P and K-C have reallocated commercial-channel resources to maximize production at their consumer-grade tissue mills, commercial-grade toilet paper production and consumer-grade production are not quickly interchanged.
Unlike toilet paper, the packaging is often the only product difference between the commercial and retail consumer food channels. With restaurant dining options severely diminished because of the pandemic, households are preparing more meals at home. Spaghetti has enjoyed increased abundant popularity (see Figure 4).
Figure 4 – Spaghetti and beer
Spaghetti was also subject to panic buying and stockouts. There was also a brief pause before replenishment. The supply recovery for spaghetti happened more quickly than for toilet paper (see Figure 3). Nevertheless, occasional stockouts continue to occur. Some large-scale retail pasta producers are multi-channel suppliers. With the collapse of the foodservice industry’s demand, pasta suppliers simply require enough retail packaging to provide more spaghetti to supermarkets. Among the grocer’s pasta suppliers, DeCecco, Riviana and their private label supplier produce for the foodservice industry. All have significantly increased the spaghetti they supply (see Table 2). Spaghetti sales by supplier
The pasta producers that only service the retail channel could not appreciably scale up supply. Their single-channel presence left them unable to capitalize on increased consumer demand. Selling to multiple channels can provide substantial flexibility when demand disruptions occur. Unlike the large investment of resources and time required to changeover toilet paper manufacturing, many food products can be easily allocated to either commercial or retail channels.
Multi-channel products delivered directly to stores
Unlike most items at supermarkets, beer, soda and many snack foods are often delivered and stocked at stores by the supplier. For sodas, direct store delivery allows bottlers control of shelf-inventory management and permits the bottler oversight of pricing and promotions. The retailer gains the benefit of essentially outsourcing the management of fast-turning products. In the states where the grocer operates, beer must be delivered and stocked by licensed distributors. Even though beer sales have generally increased during the COVID-19 pandemic, there was never a complete category-wide stockout. Individual beer brands did stock out, but the stockout rate was not appreciably different than before the pandemic. Bud Light, Keystone Light and Michelob Ultra are the grocer’s most popular beer brands (see Table 3). Beer Sales and Stockouts
Similar to beer, soda sales increased by approximately 15 percent during the pandemic; soda has never wholly stocked out. Distributors of beer and soda typically service multiple local channels. Locally-operated multi-channel distributors are resilient to channel-shifts in demand. Beer and soda distributors deliver to the foodservice industry, to vending locations and to retailers. Most of their products are interchangeable and are often identical among channels. Because of their flexibility and proximity to retailers, beer and soda distributors were able to react immediately when retail demand increased and stay-at-home orders closed bars and restricted the operations of restaurants.
Lessons and takeaways from the grocery store industry and the COVID-19 pandemic
Personal protection and sanitizing products are challenging categories, and rapid demand shifts can occur with little warning. In the past, retailers have increased stocks of hand sanitizer for pandemics that did not reach the United States. Hand sanitizer expires after about three years because the alcohol eventually dissolves. Consumer-grade masks and disposable sterile gloves have near infinite shelf-lives. Perhaps sanitizer demand will remain strong once the COVID-19 pandemic passes. We imagine many households will begin maintaining emergency kits of personal protective equipment and hand sanitizer. As a supply chain management profession, we need to develop a solution for shortages of personal protection and sanitizing products. Perhaps a public-private partnership will be required to maintain stockpiles that can be provided to retailers during public health crises.
Across channels, there is plenty of production capacity and inventory for most grocery items. It is disconcerting when dairy farmers fertilize farm fields with milk because demand from the foodservice industry evaporated. Children that were drinking milk at school are presumably drinking milk at home. Since the pandemic began, there have been encouraging instances of supply chain cooperation and baffling occurrences of shortages. Households are now cooking breakfast at home which has increased supermarket demand for eggs.
Every year, Easter causes a drastic spike in egg demand. Grocery managers reported instances where foodservice egg producers shipped eggs to retail egg suppliers and situations where retail egg suppliers simply sent retail packaging to foodservice egg producers. While there were a small number of store stockouts of eggs the week prior to Easter, there were virtually none during the week of April 12-18. During the pandemic, the grocer added eight egg suppliers that have cumulatively provided over 169,000 additional eggs to consumers.
Perplexingly, dry yeast suffers a different story. Home baking has again become popular and demand for retail dry yeast has correspondingly increased. The grocer had a single brand of yeast, Fleishmann’s, and the product had never previously stocked out. However, during the week of April 19-25, less than six percent of the supermarkets had dry yeast available.
Daily, the total number of stores stocked out of dry yeast outnumbered total, network-wide, dry yeast sales. Fleishmann’s and the other two major retail dry yeast brands, Red Star and Bellarise, also manufacture for the foodservice industry. Upon superficial examination, cross-channel production should be sufficient to supply supermarkets during this period of increased demand. Nevertheless, commercial bread production has continued during the pandemic and bread sales in supermarkets have increased. Demand for other products requiring yeast have also increased. Yeast production may have reached full capacity. A modest increase in the number of people eating and working outside the home will, most likely, alleviate shortages of toilet paper and spaghetti.
As the pandemic subsides, grocery retailers must become more vigilantly aware of the scaling capabilities of their suppliers. Having a few producers in each commodity category that also supply the foodservice industry or other commercial markets are critical when demand disruptions occur. Their cross-channel production provides a pooled inventory not available to retail-only producers. As pandemics or other disruptions begin to develop, communication with these producers is essential.
As illustrated with toilet paper and spaghetti, many products can require weeks to months for changeover to the retail consumer channel. Hopefully, we will never experience another public health crisis of COVID-19’s magnitude, however, new challenges for retailers occur every day. When demand disruptions occur, improvements in supply chain management are required to better facilitate the transfer of products across channels. Despite frequent shortages of many frustratingly basic products, supermarket supply chains have proven remarkably resilient during this unexpected pandemic and its enormous disruption to our everyday lives. Our continued relative comfort and sustenance are thanks to the hard work of grocery employees, managers and their suppliers.
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