Hardly a day goes by that we don’t hear of another shortage: we all remember how hard it was to find toilet paper, the recent baby formula shortage turned into a supply chain crisis, and there’s now a shortage of tampons.
But that’s not all.
Contrast dyes for medical imaging scans, Sriracha hot sauces, and helium are some of the most mysterious I’ve heard of recently. So how should we think about what happens to supply chains? Although it seems that a wide range of assets are suffering in one way or another, we can classify the problems into a few categories:
Sudden changes in demand patterns are difficult to track
The pandemic has brought about big changes in demand patterns. More sweatpants, less dressy clothes. More major appliance purchases and more home cooking, less dining out. And these patterns are now reversing, leading to yet another round of demand shifts. The problem is that many products have long lead times – the time it takes from when a company puts the plans in place to make a product until it rolls out of the factory and ships. at the stores.
This time frame can be a year or more for footwear or consumer durables – perhaps longer for some items and less for others. It takes time to react because you need a production line in place, raw materials ordered and delivered and workers available; you may not just be able to add more capacity quickly. The problem is the time lag between fast changes but slow responses. The scale of the disruption was also unprecedented, implying a significant transfer of capacity at all levels. Meanwhile, consumers waited.
In some cases, when demand dropped, capacity was shut down
Sometimes we just have less manufacturing capacity for a product than a few years ago. If you operated an oil refinery during the pandemic, you saw demand for gasoline fall by 14% and diesel by 8% in 2020. Five national refineries, with a combined capacity of more than 800,000 barrels per day, have been permanently closed as a result. This caused domestic capacity to drop to a level below what we had in 2016. Globally, 1.6 million barrels per day of capacity was shut down with only 850,000 new capacity coming online, the first global decline in 30 years according to the International Energy Agency.
The last major new national refinery was Marathon in Garyville, Louisiana, which was commissioned in 1977. With the energy transition looming, investors are likely reluctant to build new capacity. So when everyone finally decides to get to work again or take a driving vacation, we have capacity shortfalls and prices go up. This is even before the cut in Russian crude oil supplies. And there’s an added complication: refineries are designed to process certain types of crude oil, depending on factors such as their weight, the amount of sulfur they contain, and so on. The capacity is therefore not easily interchangeable. And it impacts just about everything, as trucks and trails use diesel fuel to move goods.
In other cases, demand stayed the same or increased, but capacity still exited the system
This is an important part of the story behind the baby formula shortage. Abbott Nutrition’s plant in Sturgis, Michigan, accounted for a good portion of national capacity. If you take that much production capacity offline for four months, you will inevitably have shortages. We saw the same problem when some meatpacking plants closed at the start of the pandemic.
This is also the story of helium. In mid-January, a leak at the Cliffside helium enrichment plant in Texas caused a four-month outage, sidelining a source that usually produces 14.2 million cubic meters per year. In addition, a fire at a new natural gas processing plant operated by Gazprom in the Russian Far East led to the loss of an additional 49 million cubic meters of production. On top of that, Qatar closed two of its three liquefied natural gas (LNG) plants (which extract helium as a by-product offline) earlier this year for scheduled maintenance. No wonder there is a shortage. Earlier in my career, I actually worked with a lot of liquid helium to cool superconducting magnets, so I appreciate how essential this particular product is.
Then there’s hoarding or “just in case” inventory.
If you’re worried that something you really need every day is out of stock, you can buy some more, just in case. That was the toilet paper story – Americans bought 700% more toilet paper than usual in March 2020. But they certainly didn’t use 700% more toilet paper. Who knows how many people actually stocked up to this point, but no manufacturer could keep up with this surge in demand. Although not as visible, it was just as bad in a number of other industries. For example, it seems that many manufacturers were buying twice as many microchips as they needed.
So what is the history of tampons?
I had to research the history of the tampons as I know absolutely nothing about this particular supply chain. So I called Wendy Tate, who is a professor of supply chain management at the University of Tennessee. She told me there was a factory in the southeastern United States that was having trouble recruiting enough people for its third shift. That’s a third of their capacity. Okay, like me, she wonders why demand has increased for the hygiene product which, like toilet paper, should be relatively stable and predictable. “There is no excuse for variability in demand, and yet there are shortages,” she told me. I asked her if she thought the hoarding was increasing. “I have no idea, but there has been a significant increase in demand for these feminine care products over the past few months,” she replied.
And that is the dilemma at the heart of this problem. If I “cooperate” with other shoppers and don’t stock up, maybe there will be enough of an essential product for everyone. But if I’m afraid I’ll run out, maybe I’ll buy some more. If everyone buys a little more, stores start to run out as manufacturers rush to respond. In the meantime, when other shoppers learn they better stock up, everyone runs out and buys whatever they can find. Eventually everyone has so much stocked in their cupboards that they stop buying and then demand falls off a cliff. It happened in toilet paper, maybe it will happen here.
Now, about that Sriracha hot sauce linked to continued chilli shortages and drought – it’s probably still in another bucket.
Willy C.Shih is the Robert and Jane Cizik Professor of Management Practices at Harvard Business School. His research focuses on global manufacturing and supply chains. Follow him on Twitter: @WillyShih_atHBS