In considering the range of influences that the COVID-19 pandemic has had on retail supply chains, paper towels provide an instructive, comprehensive example of just how business practices, drives toward efficiency, and shifting retailer power created a perfect storm—without any paper towels left (literally or figuratively) to mop up the mess.
Let’s start with the idea of lean manufacturing, a popular theory that suggests that supply chains should only hold as much inventory as they need in the immediate future. Also referred to as “just-in-time” approaches, these business practices seek to make the supply chain as efficient as possible. If the manufacturer only makes as much as the retailer orders, which is only as much as consumers buy that week, then there is no excess inventory clogging up the system and requiring expensive storage facilities. Those expenses are especially high for bulky items like paper towels. If a retailer is faced with a glut of them, it has to struggle to find places to stick the huge packages.
Lean operations also make logistics are more efficient, because all the members of the supply chain can plan their capacity nearly perfectly, knowing exactly how much they will be shipping and receiving. A pallet of paper towels takes up a lot of room in the truck, but if it is only there when needed, the supply chain can plan accordingly and also ensure that all the shipping containers are perfectly full.
These practices, generally attributed to engineers at Toyota, have grown so popular that “lean” operations came to represent nearly an end goal unto themselves. Investors complained about any excess, and powerful retailers such as Walmart demanded precise inventory controls. If a shipment of products from a manufacturer arrived either too late or too early, it punished that supplier with monetary penalties. For the consumer good manufacturers that make paper towels, among a broad range of other consumer products that tend to appear on Walmart’s shelves, those demands were integral to their extensive, intricate agreements with the retail giant. They readily accepted them to ensure that their products would be available, with optimal shelf placements, to the millions of consumers browsing Walmart’s aisles.
But then came the pandemic. Perhaps the biggest challenge of lean operations is an unexpected increase in demand. Without excess inventory as a cushion, the supply chain cannot fulfill consumers’ demands if they suddenly and unexpectedly increase—such as when the coronavirus hit. Consumers’ demands for various household products skyrocketed. They wanted sanitizing wipes to protect against transmission of COVID-19, and if those were out of stock (which they frequently were), consumers instead sought out disinfectant spray and paper towels. Stores quickly upped their orders for all these consumer goods, but the shelves emptied more rapidly than they could get inventory to restock them.
Without any excess stock, even as retailers kept demanding more and bigger shipments, the manufacturers did not have anything to ship. In addition, their lean strategy extended to their factory operations too, such that they did not have the basic capability to produce any more. One Georgia-Pacific plant, already operating at nearly full capacity, decided to focus all its production on a single product line, rather than the various options it had rolled out previously, to reduce the time required to switch the machines’ settings. This move increased its output by about 25 percent—but demand had jumped by more than 100 percent.
Most plants already operated multiple shifts; they could not simply run for longer hours. Furthermore, the machinery involved in producing paper towels is expensive and massive, so it was not as if the consumer products suppliers could simply build new factories. Expansion efforts would have required several years of planning and building. Furthermore, manufacturers have expressed hesitation about the wisdom of committing to a massive growth effort, without any assurance that demand will remain at its current high levels. It is not as if they can just ship excess paper towels to overseas markets, because (as noted) the shipping costs for these bulky products are too high.
According to scholars familiar with the theory behind lean operations, the situation shows that the retail supply chain failed to implement all of its nuances and elements. That is, the theory for just-in-time manufacturing emphasizes the need for backup stock, held in inexpensive locations, just in case of emergency. But it appears that for paper towels, the members of the supply chain forgot about that caution in their persistent drive for ever-increasing efficiency. Skipping this step might be part of human nature too; with apologies to Monty Python, no one expects a pandemic.
But a pandemic, or epidemic, or natural disaster, is nearly always apt to happen. And people need household supplies to deal with such events, suggesting a key lesson to be learned by supply chains for paper towels, as well as cleaning products, food items, and so on. Lean is good. Flexible is even better.
Discussion Questions:
- Define the concepts of lean operations and just-in-time manufacturing.
- What features of modern supply chains have led to paper towel shortages?
- How have consumer product goods companies tried to increase output?
Source: Sharon Terlep and Annie Gasparro, “Why Are There Still Not Enough Paper Towels?” The Wall Street Journal, August 21, 2020