But those are local events. Supply quickly recovers. The COVID-19 pandemic has been different for a number of reasons. Fear of supply chains failing was widespread, and somehow toilet paper came to the forefront of those fears. Panic buyers caused shortages, which caused more panic buyers. Factories show no signs of shutting down. The real cause of this shortage is psychological.
Or is it?
Toilet paper is an interesting commodity. Its light-and-fluffy nature makes shipping a relatively large part of its costs, meaning to maximize profits, firms locate production near demand centers, shipping the denser pulp rather than the finished rolls[2]. Decentralized production means fewer bottlenecks in production that could be blocked by a coronavirus outbreak. That’s especially true in forestry-rich North America. And while demand has skyrocketed, the actual price of toilet paper and the raw materials used to make it have remained low, due to decreased demand in other paper industries, such as consumer/industrial packaging[3].
The real bottleneck in production is the factories themselves. Toilet paper has an extremely predictable demand, in almost direct proportion to population. Manufacturers have exploited that fact by building out extremely lean operations. Unfortunately, no excess fat on the books or factory floor means nothing to fall back on during a demand surge[2], and current demand exceeds last year’s by 102%[1][4].
In response, manufacturers are ramping up production[5]. New “startup” paper mills are opening[6]. But, is that a good idea?
People don’t actually need more toilet paper, right?. When they realize there isn’t a shortage, they’ll stop buying and begin to use up their pantry supply. Demand will fall below normal levels, and total demand across 2020 will have remained the same. Firms that ramped up production will scale back. Startup mills will fail, taking personal savings with them. Perhaps what we are looking at is a classic bullwhip effect[2][4][7], where differential information flows lead to inefficiencies and amplified fluctuations of demand further up supply lines (source 7 is worth the read if you’re interested).
Maybe not. After a month, people have stopped hoarding toilet paper, yet shelves are still empty. What gives?
As vitriol towards “panic-buyers” subsides, the real explanation is coming out. It is quite possible that very little of the shortage was caused by panic-buying. Instead, we owe the shortage to the obvious, gigantic shift in the economy that’s been staring us all in the face the past few weeks: quarantine[1][8]. People are “going” at home, not at work, so demand for consumer toilet paper is--quite correctly--up by over 40%[8], while commercial demand is down. The same is true for foods like bananas, no longer needed in school lunches but desired in the home instead[8]. The problem is that school bananas and workplace toilet paper don’t match their household counterparts. The bananas are smaller, and the toilet paper is more coarse and recycled. Commercial toilet paper is literally made somewhere else entirely, too big for household bathrooms, and not packaged for in-store inventory systems. It’s quite hard to shift production from one to the other, especially in a well-tuned industry like toilet paper, where factories work round-the-clock with no excess under normal conditions. This has thrown supply chains out of whack, and it’s why shelves are empty despite stores limiting toilet paper purchases per-customer.
Unfortunately, as outlined above, firms that do shift from commercial to consumer production will inevitably be hit again when quarantine ends, so many will choose to bide their time, maintaining the shortage we see right now. Though there may not be a shortage of materials, labor, or industrial capacity[8], the future of TP remains quite unclear. Conserve your TP.
[1] https://outline.com/P8mR7h (original: https://www.washingtonpost.com/national/coronavirus-toilet-paper-shortage-panic/2020/04/07/1fd30e92-75b5-11ea-87da-77a8136c1a6d_story.html)
[2] https://www.forbes.com/sites/willyshih/2020/03/04/covid-19-shortage-gaming-and-the-toilet-paper-supply-chain/#4a6a35412345
[3] https://www.bloomberg.com/news/articles/2020-03-19/toilet-paper-makers-saw-virus-coming-and-built-up-u-s-supplies
[4] https://www.forbes.com/sites/amyfeldman/2020/03/12/how-kochs-georgia-pacific-one-of-countrys-biggest-toilet-paper-makers-is-responding-to-coronavirus-panic-buying/#414d1af0797b
[5] https://www.bloomberg.com/news/articles/2020-03-19/toilet-paper-makers-saw-virus-coming-and-built-up-u-s-supplies
[6] https://www.npr.org/2020/03/31/823820779/toilet-paper-startup-ramps-up-and-rolls-in-wake-of-coronavirus-pandemic
[7] https://archive.is/uYTyd (original: https://sloanreview.mit.edu/article/the-bullwhip-effect-in-supply-chains/)
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