What Toilet Paper Can Teach Us About Supply Chains
[Music]
hi my name is willie shee
and i teach at the harvard business
school i’m going to talk to you today
about
what we have learned about supply chains
from the global pandemic
what do we mean by a supply chain i mean
that entire
string of producers and logistics
providers
that start all the way from the raw
materials going all the way to the store
now sometimes when i ask people hey do
you know where that product came from
they’ll say oh i got it at amazon or i
got it at walmart or i got at the
grocery store
well that’s your personal supply chain
okay but we want to look farther back
going all the way to the raw materials
and how did that get converted into
products
now i’m going to tell this story
starting with toilet paper
uh well you say well that’s kind of
funny well when i heard
this in early in the pandemic about
first japan and hong kong and then
singapore and australia
people hoarding toilet paper i said well
this is the perfect thing to write a
story about
because you really don’t need to know a
whole lot about toilet paper
to envision what the supply chain would
look like well first of all
it’s a product everybody understands
which is good
and the other thing we know about it is
demand is pretty
constant it’s not like there’s
seasons of the year when you consume
more toilet paper right so stable demand
next thing we know is it’s not very
expensive
okay but it’s actually takes up a lot of
volume
so uh that means this product is not
very tradable
right products that are tradable are
ones that you can make
far away from where they’re consumed you
can ship them around the world
because for the amount of value they
contain
shipping costs are relatively small poor
proportion
but toilet paper not being expensive and
being
kind of bulky to ship what you really
want to do is make it relatively close
to where it’s going to be purchased so
for example most countries are
self-sufficient in toilet paper
china is the world’s largest
manufacturer of toilet paper is also
probably the world’s largest consumer of
toilet paper but they make mostly their
own
in the us we’re the second largest
manufacturer of toilet paper
and most of it is made within our
borders maybe some wood chips will come
from
some place like canada or maybe south
america or maybe some of the nordic
countries
but by and large the factories are close
to major markets
okay well what’s the next thing you
would think
uh not knowing a lot about toilet paper
but knowing that they’re stable demand
you could pretty much guess that
factories are going to be
sized understanding that the demand is
stable
right because i’m not going to put on a
lot of capacity
if there isn’t a season where i have to
make a lot of more
a lot more all of a sudden so why were
we surprised the stores were running out
uh and you know i got a lot of questions
after i wrote this piece about
well why couldn’t factories just crank
up their production
right it shouldn’t be a surprise because
demand is level
and you make your capacity decisions
based on that demand
but then the question is aren’t people
using less of it
because they’re not going to offices
schools hotels
restaurants yes but
okay and this is where the problem is
first of all
it’s not easy to ramp up capacity if
your factory has been
sized for that stable demand and then
you have to transport it right so if you
suddenly have to make
twice as much you need twice as many
trucks even though they may be
not a great distance from the stores you
still need
more the next problem is you have to
make the right stuff
one of the things about people not going
to hotels
and restaurants and schools so
we didn’t need a lot of toilet paper
there but the institutional toilet paper
as it’s referred to
is different from the consumer product
the consumers
tend to prefer multiply they like
softer uh toilet paper so they’ll
you know the manufacturers will have
machines set up
to make that multiply or make it
fluffier
okay and the institutions they basically
want it as cheap as possible so it’s a
very different product
the next problem is you have to get the
right packages
for the right stores imagine if you’re
buying toilet paper at walmart
it’d be kind of strange to have it in
safeway or kroger
or whole foods packaging and then not
only do you have to have the right
product
in the right packaging you have to have
the right roll count
okay maybe a one pack or a four pack or
an eight pack or if people
you saw people uh buying these 36 roll
packs at costco
you have all this different variety so
our real problem was excessive variety
so and we’ve seen this during the
pandemic with other products as well if
you walked in the store
sometimes the store had too much of this
flavor
not enough of this so what’s the cause
of this problem
well the cause is that we as consumers
have come to expect a lot of variety
stores talk about stock keeping units
skus so we talk about how many skus of
toilet paper
do i need to have in the grocery store
and i was
talking to one person who was in the
supply chain who said well you know
there are almost 60 skus that they had
to deal with
uh you know that means 60 different
brands packages packages sizes
roll counts and you know this is a
problem that is actually
very common in the grocery store today i
don’t know if you’ve looked at the
toothpaste shelves lately
or any of the personal care products
where you have not only
a wealth of brands large variety of
different sizes
and a lot of different uh
a lot of different choice well choice is
nice
but it comes with a cost the retailers
have to forecast
which one of these skus are going to
sell how many
how fast then on top of that
as we go back in the supply chain
manufacturers have to forecast
which ones the retailers are going to
order
and guess what the likelihood of
everybody getting all those
forecasts correct is nil
so when we have a crisis like what we’ve
been through
it kind of lowers the water level and
exposes all the rocks
like all the forecasting errors the
difficulties of forecasting correctly
now you could say if everybody in the
country only used
one type of toilet paper in one type of
package
in one brand and it was the same in
hotels and schools as we use it at home
we might not have seen these shortages
because people could quickly reallocate
those supplies
but how much fun would life be like that
okay so now you’ve had your first lesson
on supply chain
and as you can see you really didn’t
need to know a whole lot to make a
sense of it that’s why i wrote this
article on toilet paper
and now people think i’m the world’s
expert on toilet paper