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