As consumers continue to flock to Walmart, Target, supermarket chains and warehouse clubs to clean the shelves of cleaning products, sanitizers and especially toilet paper, University of Sussex Business School scholars said such panic buying is not only disruptive to the normal flow of demand and product replenishment, but will end up clogging the supply chain over the longer term.
But that’s not the only problem facing CPG brands as well as any company selling goods online.
Dr. Sam Roscoe, senior lecturer in operations management, and Constantin Blome, professor of operations management, at the school said the coronavirus pandemic is testing Amazon’s capacity to fulfill orders while the entire e-commerce ecosystem will be saddled by labor shortages — in warehouses and in trucking. There’s also an untested challenge companies are now facing: maintaining the flow of goods as countries across the globe close their borders.
In regard to panic buying, Roscoe said companies within “the fast-moving consumer goods sector [including Amazon] are being especially hard hit by the stockpiling and hoarding trend that is sweeping the U.S., Europe and U.K.”
“The issue with panic buying is the demand amplification, or the bullwhip effect, that occurs in the supply chain when there is a sudden spike in demand at the point of purchase,” Roscoe explained. “When consumers buy 10 rolls of toilet paper, this sends a signal to the distributor [Amazon] to send 10 rolls, and they then add a 10 to 20 percent buffer in case the demand spike happens again. This then amplifies up the chain to the toilet paper manufacturers [Kimberly Clark] who make 12 rolls plus another 10 to 20 percent and on up the chain to the raw material providers of paper and cardboard who end up making 20 rolls.”
“The issue this creates is too much inventory in the pipeline that cannot be sold in two to three months time if/when the panic buying slows down,” he added.
Roscoe noted that while the “bullwhip effect” is commonly understood in the industry, “the topic that is not really being addressed is what I call ‘unspent demand.'”
“What retailers are not able to account for is when consumers go to buy a product, such as toilet paper, and it is not on the shelf,” Roscoe said. “These consumers either do not buy the product and wait, or they go to a competitor’s location. The issue that unspent demand creates is that retailers and manufacturers cannot forecast for this demand, because it is not visible at the point of sale.”
Aside from a lack of visibility, retailers and brands are unable to use historical sales data to inform their supply decisions because the impact of COVID-19 on the supply chain is unprecedented. “Companies may try to build in buffer inventory, but how much?” Roscoe said. “Is it 10 percent, 40 percent, 60 percent? and if they make too much what happens when the panic buying slows down and they are left with excess stock?”
Roscoe said due to unspent demand, “getting the balance between buffer inventory and excess stock is very difficult if not impossible during emergencies.” Then there are other issues companies are now dealing with such as labor shortages.
“Companies such as Amazon may want to cater for the surge in home deliveries during the crisis, but their drivers and warehouse workers do not want to come to work for fear of catching the virus, or because they have to stay home to watch their kids that have been sent home from school,” Roscoe said. “Amazon may look to bring in new third-party contractors to manage the surge in deliveries and to work in the warehouse, but these people take time [weeks and months] to be trained to the Amazon standard.”
Roscoe said border closures add another layer of complexity “as lorries will be stuck at border crossings along with the thousands of people trying to get back home. Companies that are running Lean and Just-In-Time supply chains [such as automotive and aerospace industries] will really struggle as Europe and the U.S. begin to close their doors.”
But he said labor shortages is the most worrisome because it is not industry-specific “and will affect all businesses selling finished goods to consumers.”
Regarding Amazon’s ability to fulfill orders, Blome said Amazon typically “builds up enough capacity for Christmas and can smooth out the effect through offers before Christmas.”
“But that has not been possible in a fast-moving pandemic breakout and capacity has to be built up,” Blome said. “It is the equivalent of waking a parent in the middle of the night and asking them to have all Christmas presents ready for the extended family in the morning.”
With border closures, Blome described it as a “completely new challenge for supply chains” and noted that the current system “isn’t made up for it and it requires time and investment to solve.”
“The supply chains that are best suited for these kinds of challenges are actually covert supply chains [like human trafficking, drugs, smuggling] as they are very agile, but long-distance supply chains typically try to optimize efficiency,” Blome said. “Planning is possible: buffer building, diversification, fast reaction capabilities. It is possible to mitigate, but it requires time. Many assets are involved and it is not possible to get rid of assets in a restricted market.”