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Toilet Paper Shortage Illustrates Economic Theory

Four graphs display the supply of toilet paper over time

A diagram of the bullwhip effect. - Photo courtesy of Col. Barry Cobb

LEXINGTON, Va., April 23, 2020颅鈥擡ach spring, Col. Barry Cobb teaches supply chain management鈥攈ow products go from raw materials into the hands of consumers鈥攊n his operations management class. This year, the toilet paper shortage engendered by the coronavirus pandemic provided him with a real-world example of a supply chain issue that鈥檚 affected nearly every American.

Specifically, the sudden surge in demand for toilet paper鈥攁 product that normally doesn鈥檛 see spikes in demand鈥攈as created what鈥檚 called a bullwhip effect.

鈥淭he bullwhip effect occurs when a change in consumer demand that is either a small or temporary change is amplified as orders move back through the supply chain to the manufacturer,鈥 explained Cobb, who holds the Roberts Free Enterprise Chair in the economics and business department.

It takes time, of course, to work out the kinks鈥攁nd because toilet paper, like most consumer staples, is produced with a lean supply chain, there are not millions of extra rolls just sitting in warehouses. And because the demand for toilet paper will eventually return to a normal level as people realize they aren鈥檛 going to be quarantined forever, there鈥檚 little incentive for companies to build new toilet paper factories.

鈥淔or [manufacturers] to add extra capacity wouldn鈥檛 be advantageous,鈥 said Cobb.

Bigger retailers, though, have the advantage when it comes to working through a tangled supply chain, as they have more leveraging power. 鈥淪am鈥檚 Club was re-stocked before a lot of retailers because of Walmart network鈥檚 ability to shift shipments to different routes,鈥 Cobb wrote in an email.

Cadets, meanwhile, have gotten to learn about supply chains from both a theoretical and practical standpoint.

鈥淏eing in operations management during the coronavirus pandemic takes applied learning to a whole new level,鈥 wrote Owen Carney 鈥20 in an email. 鈥淚nstead of simply working through fictional examples about supply chain issues, we get to see how those issues present themselves in the real world.鈥

Carney has also learned what needs to happen once the bullwhip effect takes hold. 鈥淭o reverse the bullwhip effect, we learn that supply chains must increase the availability of information, improve forecast accuracy, and eliminate order-batching, which is when retailers accumulate too many or too few products without considering the demand for them,鈥 he wrote.

Jonathan Hutson 鈥21 noted that in a crisis, normal business operations can be turned upside down so quickly that companies have little time to react. 鈥淥perations management has shown that the way stores normally operate is based on data from 鈥榥ormal鈥 circumstances,鈥 he wrote in an email. 鈥淲hen a pandemic strikes, this data has to be adjusted to account for the surges in demand.鈥

Thanks to the pandemic, Cobb has been able to take economics, a subject often dependent on theoretical examples, and find a multitude of real-world examples that illustrate the theory.

鈥淎ny concept you are trying to teach is taught better when you relate it to a real-world example,鈥 he commented. He added that nearly all of the cadets are seeing supply chain disruptions for the first time in their lives鈥攁nd in economics, where games and game theory play a central role, this spring has brought a jump from the theoretical to the practical.

鈥淣ow, [cadets are] seeing the game right in front of them,鈥 said Cobb.

- By Mary Price

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