We all know how panic buying works. Terrified that your local Tesco is about to shut its doors before you can secure enough toilet paper to get through lockdown, you and others buy reams of the stuff, leaving shelves empty.
But what about the impact this has on the toilet roll manufacturers?
In most instances, panic buying results in retailers becoming desperate for stock. In their desperation, they then tend to over-order future supplies. Even though demand for toilet paper is — as a function of people multiplied by trips to the bathroom — ultimately little changed.
This, in trade circles, is known as the bullwhip effect. The idea is simple: relatively small, and often short-term, changes in consumer demand can lead to profound shifts in the pressure placed on suppliers.
How this impacts the global economy is something that Hyun Shin, the Bank for International Settlements’ head of research, talked about earlier today.
Shin used the chart below to make a point that we think has been made too seldom over the past couple of years: the world’s makers have done a remarkable job of not only matching pre-pandemic capacity, but raising it.
For Shin, this rise over pre-pandemic levels of semiconductor supply may signal that firms are, in line with the bullwhip effect, ordering too much stock:
When taken as a whole, the signs point to strong demand that has outpaced supply capacity that is growing, but not growing fast enough. However, the key question is how much of this stronger demand can be attributed to the bullwhip effect. To what extent will the behavioural responses that gave rise to bottlenecks work in reverse to clear up backlogs once supply chain problems begin to ease? Depending on the answer, we may find that supply bottlenecks may be resolved faster than currently feared, just as they have persisted longer than initially expected.
Given that much of the inflation we’re seeing right now is in markets for things like used cars, which are directly affected by chip shortages, if Shin is right, then prices could fall sooner than people think, as automakers can build up stocks of semiconductors and produce more new vehicles.
Do we buy this argument? In theory, yes. In practice, the trajectory of the pandemic remains too uncertain to really know to what degree demand for certain products has fundamentally changed. If lockdowns remain the norm during the winter months, it’s plausible that we’ll carry on spending more on consumer durables than we did pre-pandemic. That, in turn, would mean that the world would require more chips, which are used in everything from toys to computers and cars.
Usually you’d expect supply capacity to rise to meet this demand. But in the case of chips, foundries were already operating 24/7 as a rule. And building additional capacity, according to McKinsey, can take up to 18 months. In such a scenario, firms might not want to invest more in boosting capacity if, by the time the plants come online, spending patterns have returned to their pre-pandemic norms.
Expect more on the theme of chips supplies in the coming days. For now, we’re going to reserve judgment on whether or not we’re about to see supply chains whip back into shape any time soon.
Source: Economy - ft.com
