Vital supplies: produce locally and stock up

Most people who have taken an introductory supply chain course will have played the “beer game”, which is a game out of MIT (Massachusetts Institute of Technology) designed to teach the “bullwhip effect”. Intended to simulate a beer supply chain, it illustrates how small fluctuations in demand at retail level become large fluctuations further up the supply chain. The bullwhip effect is exacerbated by long lead times, order batching and shortage gaming. We have certainly seen shortages in long lead-time items that are largely imported, such as rice.

Anecdotally, New Zealand has had fewer toilet paper shortages than Australia and the US. While I’d like to believe that this is because we are more sensible, it probably also has to do with the structure of our supply chains. First, our toilet paper supply chain is short and the Dunedin toilet paper manufacturer has been running overtime shifts for a while. Second, our supply chains are less efficient. This is not because of poor management but because small volumes mean they have to be; they have to carry extra safety stock (on a percentage basis) for just-in-case, even though demand for toilet paper is usually very predictable.

But in the US, for such a high volume, predictable, low-value item, supply chains can run very lean and it doesn’t take much of an uptick in demand to drain them completely. Then, once there are stories of shortages, people start to panic buy, and that makes it all worse.

The bullwhip effect will mean that our toilet paper (and similar) manufacturers are coping with an even higher set of orders than if we just look at customer demand. But once everyone has stocked up, it also means they are going to face a very significant downswing. Toilet paper doesn’t expire, and we’re not really using much more of it than usual, so orders will start to collapse some time fairly soon, I would guess. I hope they are saving their current additional revenues for that rainy day.

The rainy days are here already for our local non-essentials manufacturers. The good news for our economy is that many of our manufacturers supply farming or health needs, so are allowed to keep operating. I was also pleased to see the Government give a waiver for the Tiwai Point aluminium smelter since a close-down would probably mean never reopening because all the pots (where aluminium is melted) would need to be replaced after the shutdown. While many are critical of the smelter, a close-down should be deliberate, not an unintended consequence.

However, there are myriad small to large manufacturers who have had to shut their shop floors. My hope is, if this shutdown goes as planned, they will be among the first allowed to reopen. After all, we won’t be getting a return of our tourism dollars for a long, long time.

Once we are through this crisis and the Government has a chance to take stock, there are a few lessons I think they should keep in mind. First, there is the importance of reserves. New Zealand has a significant stock of pandemic medical supplies and while these were mostly designed around the flu, at least we have them. There have been stories in the past of hand wringing over large quantities of items expiring in reserve and needing to be discarded. But that should just be considered a cost of holding reserves. Similarly, the Government should look at expanding our fuel reserves and other just-in-case items. Just having agreements with overseas suppliers to provide us with stock in a crisis is probably not safe enough.

Second is the importance of local production. I was very relieved to see that New Zealand has a local mask manufacturer, and then there is Fisher and Paykel Healthcare which is one of the gems of our local manufacturing scene. We produce more than enough food for our population, but do we produce everything that is critical should our borders remain closed? I hope the Government will take this opportunity to do a serious stocktake and invest where it is needed.