As I walked through the grocery store checking items off of my list, I kept skipping that one dreaded item that’s always so hard to find these days—paper towels. Would there even be any in stock? Would I be limited to one measly roll? Turning down the aisle to learn my fate, I thought, “Why hasn’t the supply chain caught up yet?” After all, what really goes into making paper towels beyond grinding down a tree or two and shipping it off to the market?
Turns out, a whole lot of factors limit the production and distribution of seemingly basic products. On closer inspection, what seemed like one simple supply chain is actually a vast, tiered system of interlinking chains with various overlapping and pre-planned schedules. While supply chains are indeed changing, these companies are working on 3-year, 5-year, and 10-year timelines to modernize their operations.
First, let’s take a deeper look at how finished products go from raw materials to into your kitchen, and then discuss how the big players are adapting in the short run to stay abreast of this massive disruption.
The diagram shown below gives us a look at the complexity of a generic supply chain (simplified for the purposes of this article).
The different players involved function like the different pieces on a chess board—they each have a specific function to fulfill to create a smooth supply chain, and there are countless options as to how to employ them to best suit each company’s needs.
You can take out any single individual chess piece, and you still have plenty of options to get the job done, but you will have to move a lot of things around and change your strategy. Gregory Healy, Senior Vice President of Supply Chain Solutions and Workforce Analytics at Colliers International, remarks, “A company like Walmart is agile and big enough to make an adjustment when a disruption hits. Their size gives them the leverage to make sure their suppliers are swift enough to accommodate their demands.” If, for example, they have a government-mandated shutdown at a domestic distribution center (D), they can simply shift to shipping directly from supplier (A) to retail locations (E). However, a smaller regional player may not be able to achieve this flexibility, which can lead to product shortages.
Furthermore, Walmart’s flexibility also depends on the ability of its suppliers to operate dynamically based upon shifting consumption patterns—whether that means ramping up production The suppliers, distributors, and retailers must work together to estimate their annual requirements so that they can plan supplier output. These estimates rely on past years’ data as well as the projections from the rest of the chain (ultimately stemming from consumer demand). The companies work within quarterly, annual, and even 5-year timelines to plan production. Some of these players have the ability to rapidly change their output to accommodate COVID-19, but others have limiting factors that inhibit this. Household paper products, for example, come almost exclusively from “virgin pulp,” and getting more would require more trees to be cut from virgin forests all over the world, which creates legal barriers locally and internationally. The machines that turn the pulp into rolls of paper also have a maximum output of just over a mile per minute, which cannot be increased simply because we are using more paper towels at home.
With this understanding of the supply chains involved in getting us our favorite brand of toilet paper, let’s take a look at where we stand. COVID-19 threw a huge wrench into the machine, disrupting the flow of goods and services across nearly the entire economy. Healy notes, “Global supply chains, and even domestic supply have for years been a source for cost cutting. The ‘just in time’ model has pulled back much of the safety inventories in the supply chain. When demand spikes for an item, the shockwaves are felt immediately across the entire network and suppliers have to scramble to adjust to the new sudden demand.” Sticking with our example of paper products, we see a massive shift in demand from commercial to consumer markets. The big issue with this is that the paper goods we use at home are very different from the ones used in restaurants and other public venues—and they each have their own separate supply chain. Virtually all of the tissue and paper towels we use at home comes from virgin wood pulp, giving it the characteristic softness that we expect. Commercial paper goods, on the other hand, often use a percentage of recycled pulp and have lower standards for softness and quality.
The companies involved in getting us these goods and services are not planning to accommodate this drastic, temporary shift in demand. Think of it this way—if you are a victim of a violent robbery, you aren’t thinking about how to cast your vote in November to reduce gun control or gun rights, you are trying to stop the bleeding and get to the nearest hospital safely. Similarly, by the time these businesses could finish scrambling to ramp up home paper good production, the demand could shift again, and they would be left with the same supply problem in reverse.
As a stopgap measure, many companies are subleasing more warehouse space to accommodate excess inventory, especially with items such as clothing and shoes. The closure of retail stores and decreased demand for these goods has resulted in a need for temporary warehousing locations, as reflected by an increase in sublease demand.
According to Thomas Galvin, Senior Research Analyst for the Southern California industrial marketplace at Colliers, sublease activity increased 2.2% from Q1 to finish at 9.6% of total industrial leasing activity in Greater Los Angeles in Q2 2020. Further, sublease availabilities currently represent 10.2% of available industrial space in the region for Q3. However, this increase in activity implies that many companies are trying to sublease space to mitigate their losses and help pay the bills. As we continue to slog through economic uncertainty on a national and international scale, we can expect sublease inventory and activity to grow. Just one month into Q3, the Inland Empire submarket alone has witnessed the execution of over 1.2 million square feet of industrial subleases.
So instead of trying to rapidly adjust to the current disruption in consumption behavior, companies are crunching the numbers to minimize their losses. They are optimizing their production to fit with what their suppliers can accommodate and planning far into a future where the virus is contained and/or controlled, and consumption finds equilibrium again. This raises questions of what that equilibrium will look like and how “sticky” these new consumer behaviors are, but those are best left for economists. In this regard, Healy remarks, “Perhaps the new normal will be a shift from ‘just in time’ to ‘just in case’ and a new model will arise which values the opportunity costs of not having product on hand when spikes in demand require it. These vast global supply chains have developed into a very critical element of every go-to-market strategy. Mitigating the risk in them will be a theme that should resonate with this new paradigm.”
For now, we will have to continue to brave the cleaning goods aisles and hope for the best. With a deeper understanding of the global economic system, perhaps we can better appreciate the simple pleasure of finding what we need at the grocery store—but maybe it’s a good time to invest in a bidet.
About the Authors:
Tommy Gilmore, an associate in Colliers’ Ontario office, brings the same work ethic and drive to industrial brokerage that he developed as an international rugby player. While breaking into the Inland Empire and San Gabriel Valley industrial markets, Tommy has quickly gathered e-commerce and global supply chain expertise and targeted leasing and subleasing opportunities for distribution and final mile facilities. Tommy strives to identify the trends of the present to define and design the market strategies of the future.
Head of Location Strategy Consulting, Gregory Healy, a senior vice president, leads the Supply Chain Solutions team in the U.S. for Occupier Services, as well as Workforce (Labor) Analytics Consulting practice. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.