Many media outlets have blamed hoarders for the toilet paper shortages across the country and I bet, if you polled random people, they would all blame hoarders as well, but hoarders are not the main cause of this shortage. Yes, there are some hoarders, but they make up a very small percentage of the population. A more detailed look at the shortage reveals that it is instead caused by a confluence of factors: just-in-time supply chains and predictable sales, consumers using more toilet paper at home, and consumers stocking up on slightly more than before.
Let’s start with the supply chain and the sales around toilet paper. Toilet paper sales, along with the sales of other household staples, are some of the easiest to predict. That’s because the demand, in normal times, remain very stable. Each individual will use around the same toilet paper as they used the previous year regardless of their income. If you suddenly win the lottery, you might buy some nice clothes, a nice car, or some other luxury items, but you definitely will not be buying more toilet paper. The same applies to other household items such as soap, shampoo, etc. Because toilet paper is a basic necessity that is easy to produce and is relatively impervious to the status games that we play with other consumer goods, it is a low margin product. As a result, companies mainly compete by getting the cost of production as low as possible. Combined this with toilet paper’s predictable sales, and companies are incentivized to utilize just-in-time supply chains, a practice popularized and mastered by Toyota. The basic idea is to ensure that the various components that go into making a product, and the product itself, arrive “just in time”. Doing so allows companies to cut down on warehousing costs to store inventory and ensures that employees are utilized more efficiently. In normal times, this is great. Toilet paper gets bought at a constant rate and supplied at a constant rate. But, the system no longer has any slack, and when there’s a demand spike, companies are not well-positioned to meet it.
Which brings us to toilet paper usage. In ordinary times, most people spend around half their waking day either in school or at work, so when they have to go to the bathroom, they use the toilet paper there. Now, everybody is quarantined and stuck at home, so instead of using the toilet paper at their company, they are now using more of their own. “Okay,” you say, “so they use more toilet paper at home but less at work, so there’s no net change and therefore no problem, right?” Wrong. The toilet paper rolls at work and in public places are the massive rolls that do not fit onto your toilet paper rack. In fact, companies tend to specialize in one or the other (how fitting for our age of specialization), and apparently it is a difficult process to switch from producing industrial-sized rolls to consumer-friendly rolls. As a result, the companies that produce toilet paper for businesses are overloaded with product while the companies that produce toilet paper for consumers are left with little supply, which is only exacerbated by our next problem.
Most consumers are not hoarders, but most people are also not stupid. They see the news broadcasts warning them of toilet paper shortages, and though those media outlets misdiagnose the disease, they are right on its symptoms. So, when people see that stores are running out of toilet paper, their natural response is to buy some more. People also understand that they should try to limit their contact with the outside world, and so they stock up, more than usual, on supplies. In normal times, people that usually only keep a pack of six rolls at home would now buy an extra pack or two, and people that normally keep a Costco-sized pack at home now decide to instead keep two. It’s not the small minority buying massive amounts of toilet paper, but the masses buying slightly more than usual. Combined this with the additional usage of consumer-sized toilet paper and the lack of slack caused by just-in-time supply chains, and you have a toilet paper shortage.
Are you unconvinced? Change the formula a little and see how it can be used to explain why we are seeing shortages in other basic items. Take hand sanitizer and soap. There will always people who buy massive amounts of those items in times of crises to either hoard or make a quick buck, but I’d bet the shortage there is caused by most people using more soap and hand sanitizer than before. Okay, maybe that’s a bad example since the media blames hoarders for shortages there as well. How about the shortage in yeast and board games instead? I doubt anybody is hoarding any of those items. Instead, we want to entertain ourselves while stuck at home and so consumption patterns have changed on a massive scale. Or, if you want an example of the same product for different clients not being easily changed, take this example from Marginal Revolution about food intended for restaurants not being reallocated to supermarkets. Companies that were used to a stable, easy-to-predict sales flows, are now facing major supply chain shocks. And, at the root of the problem, we find not hoarders, but the changes in consumption habits brought about by the orders to stay at home.