Introduction
The COVID-19 pandemic has hurt many businesses worldwide due to the breakdowns of the weakest links in supply chains. Although it appears that the pandemic caused the disruption, when examining each disrupted supply chain carefully, it instead exposed the excessive risk of each supply chain. In this article, we look at three examples of disruptions in the supply chains of boba (the tapioca pearls that go into bubble tea), milk, and toilet paper. For each example, we provide details of the disruption while identifying the cause and underlying risk of the supply chain. Then, we discuss the different strategies to mitigate risk to make the supply chain more resilient against future disruptions.
Boba
What Happened?
When it comes to bubble tea, not having boba is unimaginable. Customers leave when they find out that boba is out of stock.[1] Among various ingredients in bubble tea, the risk associated with boba procurement is significantly higher than others because of how boba shops source their product. Most boba shops rely heavily on a single supplier to achieve economies of scale that reduce cost, but that also increases risk. Other aggravating factors magnify the risk. One is that businesses in America order 99 percent of their boba from Asia, mainly from Taiwan, which causes long lead times that diminishes the flexibility to respond to changes.[2] Before the pandemic, the lead time for receiving boba from Asia was already two weeks. Border crossing and the need to change transportation nodes, from sea to ground transportation, also increase risk as the delivery can be delayed due to border or port congestion issues.
During the pandemic, the perfect storm of Taiwan suffering from its worst drought in 56 years and the severe congestion at the Los Angeles ports due to the overwhelming number of shipments from Asia (see Figure 1) caused a significant shortage of boba in the US.[3] As a result, boba businesses had no idea when their next shipment would be delivered. The oversight of taking an exceeding amount of risk to procure boba finally got exposed and resulted in many boba shops struggling to stay afloat.[4]
Figure 1: Percentage of Shipments Experiencing a Terminal Dwell Time of Over 5 Days
Data Source: Pacific Merchant Shipping Association
What Can Be Done?
Not all bubble tea businesses struggled with the boba shortage. Boba Direct was one of the few that kept sufficient safety stock, saving the business from shutting down. Olivia Yoon, Vice President of Sales and Global Marketing at Boba Direct, says that the company had received calls from tea shops across America searching for supplies, but even though they had excess stock, they wanted to preserve it.[5]
As the above example demonstrates, among various risk mitigation strategies for boba supply, adding more safety stocks makes the most sense to mitigate risk for multiple reasons. First, boba has a long shelf-life. Adding more inventory becomes a risk if the product has a short shelf-life or high obsolescence rates. Instead, adding redundant suppliers would be a better approach for these products with a short shelf-life. For smaller bubble tea shops, adding more suppliers or capacity at nearby locations would probably not be feasible due to the high cost. Second, boba is relatively cheap. Thus, the inventory holding cost is quite low. Firms can consider using the costly air transportation mode for emergencies rather than carrying more inventory for luxurious goods because this could be more cost-efficient. However, this is not a feasible option for suppliers of cheaper goods due to the high transportation cost. Lastly, the risk associated with boba is significantly greater than other ingredients. Even if a supply is durable and cheap, there is no need to add safety stock if they are readily available such as other toppings or plastic cups. This example shows that there is not one risk mitigation strategy that would work well for all kinds of suppliers, for it depends on the product and the business environment.
Milk
What Happened?
While the boba industry witnessed its suppliers struggle to deliver their goods, the dairy suppliers saw two of its major buyers, restaurants and schools, dry up overnight. Due to a government mandate, all restaurants and schools were closed to prevent the spread of COVID-19. Immediately, many dairy farmers and suppliers had no choice but to dump millions of pounds of milk as milk has a very short shelf-life. Rob Johnson, policy director for the New Hampshire Farm Bureau, stated that 7 percent of all milk produced by the largest dairy cooperative in the country was dumped in a week in early April 2020 due to the pandemic.[6] Also, Dairy Farmers of America estimated that they dumped 3.7 million gallons of milk every day.[7] As a result, the price of milk dropped to $12 per 100 pounds (see Figure 2). According to Shawn Jasper, commissioner of the New Hampshire Department of Agriculture, many dairy farmers need $19 per 100 pounds to break even.[8] Although dairy farmers had ideas to try and save themselves from the economic ruin as they were absorbing most of the shock to the supply chain, for many of them, it was too late.
Figure 2: Milk Price Disparity in 2020 Compared to Other Years
Data Source: US Department of Agriculture
On the other hand, it is well-known that there was a considerable shortage of all kinds of groceries, including dairy products, in supermarkets for the first few weeks when the pandemic broke out. The pandemic exposed the weaknesses of the dairy supply chain, which resulted in one side throwing out milk while the other side was experiencing a shortage of milk.
So, what caused the crisis of one side having overflows of milk while the other side experienced shortages? Although one could easily blame the pandemic, we find that the many dairy suppliers took great risks when taking a closer look. One significant risk was that dairy suppliers did not build flexibility in the supply chain or have any contingency plans to respond to unexpected disruptions. Unfortunately, searching for options after an emergency is rarely effective, as evidenced by the case of the dairy supply chain. The government stepped in and helped with the CARES Act, which included $9.5 billion in emergency response funds to support farmers directly. However, eventually, they had to provide $16 billion in direct support, bought $3 billion in fresh produce, dairy, and distributed meat to food banks and other nonprofit organizations.[9] While this helps desperate suppliers, it would have been more effective and cost-efficient if contingency plans were to be established before the pandemic. The other risk for the dairy suppliers was that they had a small set of buyers. Even though schools and restaurants seem like stable and reliable buyers, and it was nearly impossible to predict the outbreak of COVID-19, the risk was still consistently high by not having a diversified portfolio of buyers.
What Can Be Done?
Developing flexibility in the supply chain should be the priority to mitigate the buyer risk. Flexibility can be added in various manners. One way is through channel and manufacturing flexibility. Some dairy suppliers thrived during the pandemic by selling through both food supply and retail channels. They also had the manufacturing flexibility to shift production more towards the retail channels while subtracting from the food supply channels. The struggling dairy suppliers were the ones supplying solely through the food supply channels having rigid food supply contracts. Expanding to an online platform is also becoming a popular option for channel flexibility. From a survey that McKinsey conducted of more than 50 U.S. dairy CEOs, 67 percent answered that they are investing in e-commerce to sell directly to customers.[10]
Creating opportunities and options through product diversification is another excellent way to strengthen the system. By developing more products, it makes it easier to expand the number of buyers. McMaster-Carr Supply Company, an Illinois-based maintenance-materials supplier that produces over 500,000 products, enjoys much less risk by distributing to tons of customers rather than a few large consumers, which was possible due to the wide range of products.[11] For dairy products, product diversification could even lead to increased shelf-life. For example, ultra-pasteurized milk, a process of heating milk for a minimum of two seconds at a minimum of 280℉, used for creams and specialty dairy products, increases the shelf-life to 30-90 days.[12] Also, investment in packaging could also lead to increased shelf-life. The McKinsey survey shows that 29 percent of executives are already investing in this technology. If dairy suppliers could utilize these technologies whenever experiencing a surplus, this could significantly reduce risk. Developing bow-tie diagrams, which help build action plans to reduce the likelihood and consequences of possible troubles (see Figure 3), and contingency plans are valuable tools to help mitigate various risks. It is important to note that these risk mitigation approaches do not only apply to dairy suppliers but could benefit all kinds of suppliers against disruptions.
Figure 3: Example of a Bow Tie Diagram
Toilet Paper
What Happened?
With COVID-19 on the rise, customers feared the future and started panic buying toilet paper while panic selling stocks. As a result, America witnessed a significant shortage of toilet paper. On March 12, toilet paper sales ballooned to 734 percent compared with the same day the previous year, and by March 23, toilet paper was out of stock in 70 percent of U.S. grocery stores, including Amazon and other online sellers.[13] The fear of running out of toilet paper seemed to spread faster than the virus.
In a fiercely competitive market with slim profit margins, cost-saving is key to each toilet paper manufacturer. This approach caused all manufacturers to keep inventory levels at the minimum to save on the holding costs by employing “just-in-time” manufacturing. Thus, the dramatic surge in demand coupled with deficient inventory levels kept across the entire supply caused the historical levels of toilet paper shortage during the pandemic.
Consequently, toilet paper companies started to produce at 99.8 percent capacity for an extended amount of time.[14] Roughly a year later, Kimberly-Clark reports that they are left with excessive volumes of toilet paper and struggling to sell to retail stores as they are also facing the same issue.[15] Demand declined significantly as customers now had piles of toilet paper stocked at home. Thus, many toilet paper manufacturers, including Kimberly-Clark, became victims of the “bullwhip effect,” a well-known phenomenon of distortion in demand becoming greater, moving up the supply chain causing tremendous inefficiencies (see Figure 4).
Figure 4: Bullwhip Effect
What Can Be Done?
We have learned from the boba shortage that adding safety stock can make the supply chain more resilient against potential disruptions among suppliers. This approach would also be effective against rapid surges in demand for toilet papers to mitigate risk. However, this would lead to increased cost, which would be detrimental in an industry where cost minimization is essential. So, unfortunately, there is not much a manufacturer can do against panic buying as demand surges rapidly and keeping excessive inventory is not an option. Retailers can help by limiting customers’ purchases per visit, but due to rationing typically being implemented too late in a crisis, they are rarely effective.
Although panic buying itself is tough to control, businesses can still mitigate the bullwhip effect caused by panic buying. The bullwhip effect, triggered by the distortion in demand, can be caused by various reasons. It is essential to understand each cause of the bullwhip effect, as the most effective way to counteract it is to offset the source. Price discounts, for instance, can cause the bullwhip effect as customers “forward buy,” which creates large swings in demand. Using “everyday low price” approaches would eliminate the root cause.[16] Regarding panic buying, although it is nearly impossible to eliminate the source, there are still practical principles to follow to mitigate the bullwhip effect. It is crucial to make demand data visible to avoid multiple forecast updates within the supply chain. If the manufacturer spots the demand slowing down in real-time, they can then quickly react accordingly. Another important principle is not to overreact when there is a surge in demand. The bullwhip effect has caused numerous examples of overproduction and unnecessary capacity investments.
Conclusion
COVID-19 turned out to be the ultimate stress test for supply chains. We learned the importance of supply chain risk management and that each supply chain encounters different types of risk from the three various supply chain disruptions that we investigated. Although the magnitude of COVID-19 was catastrophic, it does not necessarily mean that the pandemic exposed all vulnerabilities of each supply chain. There could be other minor incidents that reveal other hidden weaknesses in the supply chain. Thus, it is crucial to first identify all risk factors by inspecting all parts of the supply chain thoroughly. Once a business develops a risk profile, exploring and implementing effective yet cost-efficient approaches to counteract each risk will make supply chains resilient against future crises.
