We don't blame commuters for overcrowded trains...

Anyone who has travelled to central London during rush hour will know what an unpleasant experience it can be. No seats, often late, and some of the highest ticket prices in the world. Yet when was the last time you blamed commuters for the fact that the trains are overcrowded, late and expensive? Yet we are we using pejorative terms like ‘panic buying’ and vilifying people for wanting to make sure they can feed themselves and their families. From a supply chain perspective, the behaviour we are seeing is actually an almost direct copy of what goes on in industry.

Hedging is used by firms to reduce risk. If you guarantee the supply of a product at a particular price at an agreed time in the future through a contract, then you are hedging. Airlines do it to mitigate the risk of wild swings in fuel prices since fuel accounts for around a third of their running costs. As consumers we can’t access the futures market but instead forward buy our products as a way of reducing risk.

Industries that carry inventory carry more than they need all the time when they make purchasing decisions – it’s called safety stock. If I use 20 per week of a product and order in batches of 100, knowing that my order will arrive two weeks after I place it, then I know that I need to send the order when I have 40 items left in stock. Simple maths. But not without risk – what happens if the delivery arrives a couple of days late? To mitigate this risk companies will add in a safety margin and reorder when (say) their inventory gets to 50. That way even if the delivery is a couple of days late, it won’t disrupt the operation. How much safety stock do you need? Well that depends on how reliable the supplier is and how critical the product is. Most supply chains are now very reliable and thus very ‘lean’ – there is very little safety stock. 

What industry also does is to reduce batch size. Ordering 100 at a time is more costly – it ties up working capital, requires storage space and personnel to count it in and count it out. So better to order as you need it – just in time. Daily deliveries of the product above reduces your batch size to 4, and your working capital by 96%. Leaner, quicker, cheaper.

If you’re a parent with hungry mouths to feed then the last thing you want is to be caught short. Since our experience suggests that the food supply chain is reliable, we carry little inventory and instead replenish as we need it. I live in Amsterdam and cycle to the supermarket (I have no car). So my batch size is small since if it doesn’t fit on my bike I can’t get it home. Plus apartments in Amsterdam are tiny (me and my kids live in a space of 67m2) so there is little storage space - this again reduces reduces batch size, meaning I shop little and often - 2 or 3 times a week.

During Corona, there is news of a disruption in supply. What do we do? Same as industry - go buy some safety stock of this critical item. Game theory says we need to do it before anyone else. And our ‘anticipated regret’ if we do miss out drives us to go as quickly as we can.

The problem comes is that the rest of the supply chain is lean and shortages happen quickly. Let me give you an example. When I was a teenager I worked in a supermarket stacking shelves. The process was to visually inspect the shelves, write down where the gaps were (I generally did biscuits), go find some in the store room then fill up. The store room inventory was the responsibility of the supermarket manager. Run the clock forwards 35 years and there are no store rooms out back. Point-of-sale information means that a computer system knows on a second by second basis what items are selling. A signal is sent to the DC (distribution centre) to load more goods and the deliveries – which might be several times a day to a small busy city-centre store, are put straight on the shelves since there is no store room. What that means is that there is very little safety stock – small batches, rapid and regular deliveries and stable demand means that this additional cost has been designed out the system.

During Corona, we end up with a self-reinforcing problem; pictures of empty shelves on supermarkets drive people to buy more which leads to empty shelves. The lean supply chain simply can’t keep up. The Prime Minister comes on TV telling people not to panic – which clearly raises the level of fear.

I went out and bought about 10 days worth of extra food. I am not ashamed to admit it. Actually, I did it about 4 weeks before anyone else did. I saw it coming since I am a professor of operations and supply chain management and know supply chain theory better than most. I rationalised it to myself that if it wasn’t used during the crisis it would be afterwards, and anything that I didn’t want I would give to a food bank.

But I felt no sense of panic. I was not panic buying. I made a rational decision based on the information I had in front of me. The uncertainty of future supply was a risk that needed mitigating. For a small capital outlay I could secure the supply of a needed commodity by creating inventory. So I did.

The UK government did exactly the same thing before Brexit. They worked with pharmaceutical companies to ensure they carried additional safety stock to mitigate the risk of drug shortages. It makes perfect sense to do so. Over a period of time an additional four weeks of critical medicines were purchased and stored at great cost to the tax payer in secure (often refrigerated) depots across the country.

So to return to the train load of commuters, they are not to blame for overcrowding. And consumers should not be criticised for creating a buffer of additional inventory – particularly not by a government who is applying exactly the same strategy to deal with the uncertainty caused by Brexit. But if the problem isn’t consumer behaviour, then who’s to blame, and what’s the solution.

Not only do governments choose to carry additional medicines to offset the risk of shortages in uncertain times, many also carry 90 days of oil. History says that supply can be disrupted and it is a critical resource. Governments have not had the same thought process when it comes to food. Yet increasingly food is imported from far away places via extended supply chains. Yet live in a world that is becoming more volatile due to global warming, protectionism, popularism and globalisation. I think it’s time we looked at the systemic risk that we are faced with. Corona has taught us that our supply chains lack robustness and the fine line between lean and anorexic has been crossed.