We all know how panic buying works. Fearing that your local Tesco will close the door before you get enough toilet paper to pass the lock, you and others have bought a lot of things and the shelves are empty.
But what impact does this have on toilet paper manufacturers?
In most cases, panic buying will cause retailers to desperately need inventory. In desperation, they tend to over-order future supplies. Although the demand for toilet paper-as a function of the number of times people go to the bathroom multiplied by them-ended up almost unchanged.
This is known as the bullwhip effect in the trade world. The idea is simple: relatively small and usually short-term changes in consumer demand can cause profound changes in supplier pressure.
Hyun Shin, head of research at the Bank for International Settlements, believes how this will affect the global economy. Discussed Earlier today.
Shin used the chart below to make a point that we think few people have made in the past few years: the world’s manufacturers have not only done a good job of matching pre-pandemic capabilities, they have also improved their capabilities.
For Shin, the fact that semiconductor supplies are higher than pre-pandemic levels may indicate that the company is ordering too much inventory due to the bullwhip effect:
Taken as a whole, these signs indicate strong demand, surpassing the supply capacity that is growing but not growing fast enough. However, the key question is to what extent this strong demand can be attributed to the bullwhip effect. Once the supply chain problems begin to ease, to what extent will the behavioral responses that lead to the bottleneck work in reverse to clear the backlog? Based on the answers, we may find that supply bottlenecks may be resolved faster than currently feared, as if they lasted longer than originally expected.
Given that most of the inflation we are seeing now occurs in used cars and other markets, these markets are directly affected by the shortage of chips. If Shin is right, then prices may fall earlier than people think because of automakers. Can increase the inventory of semiconductors and produce more new cars.
Do we buy this argument? In theory, yes. In practice, the trajectory of the pandemic is still too uncertain to truly understand to what extent the demand for certain products has radically changed. If lockdowns remain the norm in winter, we may continue to spend more on durable consumer goods than before the pandemic. In turn, this means that the world will need more chips, which are used in everything from toys to computers and cars.
Generally, you would expect an increase in supply capacity to meet this demand. But as far as chips are concerned, foundries are usually already operating 24/7. And build additional capabilities, According to McKinsey, It may take up to 18 months. In this case, if the expenditure pattern has returned to the normal level before the pandemic by the time the factory goes online, the company may not want to invest more in increasing production capacity.
Looking forward to more topics on chip supply in the coming days. For now, we will reserve to judge whether we will see the supply chain return to its original state soon.