This probably isn’t the best use of my time right now,  but maybe there’s a teaching moment here.

In the face of the COVID19 pandemic, folks in the US (and apparently most developed nations) have gone on a toilet paper buying spree.  One result besides the appearance of empty shelves, has been a lot nasty commentary in social media and news media attacking people for alleged “hoarding” of TP. The comments have come complete with  all the cheap puns and childish humor talk of toilet paper invites. (I will probably fall prey to that too!)

In store after store, the shelves often appear empty and denuded of toilet paper. This is a rather sudden and unexpected development for most people accustomed to a first-world life where a fundamental fact of like is assumed to be: there will always be toilet paper.  People and pundits have proclaimed a shortage of toilet paper brought on by irrational “idiots”. Social judgements and pejoratives have been flying since.

Even economists are not exempt. Justin Wolfers has likened the toilet paper shortage to a classic run-on-the-bank (couldn’t resist the pun, eh, Justin?) which might be individually rational but becomes a systemic failure. Justin considered the possible need for a national strategic toilet paper reserve.

I’ve read several pyschologists speculate on the “meaning” and “underlying psychological needs” driving the “hoarding” of toilet paper. I’ve read that it’s a controllable first-world comfort when people are faced with a sudden, scary uncertainty. Maybe there’s a tiny bit of truth in that, but it’s not enough to IMO to move that much TP. Other psychologists have speculated that it’s herd behavior. Some people bought up some more TP than normal, so they did too. Soon the shelves were bare and panic has ensued. Again, maybe a little sliver of truth, but not enough.

I’m going to weigh in on the topic, too. I think I have a bit more experience with toilet paper than the average person and more so than the average economist. It’s not because of my diet. Not only am I an economist and things like “supply” and “demand” are my basic tools, but early in my career I was the business planner/strategist for a very large industrial distributor/wholesaler. A distributor that distributed – you guessed it – toilet paper.  A lot of it. We didn’t supply much to the retail channel. We supplied businesses, factories, restaurants, hospitals, schools, and hotels.  Thanks to us, the nether regions of millions of people from GM factories to Florida resorts were kept clean and hygienic. I learned a lot about the economics of toilet paper back then. I’m sure it’s changed some since, given the better inventory management tools available today, but the essence of analysis still holds.

I think what we’ve seen has been a fairly rational response, at least initially, and I don’t see any great toilet paper crisis of 2020.  Yes, there has been some individual hoarding behavior, but probably a lot less than people think. What I see is a sudden shock to one of the most incredibly stable supply chains around. You see, there really isn’t any toilet paper inventory as you think of it.  Let me explain some of the economics of getting dried squares of wood pulp from a mill to your butt without discomfort.

TP-nomics: More than you ever wanted to know

Consumption drives the demand toilet paper.  Even in a crisis, there is not really any speculative value to toilet paper, nor is there any value to just owning a bunch of it. There is no ongoing use value either. Use two squares, and it’s done. It’s not like paintings which give ongoing value just for having them. It’s not a good store of value like cash, or gold, or bonds. It’s not a capital asset like a house, furniture, or a car.  It’s a single use value.  True, the perceived use value is high (at least in non-bidet using developed countries), but it’s very utilitarian. It doesn’t even bring social status, despite all the Charmin advertising.

I can tell you this from having analyzed and modeled the consumption and demand for toilet paper all those many years ago. It’s stable. Rock stable. Easy to forecast. If you know how many butts you’re dealing with, you can predict the consumption. That’s it. (and no, local cuisine or tastes don’t matter). People x days = TP needed.

The second fact of TP economics is that there’s a giant distributional mismatch. It’s produced in vast quantities in a very small number of places (mills) but consumed in a mind-boggling number of very specific locations. There are two in my house alone. When the need for it arises, the inventory MUST be in each location. When I want TP in the downstairs bath, I’m going to be really annoyed if it’s not there and I have to go source it from the upstairs bath or the basement pantry. I’ll be even more annoyed and greatly discomfited if I have to go to the store before I can use the toilet. Know what I mean?

In contrast, toilet paper is produced in a small number of places called mills in very, very large quantities on very, very large machines. So while we might indeed know how much TP is used each day – and that’s pretty much how much TP will be produced each day – we still have a problem. We produce just enough each day, but it’s in giant quantities in a few places when what we really want is a few squares in billions of places.

The third fact about TP economics, is that despite whatever its use value is, the dollar value per cubic foot of space it occupies is very low. It’s bulky. That means for a store or distributor it takes up a LOT of shelf space but doesn’t generate that much sales revenue or profit margin compared to other higher-value, smaller items.  At home, you only keep a roll or three in the bathroom. Nobody builds a bathroom cabinet to accommodate the giant Costco carton. For the store, the only way to survive those economics is to turn-over the inventory rapidly. That means that relative to demand, there’s actually very little in inventory. The large bulk makes it look plentiful to the consumer, but it’s not really. It’s simply being restocked, re-ordered, and replenished faster than just about any item in the store.

So how does our vast national TP distribution system work? It’s a network of very high turnover inventory locations, each one serving to “break bulk” in the distribution from mill to your butt.  The mill produces today and puts it on trucks or rail cars immediately and ships it out.  As soon as the truck/trains can get to the distribution centers (like the ones my ex-employer owned), it’s unloaded. A train car load is split up and becomes stacks of pallets or stacks of cases but they don’t sit still. That inventory is turned over very fast -meaning the cartons are loaded onto trucks and delivered to stores, factories, hospitals, and smaller wholesalers. Even back in my day 40 years ago, we emptied and shipped out that whole rail car in less than week. I wouldn’t be surprised if these days, turnover in some distribution centers could be measured in hours.

There really isn’t any toilet paper buffer inventory anywhere. As a nation, we haven’t really had a reserve of TP to buffer fluctuations in demand or supply – because we don’t need it.  Forests keep making wood fiber at about the same rate every day. People keep wiping their butts at the same rate everyday. What appears to be inventory is only temporary spots of relocated stuff that we turnover as fast as a possible. We have just-in-time production.

To recap:
Made in mill by train load –> whse in cases/pallets –.>store in multipacks –> home by carton–> bathroom cabinet by the extra 1-2 rolls –>dispenser roll

As soon as the minimum viable quantity runs out at each stage, we replenish. It’s a TP flow, not a TP inventory.  In reality, the slowest moving inventory is at the household.  Most households tend to buy one to a few weeks worth of TP at a time. They don’t want to waste space storing more. Assuming they don’t wait till they totally run out, that means they may have, on average, let’s say 10 days worth of TP on hand. When it gets low, they buy more. The grocery or big box where they shop knows that thousands of customers are doing the same predictable thing and the store only stocks enough for maybe 2-3 days worth of sales in inventory, maybe even less, knowing they’ll get more shipments.  The shelves always look nicely stocked with TP, but it’s all fresh, new stuff – unlike that jar of pickles you bought that was actually produced a year ago and been sitting in the store ever since.

So What Happened?

Everything is fine, until the Centers for Disease Control or other public health authorities try to gently prod people to “prepare” for possible isolation and quarantine because of COVID19.  It’s rational and it’s needed. The point of the isolation, social distancing, and quarantines is to minimize social contact. That means being prepared to go awhile without going to the store.  A necessary implication is that everybody’s household supply of TP is inadequate. If they typically run a 10 day supply on average, they need to temporarily increase purchases to actually create what they haven’t had before: a buffer stock.  So people started buying more. Rationally buying more.

Buying a buffer stock is only a temporary increase in demand.  Once you have your buffer, you go back to buying just enough to match usage, keeping the buffer stock in place. You might think that having households add some buffer stock shouldn’t be a big deal, but it was – because that’s how fast TP inventory turns over.

Initially the guidance late last February was for households most at risk to prepare (buy buffer stock) and two weeks was suggested.  But the pandemic has spread faster than most people expected. We now know from Italy’s experience and China’s that extremely broad based and possibly longer  isolation  – meaning minimizing trips to store – is needed. So it’s been an unprecedented and unexpected bump up in purchasing.

But it’s temporary. It  may take weeks for the production chain to catch up, but  purchasing will slow down too. Mills will ratchet up production some.  Nobody is going to truly hoard TP. Contrary to Justin Wolfers’ analysis, TP isn’t like cash. People can keep hoarding cash without limit. TP has some physical limits. Remember it’s high bulk/low value. Where would they put it all?

The dynamics on some other products is a little different. But even with something like hand sanitizer, where the shortages reflect a large sudden increase in consumption and demand, I expect part of the sudden shortage is because we generally have a high-turnover product distribution system. In hand sanitizer, eliminating the shortages depends largely on the ability of manufacturers to switch production facilities away from other products and into more sanitizer production. I expect that to be feasible, but I don’t really know that industry well enough to predict how soon it will restore equilibrium.

There are products in an apparent irrational short supply due to hoarding/panic behavior. I attribute a lot of that to Americans’ fascination with zombie apocalypse movies.

But toilet paper?  It’s a temporary shock to a stable supply chain.

SO relax. Wash your hands and stop being so nasty and judgemental of people.   If you’re going to criticize people, try criticizing them for standing so close in line or not covering their cough.