Hoarding and Supply Chain
TweetYoda Accounting Office extends its deepest condolences to all those affected by earthquake, especially those who have lost loved ones.
After the quake, many people rushed to hoard up goods at stores even though they were not directly affected by the quake. They were afraid the goods would have disappeared due to the quake.
Mr. Furuya Bunta commented this issue referring to Supply Chain management in his Twitter (in Japanese). He was a former CFO at a central core company at Coca-Cola supply chain management project in Japan a few years ago.
Mr. Furuya kindly agreed to copy his tweets on our website.
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Consumers have an ultimate power to control the supply chain. That is what I realized when I saw the hoarding issue and the saving power supply after the quake.
Consumers explicitly give stress on suppliers to increase production when they hoard stocks up, or they can save power supply enough to avoid the outage eventually.
Literally consumers are the king.
You may think the suppliers make amount of money when they increase their productions to fulfill the short stock after hoarding. However the reality is different.
They have to increase overtimes, run inefficient equipment, and transport materials far away, which increases their costs.
Such costs should be absorbed if the sales also increase. However, the hoarding does not increase the consumption at the end.
The hoarded goods are piled up as “stock” at consumers backyard. The consumers themselves may know soon.
They may save buying goods when they realize they piled up their stocks. By when?
Until the exceeded stocks = hoarded stocks will go out. Therefore, the production increase now is just a cannibalization of the future production. The total sales will be same at the end.
Total sales are same and costs increase more. This is the reason suppliers may fail after hoarding. Other headache is that the suppliers who increase productions for hoarding may have to dispose or discount their stock excess in the future.
Many suppliers calculate the necessary stock level and decide how many they have to produce or purchase. This is the cause of their headache, because they have to increase production or purchase more than they are requested when the demands hike.
When they catch up the demand increasing the production, the purchase decreases. Stocks at stores and warehouses slow down and the obsolete risk increases.
The suppliers may have to discount, or dispose after the UBD (used-before-dates) expire.
Hoarding is not the benefit for anyone else as a total social welfare. But the consumers are the king. It is not easy for suppliers to change their mind set.
We have one solution to change their mind.
Increase prices when the hoarding happens. It may be considered as preying consumers weakness, but it is more practical if you consider the total social cost.
Imagine you are in a long cue to wait for filling gas when the gas is short. At your turn, you may want to fill up full if the price is as usual. But what if the price is +30%? You may save and just fill as you need for the present.
This is how to control hoarding even though the gas station does not limit your maximum charge.
As discussed above, the hoarding may increase the total costs. To absorb the cost, the price increase is necessary.
The price increase is the way to show consumers how much the total social costs are and let them decide.
SCM is more than we see.