An information problem not a supply problem

“I think it’s not even a message, it is the reality, really we in Australia we are very lucky because we have a world class supply chain we have world class producers of food and produce and we really have world class manufacturers of grocery items.

‘’The vast majority of grocery and food we sell in Australia is actually made and produced here. We just don’t have a supply issue, there is more than enough, more than enough, food and groceries to go around. Australia produces enough food to feed 75 million people and have a very vibrant export market.’’

Tom Daunt – CEO of Aldi Australia

The challenge that consumers face is a quantity assurance problem (my RMIT colleague Vijay Mohan came up with that term).  They can’t be sure that when they go to the supermarket to buy widgets that the supermarket will be stocking widgets.  Under normal conditions the supermarkets perform a valuable warehousing function – they store goods until consumers need them for more or less immediate consumption.  This is a more or less egalitarian function – in a capitalist economy the stores are normally full of stuff that anyone can buy more or less at any time. During abnormal times, the supermarkets cannot perform that function because consumers do not trust that the goods they want to buy will be at the store (or any store) when they go to buy. At this point it pays consumers to perform that warehousing function themselves.

Economists are familiar with this story – it is a version of the Diamond–Dybvig bank-run model. Everyone withdraws their money from the bank because they think everyone else will withdraw their money.

Historically there are two broad categories of solution to this form of market failure:

  • black markets and price increases.
  • rationing.

Right now the supermarkets are rationing – and yesterday we saw the government threaten hoarders.  We also see black markets springing up.

This, however, is profoundly an information and trust problem. Right now a lot of information and trust is lost in supply chains and there are good reasons why that has happened. Going forward, however, to build a resilient economy we are going to have to re-incorporate a lot of that lost information and rebuild trust in our economic institutions and processes.

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52 Responses to An information problem not a supply problem

  1. stackja

    MSM don’t like trust.
    MSM want chaos.

  2. Doomlord:
    You used a term that sends most of us to sleep – “Going Forward.”
    zzz snore snuffle zzz braaapp!

  3. Sinclair Davidson

    Well – you feel asleep at the end. Makes a change for me.

  4. Terry

    Yes, our “world class supply chain” includes government regulation (Council “roools” in this case) that restrict delivery times, even in a “crisis”.

    When “emergency measures” were introduced, government/s everywhere fell over themselves to restrict, ban and limit but somehow forgot to reduce, remove or relax the “roools” that might help alleviate the ensuing panic buying.

  5. Pyrmonter

    This, however, is profoundly an information and trust problem

    Agreed. And it isn’t just supermarkets who have lost trust. If ever there was a need for ‘effective’ government, it has been in circumstances such as these, yet all the evidence (especially the early evidence, I think things are improving slightly) is that governments, federal and state, coalition and ALP, have been caught flat-footed, and shown up as lightweight, living down to their worst reputations.

    I’m a liberal, not an anarchist. We need governments to do some things: defence, the control of communicable disease are two things high up the list where, generally, private and unco-ordinated action is unlikely to be as effective as centralized co-ordinated action. I distrust government and those who would take it up; but there needs to be a body in which we can have some confidence. To date, there is scant evidence we have one.

    A note on terminology. Reselling ‘hoarded’ (aribtraged) goods is not a ‘black market’ activity. We haven’t yet been reduced to the level of bartering products for cigarettes or needing to evade price controls. If things don’t come under control soon, I fear we may not be able to say that for much longer.

  6. Pyrmonter

    @ Terry

    The delivery issue is a real one. In NSW it has been temporarily resolved. But I wouldn’t suggest permanent deregulation: the planning rules have substituted for private planning by agreement, and control what is, in ordinary times a true ‘nuisance’. Remove the regulation and you’ll end up with private contractual arrangemnts that are even more inflexible.

  7. Trvis T.Jones

    Politicians who lost their minds over failed doomsday global warming, blowing up a good energy system to supposedly weather changing windmills, are now telling us to use common sense and are in charge of the economic recovery?
    Good luck with that.

  8. rebuild trust in our economic institutions and processes

    ROR

  9. Sinclair Davidson

    Reselling ‘hoarded’ (aribtraged) goods is not a ‘black market’ activity.

    It’s a black market – but I approve of such things.

  10. Mark M

    The same incompetent fool politicians who forced the failed UN global warming scare on us are now demanding we use common sense whilst in charge of the economic recovery.
    It can’t end well.

  11. John Comnenus

    This is not an informational problem on supply assurance. This is the result of Chaos Theory.

    It is a classic example of unchecked positive feedback loop or a self fulfilling prophecy. Initially some people panic brought toilet paper because they were worried that they might run out. This created half full shelves of toilet paper spurring others to panic buy, in effect creating exactly the circumstances the initial panic buyers were worried about. Seeing toilet paper disappear created panic buying of everything else. This is an informational non linear positive feedback loop creating exactly the circumstances people initially feared. The disproportionate, or non linear, outcomes of information feedback loops are a feature of chaos theory.

    But why have supermarket chains been so slow to respond. Because they can’t. Another concept of Chaos Theory is that the more tightly coupled a system, the more vulnerable it is to massive disruption. A tightly coupled system is one that is very efficient and has little redundancy and few buffers built into it. Think about a train, once one carriage derails all the other carriages are affected. Our Just In Time supply chains are extremely efficient. But they have minimal redundancy, in the form of excess stocks of groceries sitting in a warehouse just in case, and they have few buffers – they don’t have lots of middlemen sitting between them and their store. Hence a slight change can be magnified into a huge change through a positive feedback loop which is what panic buying is.

    It is useless for Government to say don’t panic. Shutting all your borders for the first time in anyone’s life time smacks of panic – it is unprecedented and never happened before. You can’t tell people everything is normal when we are seeing measures no one has seen in their lifetimes.

    The best outcome is to create a buffer in the system and break the just in time supply chain through temporary managed distribution. This can be done through online shopping where the big chains can effectively ensure people have access to enough to stop people panicking. It is also better for social distancing etc. the non major retailers should apply strict limits to say no more than 15 items except for pensioners. Such measures would immediately slow the buying and allow us to gradually return to normal as the stockholding situation improves with respect to toilet paper, meat and sanitary products.

  12. Tim Neilson

    ‘’The vast majority of grocery and food we sell in Australia is actually made and produced here. We just don’t have a supply issue, there is more than enough, more than enough, food and groceries to go around. Australia produces enough food to feed 75 million people and have a very vibrant export market.’’

    That’s all very well, but what if we face a nationwide shortage of “lucky cat” statuettes with moving arms?

  13. Porter

    Right now a lot of information and trust is lost in supply chains and there are good reasons why that has happened.

    And they are …?

  14. lotocoti

    Definitely a self fulfilling prophecy.
    Collapse the supply chain worrying about a collapsing supply chain.

  15. calli

    The vast majority of grocery and food we sell in Australia is actually made and produced here.

    Honest question.

    Where is the packaging made for these goods?

  16. Terry

    @Pyrmonter
    ‘The delivery issue is a real one’ Yes. Probably the biggest, given that’s what people see, when determining whether or not people start “panic purchasing”.

    ‘In NSW it has been temporarily resolved’ Yes. I saw Gladys, via a media conference, tell delivery companies to ‘not worry about the restrictions’. Great. Correct answer; but why was this not done, proactively, weeks ago? These restrictions should have been instinctively relaxed as soon as the shelves started depleting and delivery companies proactively contacted to ensure they knew they could deliver whenever and as often as they needed to, to help alleviate undersupply and any ensuing panic.

    ‘But I wouldn’t suggest permanent deregulation:’ Nor I. The “roools” probably work okay enough, under normal circumstances. These times are not normal.
    I much prefer a rapid relaxation of regs and “roools” to help “fix” the supply problem than queues, rationing and threats of prosecution for “hoarding”; all well-meaning, I am sure, but mostly counter-productive if not draconian and antithetical to our society.

  17. Old School Conservative

    The argument against on-line shopping rests on the shortage of delivery trucks.
    That could easily be overcome by recruiting some of the gazillion people who are working from home on reduced pay or out of work. Using their own vehicles they could quadruple the amount of deliveries to their local area very quickly.
    Even the army could be brought in with trucks and manpower to restock supermarkets overnight.
    Let everyone know what is being done and the information fear barrier would be torn down.

  18. Pyrmonter

    @ Sinc

    What is ‘black’ about the market? It’s lawful.

  19. Pyrmonter

    Qualify that – the suggestion of hoarding of salbutamol (ventolin – the near magical, cheap asthma reliever) would require breaches of the pharmacists’ monopoly. Not a monopoly I’d normally support, though here hoarding is hard to justify and has the potential to deprive someone of life-saving medication.

  20. Sinclair Davidson

    What is ‘black’ about the market? It’s lawful.

    Doubt it.

  21. Old School Conservative

    Terry, you made me think of Donald Horne:

    Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people’s ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.

  22. Sinclair Davidson

    And they are …?

    Transaction costs – the cost of transmitting information along with the good as it moves down a supply chain is very high. Until recently there was no demand for that information by the final consumer either. So the information has been discarded.

  23. Pyrmonter

    @ Sinc – that website is wrong. You don’t need an ABN unless you reach the GST thresholds. They’re available on request anyway.

  24. Sean

    In some ways increasing the price of toilet paper to $5 a roll would solve the problem of shortages.

    What marginal utility to an individual does 200 x $5 rolls in a garage provide? It will quickly make people more rational, why waste so much of a weekly wage on a potentially useless item.

    Super profits would go to the supplier who could invest in more production or it might bring in new entrants or potentially allow them to bid for a higher grade of input material and move production away from paper etc. and increase output further

  25. Sean

    The argument against on-line shopping rests on the shortage of delivery trucks.
    That could easily be overcome by recruiting some of the gazillion people who are working from home on reduced pay or out of work. Using their own vehicles they could quadruple the amount of deliveries to their local area very quickly.

    There must be some idle resources from the tourism industry that could fill the void also. All those tour busses and vans out of action.

  26. Mater

    Initially some people panic brought toilet paper because they were worried that they might run out. This created half full shelves of toilet paper spurring others to panic buy, in effect creating exactly the circumstances the initial panic buyers were worried about.

    I agree, but with a small modification.
    Speak to the checkout personnel in rural communities and you’ll find that the locusts came before the panic buyers. It was the raiders which kicked off the panic buying, certainly up this way.

    If it were otherwise, the initial panic buying would have been seen across a large number of staples, but it wasn’t. Initially it was limited to toilet paper. The shoppers which immediately followed ‘the raid’ wondered what the problem was with the TP supply? They acted accordingly, after all, how often are shelves of only one particular item completely empty?

    “There must be a problem in the supply system of this particular product. I can do without for now (I’ve still got a couple on the holder), but I’ll get double when I see it next, just in case!”

    As the raids continued ‘regularly’ and the shelves remained empty for most shoppers, post the first hour of trading, suspicions rose.

    The panic built from there and as the ‘raiders’ broadened their product selection, the panic went exponential.

    People wondered what was so special about toilet paper. The answer is: nothing. It was just the first target…for a yet to be discovered reason.

    I will hypothesis that if there hadn’t been empty shelves, no panic would have emerged. Who emptied the shelves first, and kept it that way for an extended period?

  27. Pyrmonter

    @ Sean

    Apparently airline personnel are being re-deployed overseas as health workers.Makes some sense, but I can’t see the regulators – labour or health – allowing it here until it’s too late.

  28. Rohan

    calli

    Honest question.

    Where is the packaging made for these goods?

    For the vast majority (cardboard, extruded film for bags, cans etc) is Local. The quality of packaging from China is generally aweful.

  29. Rohan

    Old School Conservative
    #3365493, posted on March 20, 2020 at 12:40 pm

    Even the army could be brought in with trucks and manpower to restock supermarkets overnight.
    Let everyone know what is being done and the information fear barrier would be torn down.

    Cool. Soldiers can pop a few caps in hoarders and black marketeers derierre while they’re at it. (NADT, just a flesh wound will do.)

  30. calli

    Thank you, Rohan.

    My thinking was that to be truly self-sufficient, all aspects of the chain had to be local.

  31. Iampeter

    Right now a lot of information and trust is lost in supply chains and there are good reasons why that has happened.

    It happened because the government has created a panic, so I wouldn’t characterize it as “good reasons.”

    Going forward, however, to build a resilient economy we are going to have to re-incorporate a lot of that lost information and rebuild trust in our economic institutions and processes.

    How are we going to do that with everything shut down?
    Toilet paper shortage is just the beginning.
    Wait until the internet goes down because everyone is trying to do business over residential infrastructure.
    I hope I’m wrong but I’d give it a week or two before thinking there’s necessarily any “going forward” from what’s happening right now.

    The only way this ends is if the Prime Minister addresses the nation and advises that most people should be going about their business as normal. He can even play some soundbites from knowledgeable medical professionals trying to say the same thing.

    Of course then he’ll have a lot of explaining to do so this isn’t likely to happen.

  32. John A

    John Comnenus #3365460, posted on March 20, 2020 at 12:07 pm

    This is not an informational problem on supply assurance. This is the result of Chaos Theory.

    Shorthand for
    “This is a result which can be explained via the propositions of Chaos Theory”

    since Theories don’t cause anything… [chuckle]

  33. Sean

    Wait until the internet goes down because everyone is trying to do business over residential infrastructure.

    The ISPs can slow down the connection to houses so there might be a technological solution for that.

  34. nfw

    Yep, more gummint involvement in the free market, that always helps. Ah, the “progressives” long for the days of queues at shops a la Soviet Union.

    As for Dutton’s bluster: 1. What laws are against hoarding?; 2. Why is it a Commonwealth Gummint of Aussie concern anyway, it’s a state matter and he knows it?; and 3. The useless AFP doesn’t prosecute anybody, it arrests and hands over to the Director of Public Prosecutions. Typical stupid politician making noise for the low IQ who watch too many American TV shows and think it’s real life.

  35. Fisky

    Going forward, however, to build a resilient economy we are going to have to re-incorporate a lot of that lost information and rebuild trust in our economic institutions and processes.

    But libertarians also want to allow Chinese state-backed companies to buy out Australia’s agriculture and infrastructure. They literally do not believe we should have a country at all.

  36. Sinclair Davidson

    It happened because the government has created a panic, so I wouldn’t characterize it as “good reasons.”

    Information loss over supply chains has always occurred – long before the current panic.

  37. Sinclair Davidson

    But libertarians also want to allow Chinese state-backed companies to buy out Australia’s agriculture and infrastructure. They literally do not believe we should have a country at all.

    You make that sound like its a bad thing. I’ve on-sold your soul too.

  38. nfw

    I see Coles has taken to printing its Refunds & Returns conditions on its tax invoices, ie till receipts. No doubt many of the low IQ have suddenly realised their perishables have started doing just that and thought they could return, say, defrosted out of date chickens to Coles for a refund. I wouldn’t put that past the morons who thought the world was going to end and now realise they have burnt through all their money which they need for “the club”, its alcohol and the pokies. The next “problem” we are going to see is waste, waste and more waste as the Henny Penny morons throw “out of date” and “past best by date” (mostly a crock anyway) into their bins because they didn’t have the freezer space for it and they need to keep their beer cold instead.

  39. Beachcomber

    If the establishment and media hysteria, and government regulation and control of prices were removed; the problem could be solved by retailers making windfall profits.
    A free market would make it more likely that goods would go to those who need them most. It would help solve a social problem

  40. Pyrmonter

    @ nfw

    Am I alone in having been ignorant that Coles and Woolworths would accept returns for reasons not required by the Competition Law?

    I understand returning, say, food that is off when bought, but their whole retail model is to sell pre-packaged goods that contain exactly what it says on the box. It had never occurred to me to seek to return my strawberry milk if I decided chocolate would be nicer. For that, you want David Jones or Myer (if then).

  41. Pyrmonter

    @ Beach

    I think the supermarkets understand that, but are apprehensive of popular reaction. But they’ve been quite unimaginative in how to deal with it: they could have implemented a sort of surge pricing (standard price for the first item, but, say, 25% increments for each purchase thereafter) or levied a general increase on those goods, to be donated to charities etc.

  42. Squirrel

    “The challenge that consumers face is a quantity assurance problem….”

    With Just In Time, that sometimes happens in normal conditions – but a product which is out of stock will probably be back in stock next time you go shopping, or maybe the time after that.

    That has all changed now, so some degree of home warehousing, even for people who aren’t overly worried about having to shut themselves in for two weeks, or more, makes perfect sense.

  43. Narwhal Tusk

    Pyrmonter
    It is almost impossible to do business without an ABN.
    Customers want to see your ABN or will not transact.
    They probably believe they are missing out on the GST credit.
    If your turnover is under $75,ooo however, you just issue an “invoice”, not a “tax invoice” because you are not registered for GST. The omission of the “tax” on your invoice explains your situation.
    No GST is charged and the buyer doesn’t claim the GST credit.

  44. Tel

    They can’t be sure that when they go to the supermarket to buy widgets that the supermarket will be stocking widgets.

    That’s always been true with Aldi.

    During abnormal times, the supermarkets cannot perform that function because consumers do not trust that the goods they want to buy will be at the store (or any store) when they go to buy. At this point it pays consumers to perform that warehousing function themselves.

    That’s not how warehousing operates. Think of it like insurance, do you buy car insurance before you have an accident or afterwards? Generally beforehand, right?

    So the warehouse provides a buffer to ensure continuity of availability despite intermittent supply. You stock the warehouse BEFORE the supply runs out, as an insurance policy for the times afterwards. The fact that there are empty shelves right now proves that consumers have always needed to perform warehousing themselves, and always will do … even during the normal times, actually especially during the normal times.

  45. Pyrmonter

    @ Narwahl Tusk

    Customers who are themselves registered for GST want to see an ABN: they need it to avoid the rigmarole of withholding at 48.5c/$ (it involves more entires on your Activity Statement). But consumers don’t withhold, and can’t claim input tax credits – they are, basically, not carrying on an enterprise. They’re fine with it.

  46. Narwhal Tusk

    Pardon me Pyrmonter.
    What did you mean by saying you don’t need an ABN until you reach the threshold?
    I wasn’t talking about just a business selling to Joe Public.

  47. Pyrmonter

    How many businesses turn over less than the threshold?

  48. Arky

    It isn’t a just in time problem.
    The supermarket chains have enough supplies warehoused, and are adding pop up capacity in case it gets worse.
    The problem is physically getting the stock onto shelves and managing the crush of idiots who think the start of a pandemic is a good time to go to the supermarket.

  49. Narwhal Tusk

    Quite a lot Pyrmonter.
    For example, part time or semi retired can gross$70K odd with minimal overheads and make a living.
    Double it if two in a family do it.
    Not uncommon at all.

  50. Iampeter

    Information loss over supply chains has always occurred – long before the current panic.

    Sure, but I think we may now have an actual supply problem thanks to the misinformation.
    Anecdotally many colleagues are finding supermarkets announcing there is no toiler paper in the building the moment the non-seniors are allowed in.
    We haven’t even gotten to the food situation yet. That’ll take another week or so at this rate.

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