Essential services rely on suppliers
You’d think it would be easy to figure out just what is an essential service when there’s need for pandemic lockdowns. Food services and health services obviously make the cut; movie theatres and concerts, not so much. But going beyond that, it quickly becomes impossibly hard to tell just what is an essential service in a world with complex supply chains.
We all know the old proverb ‘‘for want of a nail’’, in which a nail missing from a horseshoe leads to a chain reaction that topples a knight, changes a battle, and loses a war.
Flour mills had been serving bakeries buying flour in bulk, and some home bakers bought bulk flour at places like Bin Inn. Now, everyone’s baking from home using retail-sized bags. The sudden shift in demand for a different sized flour bag caused problems.
Similarly, a North American newspaper reported on toilet paper shortages there. The problem is not hoarding but rather that people have shifted from using the facilities at work to using ones at home.
The toilet paper used in the big rolls at offices and factories come from different machines and different paper. The change in demand in a finely tuned system can be hard to accommodate when the rest of the supply chain is constipated.
This kind of problem will only get worse as New Zealand’s lockdown progresses. We need to be prepared for some of the consequences that will inevitably follow if we are not incredibly nimble.
During normal times, markets can respond quickly to changes in demand. If people started wanting to purchase more flour at the supermarket, the supermarkets would increase their orders.
Suppliers would increase their prices if they couldn’t easily increase production to suit. That increase in prices would both draw more suppliers into the market and pare back demand for the relatively scarce product. Some shoppers would flip to purchasing in bulk from places like Bin Inn. And all of it would happen without central direction. Prices send the signals needed to guide behaviour.
Pandemics and lockdowns make all of that impossibly harder.
In normal times, there are myriad potential ways of routing around a blockage in a supply chain.
Many of those potential alternative suppliers will now be closed because their products are not considered essential. Or, they will be unable to help even if they are open because one of their own suppliers is not considered essential.
When essential services closer to consumers start running out of the nails needed to fix a piece of equipment, the closure of the ‘non-essential’ nail factory five steps back in the production process starts to bite.
Or the closure of the company that provided the boxes for those nails. Or the closure of the company that provided the flanges needed to repair a bit of equipment at the box factory.
Normally, signals provided by price changes can co-ordinate all of this activity without anyone in Wellington having to get involved.
If people started wanting to buy cloth face masks instead of T-shirts, companies would shift production to meet demand. That shift would now require permission from a desk in Wellington if the clothing company had been considered non-essential.
That isn’t to fault those making the calls. It would be impossible for anyone to know in advance just what products or companies will wind up proving essential.
The pandemic also risks muting the price signals that normally encourage companies to redeploy efforts as demand changes.
A supermarket increasing the price of flour in response to shortages up the supply chain that are invisible to consumers would too easily be accused of profiteering.
In normal times, those accusations would be silly. Even a duopolistic supermarket environment has competition on the fringes that restricts that kind of behaviour.
But when all the competitors are shut down by edict, price increases are automatically more suspicious.
If solving a supply chain blockage comes at a real cost increase, and a retailer fears greater long-term reputational damage from price increases than from empty shelves, we could get more shortages.
These ‘for want of a nail’ problems are no reason to end lockdowns early, or to prevent their extension if extensions prove necessary.
But they do suggest the Government needs to be quick to allow companies to reopen, under tighter hygiene procedures, if they are found to be more essential than first thought.
Otherwise, ‘for want of a nail’ problems will cascade. And they also suggest that the Government might want to look again at whether a broader set of food retailers should be able to open under strict hygiene protocols.