Food manufacturers can insulate their operations against supply chain uncertainties by applying five core strategies: accept, avoid, transfer, reduce, and hedge risk, says a food strategy expert.
The past few years have brought unprecedented supply chain disruptions, including the effects of more extreme weather patterns on crop yields and prices; shortages of cereal-based commodities as a result of the war in the Ukraine; increased energy and transportation costs; high poultry and egg prices owing to avian flu; and labour shortages.
No food business has been immune to this succession of challenges, and it has prompted business leaders everywhere to look at how they can become more resilient.
“The big question managers and owners are asking themselves is: what can we do to offset major disruptions like these?” said the Food Strategy Institute’s CEO Rob Kooijmans, in an Fi Webinar on this topic.
In the absence of prophetic powers, Kooijmans said companies have five options for dealing with risk: accept, avoid, transfer, reduce and hedge.
For example, by establishing multiple suppliers for each raw material and using a TCO (total cost of ownership) model to assess cost, companies can hedge their risk, according to Kooijmans.
“Limiting yourself to a single supplier or just two suppliers can be a risk. For crucial raw materials it might be a smarter strategy to accept that a lower price is not the only thing you should be looking for. When you look at TCO, it might be better to have multiple sources across the globe, making your supply chain less vulnerable to disruption,” he said.
He explained that when calculating ingredient costs, additional costs such as transportation and import duties need to be factored in, which is why a TCO approach makes sense.
“By building a more elaborate model you will be able to take better decisions towards having a more reliable and more secure supply of ingredients. In the end the TCO will be lower,” he said.
Kooijmans advised that companies should look to reduce risk by sourcing ingredients closer to home and advocated vertical farming as a “strong enabling technology”.
However, he conceded that for some ingredients that will only grow in certain parts of the world - herbs and spices for example - this simply isn’t possible. In this scenario, he said that the only thing companies can do is to accept these risks and costs and offset them by buying more and storing large quantities of these products.
Alternatively, he said companies may be able to transfer the risk by reformulating.
“One of the key strategies we have seen in relation to the sunflower oil shortages last year is reformulation - by switching to other types of oil the shortage can be offset,” he said.
Kooijmans recognised that this involves a lot of work in terms of reformulation, testing and finding new suppliers, as well as making changes to the ingredient declaration and the nutritional values on the product label.
When it comes to offsetting rising energy costs, he said the obvious action companies can take is to move to sustainable energy sources.
“The payback time for investments in sustainable energy sources is significantly less than it was and in many countries there are subsidies for renewable energy sources. Despite inflation, these investments are still interesting,” he noted.
If there is one thing companies should start investing more time and money in it is horizon scanning, according to Kooijmans.
“Today’s food supply chain is a global supply network and disruptions in one place might cause problems in another supply chain. Just watching the news isn’t enough, it is time for companies start to understand their supply network in more detail,” he said.
And in Kooijmans’ experience, just knowing your immediate suppliers isn’t enough - digging deeper and knowing your supply chain back to the farm level is essential.
“Only then can true risk be tabled, monitored and addressed,” he said.
Linked to a deeper level of horizon scanning is a more structured approach towards risk reduction.
“As long as you have a global supply chain in which a single country may supply up to 50% of global demand, the only thing you can do to reduce the risk is to not put all your eggs in one basket. A structured risk reduction strategy based on deep insights from horizon scanning will help companies to reduce the impact of supply chain issues,” Kooijmans said.
So, what does a structured approach to risk entail?
“Look at your supply chains in a more holistic way - and include potential delays, the cost of raw materials and the storage of larger quantities in a large equation and try to optimise this for each raw material,” advised Kooijmans.
He said that this will require investment in business intelligence and automation, but that in any case, the industry should be looking at automating more of its processes to offset the difficulties with accessing labour.
“There are two underlying reasons to automate: in the short term, access to the right number of skilled workers is getting increasingly difficult and in the medium to long term most countries are faced with an ageing population. Hence the pool of workers will become ever smaller, and added to this, wages are increasing over time as inflation keeps on rising. Therefore investing in automation is essential for future proofing,” said Kooijmans.
He warned companies not to be deterred from investing by short term considerations such as higher interest rates and long lead times for equipment.
“We are sure that those who invest now will be the winners of tomorrow,” he added.
Lastly, he underlined the importance of investing in people, saying: “80% of a company’s success is down to its people. This is true today more than ever. People are not only interested in a higher salary and better working conditions. More and more they are looking for employers who value them as individuals and this can only be done if owners and managers build relationships with all team members.”
He acknowledged that this might not be something that comes naturally to everyone, and therefore mentoring and coaching of managers is important to ensure companies can attract and retain talented people.
“In short, employers should be doing more for employees and make what they do more personal.”
Companies will not be able to fully compensate for cost increases through increased efficiency - they will have to pass some cost on to customers and consumers - and some of the trends, such as higher energy prices, are here to stay, said Kooijmans.
However, he said that by taking the opportunities discussed, manufacturers can start to break this vicious circle.
“Despite the difficulties the global food industry has faced over the last few years it has managed to keep food on the table for almost everybody, and if we keep an open mind about what is going to happen and take decisive action, this will help keep food affordable and available to everybody,” he concluded.
