Supply Chain Pressures Cause for Conflict

Who’s managing whom? In a year of unprecedented pressures, our exclusive joint survey finds a tug of war between food processors and their suppliers.

By Dave Fusaro, Editor in Chief

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“It’s been a challenging year for food and beverage manufacturers,” begins our report “Supply Chain Pressures.” The result of a June survey and joint research project among Food Processing, Grant Thornton and the MPI Group, it found respondents worried not only about the escalating prices of ingredients but about their availability and safety.

Nearly all participants reported the price they paid for ingredients and other materials in the past year increased; 24 percent report startling increases of more than 20 percent.

Few factors are as important to food and beverage manufacturers’ success as the ability to obtain ingredients and other materials from suppliers when needed. Yet only 7 percent of processors responding indicated deliveries are 100 percent on time.

Forty-four percent of food processors report their primary materials or ingredients is “readily obtainable”; 49 percent say it’s “somewhat obtainable.” Six percent of respondents indicate their materials/ingredients are difficult to obtain, and one company indicates it could not obtain its primary ingredient.

The report was the result of 154 responses to our joint e-mail survey. Sixty-seven percent of respondents were responsible for purchasing ingredients, 44 percent buy equipment and 35 percent said they also procure other materials. The full report is available at www.foodprocessing.com/GTSurvey1; but following are some of the highlights.

Availability and price

Unavailability of ingredients is rare but potentially devastating. For example, in the past year many breweries found themselves unable to attain hops specific to their brands. And for brief periods, various ingredients have been unobtainable due to natural or manmade disasters.

 “Several spot shortages of raw materials caused us problems because our volume demand was higher than the original forecast on seasonal raw materials,” said one executive responding to our survey. Others noted the unreliability of materials causes them to carry more inventory: “We must buy in advance because products are not readily available.”

Not surprisingly, large food and beverage manufacturers have more clout in getting the ingredients they need: More than half (54 percent) of food and beverage manufacturers with annual revenues exceeding $100 million report their primary ingredient is readily obtainable, and 46 percent say it’s somewhat obtainable; only 39 percent of smaller firms (revenues of $100 million or less) report their primary ingredient is readily obtainable.

“Complete unreliability for the small manufacturer,” says one executive about vendor dependability. “[Suppliers] will get ingredients ordered to you ‘whenever’ and ‘maybe’ or promise them over and over, but the ingredient never shows. And good luck if it shows up and is to spec.”

The same small manufacturing firm executive continues, “Special orders are shunned, even if you’re willing to pay a premium. And orders of less than 11,000 lbs. are treated with what verges on contempt, which translates to a complete unwillingness on the part of ingredient suppliers to help a small concern grow into a giant one — very shortsighted of them!”

Food sectors where ingredients were least likely to be readily available were dairy products (27 percent of dairy product manufacturers report readily available); meat, poultry and seafood (35 percent); and snacks (37 percent). The sector where ingredients were most likely to be available is confectionery products (55 percent).

While materials and ingredients are generally available, food and beverage manufacturers are finding them at dramatically higher prices, in some instances at costs that put margins in jeopardy. Ninety-four percent of participants reported the price they paid for materials/ingredients in the past year increased; and 31 percent report increases of 1-10 percent; 39 percent report increases of 11-20 percent; as we said earlier, nearly a quarter saw increases of more than 20 percent.

One food executive notes, “Ingredient costs (grains) have risen over 400 percent.” Only 5 percent of food and beverage manufacturers report that prices had decreased.

Despite a lot of dissatisfaction over price increases, few respondents placed blame on their suppliers. “The price increases are hard to handle [but] we have been fortunate that our suppliers work with us to have the highest quality at the lowest price possible.”

“Prices are determined by the market – when their costs go down, so do ours,” wrote another.

Although one did note dissatisfaction over “higher prices for [increasingly] variable quality.” Another notes: “Our product shows the different attributes of raw materials supplied.”

All food and beverage manufacturers were subject to steep price increases, but larger firms were more successful at keeping costs in check. Approximately 51 percent of food and beverage manufacturers with annual revenues of more than $100 million reported prices increased more than 10 percent, while 65 percent of smaller firms (revenues of $100 million or less) report price increases of more than 10 percent (see chart).

Not surprisingly, price increases pose the biggest problem for food and beverage manufacturers (cited by 64 percent of respondents); 30 percent indicate product availability is their biggest problem; 15 percent late/wrong deliveries, 13 percent quality, and 12 percent lack of communication/information (for some questions, respondents could select more than one answer).

Delivery and quality

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