Although food industry professionals understand the importance and complexity of the global supply chain, most consumers and others have little appreciation of its critical role in getting food from farm to fork.
That was the case until the COVID-19 pandemic triggered panic buying and hoarding of groceries, disrupting food supply chains, exposing defects in the infrastructure and leaving some grocery store shelves empty while an oversupply of food animals crowded farms. In addition, products geared for foodservice outlets suddenly had no place to go due to shuttered restaurants.
“If we didn’t understand it before, we do now: The food supply chain is one of the most critical supply chains in any economy,” says Richard Sides, CEO of Adroit North America. "Other events have shaken the food supply chain, like tariffs and foodborne outbreaks, but COVID-19 had a greater impact because it affected the entire process—from the field to the consumer.
"Meat is a good example,” explains Sides. “As social distancing restrictions required a shift in the spacing within plants, the capacity for meat processing was greatly affected. This caused a chain reaction: Whole-cow pricing significantly dropped because of a lack of demand from the processors. The reduction in processing translated into reduced supply for retailers and an increase in price for consumers.”
Another example is carbon dioxide, which is used in applications ranging from soda pop, cheese cultures and beer to refrigerants, dry ice and packaging. One source of carbon dioxide is ethanol production, and a key use of ethanol is in gasoline. With many Americans working at home during the pandemic and generally traveling less, automobile driving decreased and the demand for gasoline dropped. Less gasoline meant less ethanol, which impacted carbon dioxide supplies and cost.
Promoting the supply chain
When the pandemic hit in March, food processors had to overcome several obstacles to meet retailers’ demands. “In response to controlling the spread of COVID-19, state and local governments instituted mandates that affected food manufacturers, food trade policies and workers’ ability to maintain normal operations and consumers’ consumption of goods,” says Sides. These mandates along with illnesses impacted staffing at processing plants and greatly restricted the supply and distribution of goods.
In response to the mandates, the food industry stepped up its efforts to inform and educate various government agencies, which were shutting down or placing restrictions on some businesses, about the critical function of their raw material suppliers in the manufacture and distribution of food and beverage products.
Policymakers have a basic understanding of food and agriculture, but they don’t have a view of the entire supply chain for food products, which require not just ingredients and raw materials but packaging containers, labels, caps, closures and more. Keeping those businesses up and running is just as critical to the food supply as a food manufacturer.
While the food industry has been aggressive at a macro level to ensure that policies protect the supply chain, the nuts and bolts of productive supply chains reside at the organizational level and manufacturing plants. Gaining a better understanding and grasp of your production capabilities, processes and data platforms, demand forecasting, procurement and sourcing and inventory management can help you optimize your upstream supply chains.
Taking stock of SKUs
With a surge in product and customer demand coupled with limited supplies and/or production capabilities due to the pandemic, food companies were forced to make tough decisions on what to produce. “We have a number of different size packs and flavors. What we’ve tried to do is really focus on the ones that are most important and can be used most broadly throughout the different channels,” said John Church, chief supply chain officer at General Mills in an April company video.
“It’s a balancing act of working with our customers and then trying to understand what are the things that we can make the most of in order to ensure we can be as productive and make as much food as possible during this time.”
While General Mills may have 90s SKUs of soup at any one time, “we might be making half of those and [only] giving our customers what we can afford to give them. The other thing is agility. We may find that we have a supply disruption based on a supplier’s issue. Those kinds of things we are managing through in real-time and we might switch from one production to a different production. That agility is going to serve us well and allows our people to be productive and make as much food as possible,” noted Church.
Several companies, including Mondelez, Kraft Heinz and Coca-Cola, have announced plans to reduce product variety and trim their SKUs. While product rationalization is a regular part of business review, the pandemic has prompted companies to accelerate the appraisal of their brands and product portfolios.
Consumers will always want innovation and choice. Food manufacturers need to find the best combination of innovation and production efficiency.
Seeing is believing
The days of pencil, paper and even spreadsheets are coming to an end. Data, digitization, technology and automation are bedrocks of successful supply chains and enable you to visualize in real-time your inventories, customer orders, production operations and more.
“There is so much data coming in from a supply chain that organizations must leverage tools to consume it in a way that allows for agility in planning and response. Spreadsheets don’t allow for this agility,” declares Sides.
Predicting the Unknown in Your Supply Chain
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“Technology and reliable business planning processes support the forecast and give organizations a better handle on their current demand and inventory status, manage new inputs that may require adjustments to the supply chain plan, and where those changes are needed," Sides continues. "This real-time information allows leadership and planners to make informed decisions on whether to push ahead or pull back based on profitability and risk.”
Sides notes that many companies make the false assumption that their Enterprise Resource Planning (ERP) solution will provide this information. “An ERP system is good in helping you react to plan changes. But ERP is not able to model the unknowns and create concrete plans,” he claims.
Business processes are another part of the planning equation. “Technology helps manage the data and model outcomes, but organizations require a solid sales and operations planning business process to support their supply chain planning," Sides continues. "Processes that support a collaborative process of sharing information across the organization, such as demand, supply and constraints, ensure everyone is working toward the same goals.”
General Mills utilized technology in an interesting way during the pandemic, said Church. “We may have an expert sitting at a plant in Missouri who is assessing the technical challenge of an issue we have in a plant in France, leveraging iPads or video technology in order to troubleshoot and work through those challenges. Some tools that we thought we would use episodically we are now using a regular basis.”
Although General Mills frequently reviews its supply and demand response, the pandemic has shifted those reviews to daily 24/7 meetings of managing the different disruptions and inputs with the demand signal, said Church.
Understanding the issues and challenges provides the agility “to balance our customers’ needs with our ability and what the value chain will give us at any particular moment. We’ve also created ways to view and visualize that data so we can view our performance in real-time on dashboards and make better decisions,” said Church.
Sourcing, JIT and forecasting
The pandemic’s effect on procurement comes down to a food processor’s risk management strategy, says Sides, and many companies are using a multi-sourcing strategy for reducing supply risk, particularly for high-impact items.
“There is the temptation to leverage volume to get a lower price, but the more concentrated the source, the higher the risk exposure," explains Sides. "With international sourcing, it’s a similar argument. From a price perspective, international is frequently attractive. However, in many cases, the long lead times limit the ability to flex your operations quickly. If there is a spike in demand, that can lead to unplanned air freight and other expedite charges.”
At the start of the pandemic, many nations instituted protectionist policies and halted the export of goods, which disrupted global supplies. “There’s a lot to be said for considering multiple domestic suppliers or offsetting the risk of international suppliers with a domestic supplier,” adds Sides.
Many companies — including both processors and suppliers — rely on just-in-time (JIT) models to keep inventory levels and costs low. But that approach caused problems when inventories were quickly depleted during the sudden and unexpected demand surge for groceries last spring.
Indulge in Some Food For Thought
In our Season 2 Opener of the Food For Thought Podcast, Dave, Pan, and Erin talk about how JIT, sourcing, automation, e-commerce, a new administration, and the gravitation toward the center-store will change the food and beverage landscape in 2021. Listen to the episode
Inventory and processing capacity are buffers to mitigate the risk of uncertain supply and demand in the supply chain. “The pandemic reintroduced whether a shift in demand is a one-time shock or a systemic shift," says Sides. "Lean techniques that advocate for keeping inventory in its most raw form as long as possible to provide the flexibility for dealing with finished product variability is the right approach.
"More sophisticated planning systems offer the capability to stratify aggregated demand based on percentages across a family and use that aggregation to determine likely supply demands.”
Forecasting the demand for foods and beverages has always been a volatile endeavor. “COVID-19 was a one-time extreme spike in which the food supply chain proved surprisingly resilient," notes Sides.
"Planning tools are vital to understanding the consistent underlying demand, purposeful variability introduced by pricing and promotions, and unpredictable variability raised by the competitive, environmental, and regulatory landscape."
Understanding the demand breakdown enables processors to decide how much of the variability they want to cover and what effects it will have on customer satisfaction.
“To reduce the variable elements of demand, processors must work with customers to improve visibility and transparency. Without that, the balance of the supply chain has to buffer the uncertainty with inventory and capacity,” he explains.
An optimized and agile supply chain requires an internal investment in an integrated supply chain planning solution and associated planning processes.
“Demand plans, supply plans, inventory plans, capacity plans and financial plans all have to mesh to optimize customer service levels and financial performance and mitigate risks," says Sides. "Processors need to diversify their supply across multiple companies, geographies, and nations to the level financially supported.
"Key supplier relationships need to be cultivated through regular meetings to create mutual understandings of predictable demand and supply events. The more trust there is in the supply chain, the less buffering is necessary,” concludes Sides.