Mitigating Risk in the Supply Chain

So it’s happened. Your supplier just called and said the standing order will not be coming this week. The worst part is that it may not be coming next week either. There’s no confirmation as to when you’ll receive it either.

As COVID-19 continues to impact business operations across the country, critical components of the supply chain have been impacted.  And it’s impacted both a critical and unexpected point, the middle.  This has left both producers of raw materials and consumers of finished goods in a bind, with unusable goods on the front end and the laws of supply and demand forcing consumers to pay higher prices.

Across the United States and Canada, meat packing plants have been temporarily closed or operating at a reduced capacity. Industry leaders, Cargill, JBS, Smithfield, and Tyson Foods, that supply a major portion of the consumable meat to consumers have all shut down key plants within the past few months. In the short term, this has driven up the cost of fresh product, and in some cases has forced changes to product specifications to allow for a more continuous supply chain, which may not meet the consumers needs. The temporary closures and reduced capacity in these major packing plants has reduced output and increased the pressure on suppliers that have resulted in higher prices.

In the long term, a backlog of raw materials is being created on the fields and on ranches across the country. Ranchers and Farmers simply have an oversupply of product, forcing them to consider euthanizing livestock given the reduced processing capacity. The buyers that purchased at the highest levels are no longer buying. Cattle, pigs and other livestock are being kept on the feedlots longer than designed.

Feedlots are designed to enable product growth at a consistent and scientific rate. The reduced processing capacity creates several challenges, one that the product may become too large for processing and two that specific product output is not available or meet the required specifications. As a result of the size ranchers have been forced to either slaughter product simply to move it off the lot, or to try to slow the growth to enable future, right sized, pricing.   

As ranchers look at finding a creative solution, they may be left with only one choice, to reduce the lot placements for the impacted livestock. This approach enables the producers to protect their investment, however, it will reduce supply in the long run. With the reduced or inconsistency in raw materials, it will make them less efficient as they cannot plan production, further impacting the ability for the processors to plan appropriately, reducing the ability to produce at an efficient rate, impacting margins and key challenges.

The overall impact of shutdowns at meat processing facilities is clearly being felt by the livestock suppliers, and in the future, will be felt by consumers.  Retailers have already begun to experience changes to the available product, with food service providers experiencing similar issues. Some food service providers, especially ones that require, and tout fresh product, may be dial back longstanding marketing campaigns like “100% fresh”, reducing major market differentiators.

As the summer approaches, with key barbecue holidays approaching, the consumer is experiencing skyrocketing prices. These price increases will on beef as well as replacement products, pork, and chicken. Many consumers require a 10-day lead time from order placement to final packaging. This will reduce the availability of the product on store shelves, and undoubtedly a subconscious impact on consumers. As consumers start to see bare shelves, they may resort to a "buy and freeze" hoarding approach which will further draw down on available product. 

In addition, consumers maybe see potential inconsistencies in the availability and quality of the final product. This will be a challenge to most home consumers, it is the nationwide chain restaurants that may see the largest impact.  These restaurants require both a consistent price point and consistent quality.  As production is rapidly changing, both of these key business elements will be tested by the shortage.  As a result of their purchasing power restaurants may be first to the table buying product, unfortunately they will not experience the discounts that enabled them to achieve desired margins prior to COVID-19.  The price increase puts the restaurants in a tough spot, raise prices, and risk consumer backlash, or decrease their profit margin, and pass the problems on to the balance sheet.

As a result of COVID-19, we’ve seen supply chain issues that were never expected.  We’ve seen the chain broken at points considered “too big to fail”.  This has resulted unexpected impacts in both the upstream and downstream directions.  Key risk indicators and tracking can help companies of varying size and market capitalization to notice these types of fluctuations early and gain a competitive advantage by adapting faster.

So what can consumers and restaurant organizations do to mitigate the risks. 

  1. Communication – Consumers and restaurants should work to stay in consistent communication with their supplier base to enable a needs-base prioritization and delivery. The communications should occur often to enable customers with a high level of visibility to the supply chain, focusing on production, as well as inventory at the key distribution centers.
  2. Alternative Solutions – Consumers and restaurants should be ready to use and take advantage of alternative suppliers. This may be a change to the historical supplier strategy, however, it should be part of the long term plans.
  3. Alternative Products – There may be additional opportunities to assess replacement products. The additional capacity offered by slightly different variations of new product may unlock new value for the business and help identify new opportunities
  4. Reevaluate & Prioritize Product Lines – Many organizations may choose to promote or create price adjustments for replacement products.

In the end, the issues with beef will not just be with beef. This product shortage will spill over into other products as consumers look for replacement products. The resulting pressure on replacement products may extend to other meats, as well as to other plant-based products, enabling plant-based products into the more mainstream consumers. As other products are utilized, complementary products, such as cheese and other condiments may see a change in demand. 

What should we do to mitigate the issues?

The reality of the supply chain, is that it is a fluid arrangement, constantly adjusting with the ebbs and flows of the market.  Simple changes, like pricing can cause impacts early in the supply chain. These small changes are magnified as the product moves closer to the final consumer. In order to manage and mitigate any risks within the supply chain, organizations must put together a comprehensive playbook to successfully navigate changes and threats to the suppliers and products critical to the business.

Know the Whole Market

It is critical for a business to know and understand the entire supply chain. Businesses must understand their suppliers and the challenges their suppliers face.  On the sales side, businesses must understand their customers in order to effectively understand and anticipate their needs.  For the supply chain to operate effectively, those market insights need to be fed into demand planning, shipping, and revenue/cost models to allow for production to occur ahead of anticipated demand.

It’s one thing to generate demand and have a product or service, which translates into a mutually beneficial scenario. However, in today’s climate, there is often a demand without the corresponding or delayed supply. This has resulted in anxiety and distrust within the consumer base which can negatively impact a product or service. 

Develop a Playbook

A critical part of understanding the market is understanding market conditions that can impact key products and offerings.  This means not only knowing products inside and out, but also understanding the raw materials and finished goods that go into the product offerings.  Businesses should consider developing playbooks for critical components to be put into action in the event of an issue. These playbooks, while potentially more general in nature, will enable business teams to quickly adapt their plans to specific risks and deploy actionable risk mitigation.  These playbooks should include:

  • Identification of replacement components (e.g. plastic instead of rubber) to be integrated in the finished products
  • Identification of replacement finished products or pricing incentives on replacement products.
  • Explore the option of expanding product lines to build the service/product that is unavailable. 

Define the Metrics

Along with the response strategies that are key components of the Supplier Playbook, are key metrics that should be used to trigger the activation of the playbook or other response.  Those metrics should be developed in conjunction with suppliers through direct and consistent communication.  These conversations should be straightforward to have with trusted partners, as they also have a vested interest in a continued relationship.  While there may be an interruption in the relationship, open and productive communication will enable vendors to thrive as favored suppliers.  Key metrics may include:

  • Commodity Demand – Are environmental factors driving an increased or decreased demand for raw materials?
  • Commodity Prices – Are key commodity prices (oil, wheat, corn, etc.) putting pressure on the pricing of key components?
  • Global Demand - In which competing geographies do products have the greatest demand? And what is the impact on pricing?
  • Labor Relations – Are key unions pushing for increased wages or threatening a strike?
  • Government Regulations – Are government, both foreign and domestic, regulations being updated to include new or more stringent requirements? For example, enforcing physical distancing in a processing or packing plant.
  • Geopolitical Concerns – Do raw materials originate from areas where conflict is prevalent or a consistent risk?

When to Deploy the Playbook?

The supplier playbook should be deployed ahead of the risk coming to fruition. The playbook should include clear thresholds and levels for the deployment of the strategy. Senior leadership of the organization should be committed to the approach and prepared to implement the plan at any time. The playbook may include steps deployed in an agile approach and may require ongoing monitoring and adjustments.

To aid in the management, monitoring, and remediation of supply chain issues, organizations should consider the use of a Supply Chain Management solution. This will provide a technology platform and framework in which the playbook can be fully executed upon and optimized. In addition, the solutions will help to identify key risks and provide visibility through dashboard reporting or other key contextual metrics.

In Closing...

The key to a happy supply chain is the identification of key risks, robust planning, and knowing when to implement the identified mitigation strategies.  These strategies will assist organizations in identifying key concerns, issues, and impacts from both directions of the supply chain.

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