Food Industry Supply Chain Recovery:
Getting Back on Track
By: Rob Veidenheimer, Bob Goldin and Gary Karp
February 2, 2022
As has been reported extensively, supply chain disruptions have impacted almost all food industry organizations – from raw materials availability to labor and logistics challenges. The key strategic issue moving forward is not how these supply chain disruptions will continue to impact food organizations, since the impact will vary significantly by organization, but rather how companies are preparing for the eventual return to a somewhat “normal” but almost certainly different looking supply chain.
While impacting all channels, the supply chain challenges have disproportionately hampered foodservice channel performance. While order fulfillment rates vary significantly by company and product category, our research indicates that typical foodservice order fill rates to distributors are currently averaging 70%-80%, while retail is averaging 80%-90% across all categories. This is partly due to larger CPG food companies prioritizing often higher margin retail customers over foodservice during the pandemic as well as the greater SKU complexity of many foodservice businesses that puts additional strain on raw material sourcing, production and labor. Field input also suggests that re-distributors are experiencing historically high product shortages, which affect their customers.
To address these marketplace realities, most food industry organizations have followed a similar playbook to maximize their more limited capabilities: reduce SKUs, prioritize strategic customers (higher volume or margin), allocate available finished goods inventories and manage SG&A expenses. These actions, appropriate in the short term, address the immediate realities of a supply chain-constrained industry. On a somewhat related note, many suppliers are “pricing up” to cover their higher supply chain costs (and, to some extent, to increase margins)
As foodservice demand continues to recover (currently 90+% of pre-covid levels on a national level) and retail growth settles back into more historic levels, now is an opportune time for organizations to assess their plans.
While significant challenges remain, there is some “light at the end of the tunnel” as the food industry responds to supply chain upheaval. Higher wages, a slow unraveling of global transportation roadblocks, identification of alternative raw materials, investments in automated processes and relatively strong consumer demand all point to an eventual supply chain recovery. Qualitative feedback from our clients indicates anticipated recovery times of 6 – 12 months to return to pre-covid service levels depending on company dynamics, yet product offerings will likely differ from pre-Covid. The average CPG food company, along with many smaller manufacturers, has reduced SKU count by approximately 20% and distributors have also pared back their offerings. These reduced SKUs are not coming back, and food industry operators and retailers will need to adjust their mix and expectations accordingly.
With an end in sight, now is the time for organizations to actively position themselves for accelerated recovery.
In our view, required actions include:
Communication – Maintain open dialogue with customers and internal team members. Create mechanisms to regularly provide situation assessments, product alternative options and anticipated recovery timing. Customers will reward their most engaged suppliers and employees will rally around a clear message.
Collaboration – Brainstorm solutions with non-competing peers, suppliers and customers. Pentallect works with several organizations that engage in supply chain discussions related to raw materials sourcing, labor and logistics issues. Industry-wide collaboration on critical supply chain issues, including the driver shortage, are needed to create impactful solutions. Often external perspectives can lead to unforeseen solutions; consider the benefits of share groups.
Systems and Operational Practices Review – It is an opportune time to review network design and supply chain practices. Companies may seek to increase their local operational footprint to shorten their supply chain, improve inbound and outbound route efficiency, reduce reliance on foreign suppliers, improve inventory allocation procedures, increase on-hand inventory, engage in more collaborative supply chain planning and reduce complexity. Many customers will prioritize secure, reliable supply chains over low price.
Brand Strategy Assessment – The move toward “fewer, bigger, better” SKUs is likely to be permanent for many suppliers, especially major CPG food companies. This does create opportunities for non-branded suppliers, although margins on this type of business need to be improved to be a sustainable business for many.
Scenario Planning – The supply chain recovery will be uneven for most food organizations, with varied timing across categories depending on supply chain dynamics. Given that demand is outstripping supply, those organizations that are able to meet customer needs the fastest and most consistently will be in the driver’s seat to gain, and likely sustain, competitive advantage. Now is the time to develop priority plans based on different recovery scenarios – Which products? On what timetables? To what customers? With what supporting capabilities and programs?