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Time to rethink supply chain risks in the food and drink industry?

Risk & Analytics
COVID 19 Coronavirus

By Frederick Gentile | May 28, 2020

This risk insight examines the impact on supply chains for the food and drink industry during COVID-19.

For the Food and Drink industry COVID-19 has brought significant challenges.

On the one hand food retailers have had to manage demand pressures fuelled by panic buying and almost unprecedented stockpiling of products such as pasta and rice for example. Demand for home delivery slots increased exponentially and supermarkets introduced buying restrictions on a number of key products.

Conversely, one of the hardest hit areas has been the leisure and hospitality sector which ironically had been a primary factor for the growth of the food and drink industry, following the rise in the number of on-the-go consumers and increased adoption of ready to eat food. This has seriously impacted the food service sector.

How has supply chain been affected?

Supply chains are becoming increasingly complex and interwoven and it is reasonable to assert that COVID-19 has unveiled the fragility and flaws of current systems. Few companies can say confidently that they were sufficiently resilient to be able to completely withstand the shock of this event.

For the food and drink industry COVID-19 has been the catalyst but certainly not the only cause for disruption.

For the food and drink industry COVID-19 has been the catalyst but certainly not the only cause for disruption. Factors affecting the overall supply chain include:

  • The ‘just in time’ business model which is not built or able to cope with demand spikes like the ones seen in the early weeks of the pandemic.
  • Arguably there has been an effective increase in demand across most product lines in that consumers are buying for prolonged periods and consuming more.
  • Demand patterns have changed e.g. the virtual shutdown of the restaurant and hospitality sector has had a marked impact on fresh produce wholesalers.
  • Processing and manufacturing have felt the effect of demand for convenience and on-the-go products declining. However, in recompense previously destined supply to hospitality has been redirected to retail or directly to end consumers.
  • Despite the ‘Feed the Nation’ scheme1 there is a concern around land worker vacancies. This is particularly problematic for larger producers whose workers may now be unable to access their workplace due to transport issues, sickness or caring for relatives and possibly also transnational movement restrictions.
  • Buying from other regions is now more challenging given, for example, the effects of the pandemic on Southern Europe.

A further complication is the fact that the pandemic’s emergence has coincided with autumn in the Southern Hemisphere, which is the main harvest time for two of the most prominent producers of staple crops – Brazil and Argentina. The latter is the world’s largest producer of soymeal livestock feed2 and the third-largest soybean producer after the US and Brazil.3

Looking at the meat and dairy sectors these have been particularly hard hit by the closure of restaurants, cafes and foodservice outlets. Premium meats, normally destined for restaurants willing to pay higher prices, have been redirected to consumer outlets as businesses adapt in order to survive. However, given consumer aversion to higher price points, this business model is not sustainable.

From a logistics perspective issues such as longer wait times at border crossings, the closure of foodservice outlets making life more difficult for long distance drivers and lack of COVID-19 related pick up, drop off procedures and assessments all contribute to delays and disruption to the food chain supply.

What should businesses do to mitigate these issues?

Complex supply chains are at greater risk

You may have various third parties involved in your supply chain, such as storage solutions and logistics providers, without even realising this. Supply chains are becoming more intertwined and complicated, as well as becoming increasingly dependent on technology which can be just as complex. Generally, the more multifaceted things are, the greater the risk of things going wrong.

We’ve already seen evidence of supply chains suffering in other industries. For example, in the automotive sector, Jaguar have reported their supply chains being affected.4 And there have been reports from the electronics and textiles sectors as well.

Mark Schneider, CEO Nestle Foods, recently commented “business continuity is key. We need to focus our efforts on securing supplies, manufacturing and logistics every step of the way. For those areas that are not affected yet, get prepared by building inventories of critical supplies and products. Please get ready for the storm to hit – because hit it will.”5

Whilst it may be challenging there may be benefits in looking to simplify supply chains by buying closer to home for example even if this means a higher price. To an extent there may need to be a trade-off between resilience versus profit.

Transport hauliers are key to supply chain but could also be a single point of failure

In the USA for example, some drivers have been refusing to drive for several reasons, including a lack of rest stops, no Personal Protective Equipment (PPE), and no revised procedures on arrival. Working more closely with hauliers to agree protocols, early alert procedures and so on can contribute to easing tensions and disruption.

Suppliers further down the chain may suffer more

In terms of the economic fallout from the crisis, your first line suppliers may have enough economic resilience to survive the crisis, but what about suppliers at tiers two and three? As an example, in 2001, following the 9/11 attack, air travel was temporary closed in the USA. In 2007, orders to Boeing were starting to recover6, however it discovered because of the earlier shutdown its supplier of specialist nuts and bolts had laid off some of its workforce and was struggling to keep up with orders. Smaller companies may struggle to survive which could mean disruptions later.

Smaller companies may struggle to survive which could mean disruptions later.

Will there be a second wave? How bad will it be?

Pandemic modelling tends to foresee a second wave – and even a third wave in extreme circumstances. The extent of a second wave is unknown, but modelling based on previous pandemics suggest that it’s unlikely to be as severe as the first. However, further disruption seems likely.

Willis Towers Watson has produced separate guidance on this which can be accessed here.

How will consumers behave going forward?

We saw panic buying at the start of the pandemic, but this now seems to have calmed down. However, there is always a risk that this could happen again if there is further news that panics consumers. A second wave or increase in the reproduction rate of the virus [R] and return to movement restriction could easily result in another panic ripple. Equally Brexit awaits later this year.

With this in mind, increasing stocks, working more closely with customers or perhaps working with similar companies in a consortium could lead to better preparedness.

Understand your supply chain

Identify the weak links in your current supply chain and develop mitigation.

Prioritise and focus on the most critical links in your supply chain – those that, if they fail, will have a serious impact on your business. Assess the impact in both monetary and operational terms and develop solutions to work around them.

Business continuity

Ensure your business continuity plan is up-to-date and has considered alternative suppliers, but if that hasn’t been done, now is the time to do it. Think about people, logistics and technology and spread the risk as much as you can.

Managing supply chain crises

Ensure you have a management structure for supply continuity during the crisis. In these times, decisions need to be made very quickly. If you can, streamline this process by having a dedicated and empowered supply crisis management group that are able to make tactical operational decisions.

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Talk to your suppliers and customers constantly

The most important thing is to be in constant communication with your suppliers and understand their position and the challenges they may be facing to deliver to you. Prioritise your customers to understand where may need to focus limited resources.

Consider whether you can shape demand

Consider marketing those products that you’re able to source rather than those you would normally market that may be harder to obtain at times of supply chain crisis.

Conclusion

The food and drink industry is facing almost unprecedented disruption resulting not only in shortages but in unpredictable peaks in demand.

As with all crises there are lessons to be learned and capturing these in a structured and consistent manner is essential to ensure that organisations are better prepared for future disruptions – and not necessarily pandemics. The Willis Towers Watson Post Pandemic Debrief Workshop offers a highly cost-effective way to do this.

Although the pandemic will eventually die down the impacts may be long lasting. The risks arising need to be carefully considered but so do the opportunities and, in particular, the need to rethink supply chain within the food and drink industry to ensure a more resilient future for both those involved in it and those who benefit from it.


Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

COVID-19 is a rapidly evolving situation and changes are occurring frequently. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded and should not be relied upon to be accurate or suitable after this date.


Footnotes

1 https://www.feedthenation.co.uk/

2 https://www.reuters.com/article/us-argentina-soyproducts/china-opens-soymeal-market-to-no-1-exporter-argentina-in-historic-deal-idUSKCN1VV2JP

3 https://www.foodsource.org.uk/building-blocks/soy-food-feed-and-land-use-change

4 https://www.theguardian.com/business/2020/feb/18/uk-car-factories-running-out-of-parts-due-to-coronavirus-warns-jaguar

5 https://www.nestle.com/media/news/covid-19-ceo-message-to-employees

6 https://www.reuters.com/article/us-boeing-alcoa/boeing-ceo-blames-industry-for-787-bolt-shortage-idUSN1141086620070911

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Food and Drink Practice Leader

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