Coronavirus: Supply chains under scrutiny22 Mar 2020
Covid-19 will reveal holes in the relative resilience of companies’ supply chains, as the global and interlinked nature of the food industry is laid bare.
It is still too early to tell which manufacturers are likely to be hardest hit, but one big surprise was The Coca-Cola Company’s warning that its supply of non-nutritive sweeteners was so heavily reliant on Chinese suppliers that it expected to see shortages. If the world’s biggest beverage company is so concerned about its ingredient supply chain, is everyone else likely to be similarly stuck?
Compared with other industries, many in the food industry are in a relatively strong position financially during the crisis, particularly manufacturers of goods with long shelf life and those that can be frozen. Demand for packaged and fresh foods and drinks is high, not only because of widespread stockpiling, but also as an increasing number of consumers work from home and change their eating habits as a result.
Transportation and logistics solutions are not working as usual, however, and foodservice suppliers are suffering as restaurants have closed in many countries. In the EU, the European Commission has said food freight should be prioritised, meaning it can cross borders that are otherwise closed, but industry has said this doesn’t go far enough to ensure food security.
Manufacturers also have been affected as employees have fallen ill or need to look after ill family members, school closures have meant many workers have been forced to stay home to take care of their children, and seasonal farm workers are staying put due to travel restrictions.
At the end of February, Danone was among the first multinationals to warn that its profits would be hit as a result of the outbreak, to the tune of about €100 million in the first quarter alone. The company generates about 10% of its overall sales in China, and about 30% of its infant nutrition sales. The British alcoholic drinks company Diageo also warned that the situation in China would cost it about £325 million (€388 million) this year.
The problem for these companies – and what will likely affect many others – is not necessarily related to changing demand as the crisis unfolds, but about the logistics needed to transport ingredients and finished products from A to B. The world’s biggest dairy company, New Zealand’s Fonterra, has also warned of potential significant risks to its business, partly due to a slowdown in the processing of its containers at ports.
For years, the food industry has sought to outsource its ingredient supplies to keep costs down – but if supplies are concentrated in one geographic region, this strategy could become a weakness.
For many in the food industry, the road to recovery from the COVID-19 outbreak is likely to be long –and it may also force companies to take a closer look at what constitutes a resilient supply chain. One approach may be to combine local and global production and manufacture, including greater investment in domestic supply chains – an approach that also could hold significant appeal for many consumers.
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