Recent inflation spikes are causing food and beverage manufacturers worldwide to face potential threats to profitability and risks to customer relationships. To prevent negative pricing-related fall out, food and beverage companies should take a broad view of their costs, product portfolio, and margin strategies. This will help put today’s economic volatility in perspective, avoid panicked responses, and reinforce the continued need for making the business and supply chain more resilient and agile. Managed carefully, the current inflation challenges can become need-driven opportunities that embrace innovation and automation.
Four common inflation-related pain points and suggested coping mechanisms:
1. Ingredient shortages and disruption
In addition to extreme weather conditions and seasonal variability, conflict, supply chain disruptions, and political pressure contribute to inflation and soaring prices for agricultural raw materials. The most recent example causing severe ingredient shortages is the Russian invasion of Ukraine that has created uncertainty for exporting grain, wheat, and vegetable oil, affecting food production globally.
Improve visibility – With real-time visibility across the food supply chain – from the farmers and suppliers upstream in the supply chain, via processing, to the distributors and retailers downstream in the supply chain – food and beverage manufacturers can receive notice of shipment delays, allowing the procurement team to form and execute alternative plans.
Review the product mix – Diversifying their raw material and supplier options is another way food and beverage producers can mitigate the risks of ingredient shortages. Alternatively, scaling back on some products if the price increase can’t be justified (or absorbed) may be an unavoidable option.
Improve supply chain planning – Modern supply chain planning solutions can help food and beverage companies achieve greater planning and forecasting accuracy. These solutions should have embedded machine learning (ML) to make the forecast more accurate and responsive to demand contributors such as the weather and price changes.
Think long-term – Accurate forecasting and planning scenarios will help food and beverage manufacturers understand their long-term needs so they can confidently negotiate contracts with suppliers to guarantee availability. In some cases, prices can be locked in, protecting the food company from future price spikes.
2. Spiking fuel prices, energy costs, and transportation costs
The shut-down of container ports during the pandemic is still being felt in the global food supply chain. The rise in energy cost and fuel prices are again adding significantly to the cost of food products. All regions are impacted, even those with pipelines, fuel reserves, and relaxed sustainability mandates.
Plan shipping strategies – costs are impacted by inflation, including container carriers, cargo planes and long-haul tractor trailers. Ensuring efficiency in shipping perishable products or raw ingredients may require choosing new suppliers that are closer to the manufacturer. Software that provides end-to-end visibility and cost analysis is critical to proactive procurement strategies.
Consider local sourcing – Consumers prefer local and organic products where possible. As a trade-off, they will face limited choices and reliance on locally sourced produce. Strategies for bringing production back from countries with low labour costs may require a fresh examination due to disruptions in shipping costs. When the savings achieved from low wages are eroded by high shipping costs, returning the production facilities to the home country is a logical step if there is an available workforce.
Outsource logistics – Turning to third-party logistics companies (3PLs) can play a role in last-mile fulfilment. Working with 3PLs, like any strategic collaborative partner, is best managed via highly flexible cloud solutions that support data sharing while protecting security and data governance.
3. Customer experience and alignment
Inflation is severely impacting consumer spending worldwide. Some expect a recession is on the horizon – a prospect that’s further discouraging investment. Whether a food and beverage manufacturer should absorb price fluctuations or pass higher costs on to its customers is a classic dilemma. But shrinking packaging sizes and product value as a way of keeping prices stable can backfire as savvy consumers are becoming more aware of changes. Today, news like these spreads fast on social media.
Maintain quality – Manufacturers may be tempted to replace suppliers or ingredients to save costs, but that doesn’t come without the risk of non-conformance with the product declaration. Product lifecycle management solutions can simulate the impact of a new supplier or ingredient on the product specification, avoiding quality loss and non-compliance.
Manage the product lifecycle – While quality and compliance can’t be sacrificed, food and beverage manufacturers should offer more economical options in their product portfolio. This may include scaling back products or evaluating the use of ingredients that are becoming difficult to obtain. Product lifecycle management solutions can help manufacturers reduce the time needed to develop and manage new products, as well as achieve regulatory and labelling compliance.
Manage warehouse inventory – Being strategic about warehouse inventory will enable manufacturers to better manage cash flow and minimise the amount of capital tied up in inventory. As supply chain disruption has changed the way manufacturers think about just-in-time delivery, expanding stock levels must be carefully considered to avoid the risk of waste due to expired ingredients or obsolete packing materials. Inventory planning software can help manufacturers understand the nuances of different strategies to pick the right course of action.
Automate processes – If you can’t adjust a recipe and the customer base is opposed to price increases, improving productivity and efficiency through automation may be the best option to counter the impact of inflation. Automation can range from eliminating redundant data entry and streamlining workflows to adding image recognition with machine learning (ML) to automate labour-intensive tasks that previously required human eyes and decisions.
4. Product innovation
Manufacturers can turn to innovation to help alleviate the pressures caused by inflation and the increased costs of ingredients. But to truly seize opportunities for product innovation, manufacturers must work to eliminate IT silos between departments. This helps ensure that everyone has access to the same data, business systems, and processes which enables companies to quickly introduce new products that will appeal to consumers.
Introduce new recipes – The ability to recalculate recipes and product specifications when inflation is causing food companies to switch suppliers or change ingredients is crucial and something that is too complex and time-consuming to be left to spreadsheets. A modern product lifecycle management solution can manage the process efficiently, optimising specifications, costs, and sustainability.
Stand up new options – Another way manufacturers might confront inflation is by standing up new branches, new sales initiatives, or new go-to-market models. Cloud solutions offer rapid deployment, making agile response possible. Two-tier systems, also supported by highly flexible ERP solutions, may provide a quick way to branch from an existing enterprise and its ERP system, yet take advantage of new, modern functionality.
Overcome volatility
Inflation has hit food and beverage manufacturers hard in all parts of the world. Economic experts predict that volatility and high costs may be challenges that won’t be resolved quickly. Manufacturers can counteract increased costs by examining their supply chain processes, services, and product portfolios. Modern cloud-based ERP solutions can help companies make data-based decisions and find innovative solutions to inflation-induced issues. Being proactive and strategic can differentiate manufacturers and set them apart from the competition.
By Jarrod Kinchington, ANZ vice president and managing director, Infor
This article was first published by Food & Drink Business