Tips to ride out supply chain disruptions and rising costs

Unprecedented labour shortages and rising costs are leaving food processors with the challenge of making a profit with increasingly thinner margins.

Every point on a food processor’s supply chain, from the farmer who produces the raw ingredients to transportation, has been disrupted.

Simon Somogyi is the Arrell Chair in the Business of Food and a professor in the school of hospitality, food and tourism at the University of Guelph. He says the war between Russia and Ukraine is the biggest cause of rising costs.

“The Ukraine conflict has had a profound impact on the cost of goods with skyrocketing grain and fertilizer prices impacting the production costs in almost all areas of food production - meats, produce, dairy and eggs,” Somogyi says.

Limited access to competitively priced local ingredients continues to push food processors to look abroad. However, diversifying suppliers can help protect food processors from potential disruptions.

Diversifying suppliers can help protect food processors from potential disruptions.

"Having numerous suppliers for goods, particularly raw materials, is so important," Somogyi says. "This way, when one supplier shuts down for the ingredient you need or the logistics make it slower to get the ingredient into the processor, you have alternatives.”

It's about finding ways to develop stability in a supply chain that is constantly in flux.

The current economic climate has forced food processors to look at their entire supply chain to determine potential losses and reduce costs.

"Our clients are finding more and more that they have to focus on their business and do it well,” says Véronic Laliberté, FCC’s director of commercial financing.

Developing partnerships across the supply chain, including partnering with transportation firms, can help reduce the risk.

Transportation can be outsourced, for example, where food processors can opt to work with companies more adept at maximizing transportation, including making round trips with full trucks and logistics.

There are other partnership opportunities too.

Hannah Watson, the CEO and founder of New Brunswick-based Snak, a power bar creator, explored co-packing. Although she eventually decided to keep the business in-house, she came away from the decision with three specific lessons:

As a manufacturer, scaling is risky business. Partnering with copackers can be a way to reduce the risk.

“Equipment is extremely expensive, and so sometimes it makes more sense to let someone else carry that risk,” she says.

Working with copackers provides both equipment resources and food industry expertise.

"If we had a frustration that we were trying to work through, there was a room of individuals that willingly shared their insights and expertise," Watson says.

Working with copackers means limited operational control, including making inventory commitments upfront.

Although Watson saw the benefit of a partnership with a copacker, she determined it was not the best solution at the time.

"With resources and finances slim, it simply made sense to operate the business as a smaller team," Watson says.

Instead, Watson has opted to invest in automation, allowing her company to become less reliant on labour while streamlining the amount of equipment the operation needs.

The current climate in the food and beverage processing arena requires food processors to look at every area of their supply chain. Somogyi stressed the benefit of adopting lean management principles, which include a review of the entire supply chain to reduce inefficiencies and streamline costs. Here are three ways to focus on management principles:

1. Do a review of all areas of the operation – such as finance, human resources, marketing, purchasing and distribution – to ensure there is no duplication. The review is called an Enterprise Resource Planning (ERP) process and should be done every quarter to ensure the recommendations in the plan are acted on. 
2. Develop a business case for robotics and automatic and see how that can occur as part of that ERP process. Identify potential areas for automation across the entire supply chain to decrease downtime and mitigate the risk of continual labour shortages.
3. Integrate predictive artificial intelligence, so you can better predict both demands from their retailers and, in turn, anticipate the number of ingredients needed from suppliers.

Article by: Anne-Marie Hardie