How food and beverage businesses can navigate today’s fragile supply chain

The world looks considerably different in 2023 than it has over the past three years. And yet supply chains remain stubbornly fragile and unpredictable. The pandemic undoubtedly triggered the breakdown we saw beginning in 2020, but ending one catastrophe has not resolved the other.

Challenges persist for food and beverage businesses that depend on shipping and distribution channels for sourcing raw materials and getting their products to market. If you want to survive and thrive through the years ahead, that means fundamentally changing how you do business.

That process of change can begin with the following seven strategies.

Get clear on your numbers

Before the pandemic, you may have gotten by with a general understanding of your margins and other financial metrics. That’s no longer an option. You need to be dialed into (and continuously updated on) what your products cost to make and how recent pricing trends have impacted your gross margins.

Specific trends and targets you’ll want to focus on include:

• Input price changes: To what degree have your raw material prices increased through inflation or supply chain pressures? Can you pass these price increases along to your customers, or will you need to focus on cost containment to manage margins? Small swings in price at the unit level can magnify at scale to significantly impact profitability and cash flow.
• Input price changes: To what degree have your raw material prices increased through inflation or supply chain pressures? Can you pass these price increases along to your customers, or will you need to focus on cost containment to manage margins? Small swings in price at the unit level can magnify at scale to significantly impact profitability and cash flow.
• Overhead: How is it increasing, and how does it impact your free cash flow? Cash provides certainty in unpredictable times.
• Buying power: What resources can you deploy to generate revenue and reduce costs?
• Supply chain measures: What steps can you afford to offset the impact of an unpredictable supply chain (e.g., Can you manage higher levels of stock without unduly harming your cash flows?)

Your answers will help you to forecast your operational costs and how best to use cash resources to mitigate supply chain issues.

Prioritize your top-performing SKUs

If you manufacture multiple products with many of the same fundamental ingredients, consider temporarily discontinuing some items in order to improve your return on investment. This won’t directly solve the challenges you have with sourcing inputs. However, it can help to curb production delays and lost revenue.

Every product you make has a purpose, so this may not be the most palatable option. Still, keeping your most profitable and popular items in stock will help to keep customers happy and hold your position on store shelves. More importantly, it will keep revenue flowing into the business, which is critical as inflation and interest rates trend well above the historical average.

Shorten your supply chain

It’s time to reassess whether the benefits of producing goods and purchasing inputs from overseas vendors outweigh the drawbacks. The savings are becoming increasingly marginal as the global supply chain teeters on a knife edge. Your costs increase if orders are continually delayed and you can’t manufacture enough product volume to cover your overhead costs.

Manufacturing businesses in all industries, including the food and beverage sector, have started to assess the upside of re-shore parts of the supply chain. It’s not a silver bullet — some costs will increase, and you may still experience delays. Still, shortening your path from production to retail may pay off with greater sustainability and relative stability over the near- and long term.

Another factor favouring a shorter supply chain that you should consider is greater environmental scrutiny and consumer demand for more eco-friendly products. Keeping products consistently stocked with a lower carbon footprint could help you carve out a sizable competitive advantage over the coming years.

Diversify your supplier network

Expand the number of suppliers you work with to create more flexibility in your supply chain. The benefits of diversifying your network are threefold.

For one, it increases the likelihood that one of your vendors will be able to deliver the inputs you need when you need them. Your business will be less vulnerable to supply shortages and delivery bottlenecks. Moreover, it gives you more leverage to negotiate competitive prices, which is particularly beneficial as inflation remains roughly twice the historical average.

Thirdly, you are less likely to suffer from quality control issues which have become symptomatic of the current supply chain crisis. Having options gives you more leverage to ensure your finished goods reflect favourably on your brand and meet your customers’ discriminating expectations.

Reduce product waste

It won’t directly solve the difficulties in your supply chain, but reducing waste on your manufacturing lines can stretch your dollars and raw materials much further. The current challenges you’re facing externally could be the push you need to optimize your business from the inside out.

Undertaking a performance improvement plan can uncover any number of cost-effective changes to reduce product shrinkage and waste. This may include automating portions of your production, implementing new processes and procedures, and/or adopting new digital tools such as an enterprise resource planning system.

Consider an e-commerce option

As with the above, controlling more of your sales and marketing will not directly solve your upstream supply chain issues. Instead, it can help you offset some of the punitive impacts of those challenges by allowing you to earn a higher margin from the products you sell — and free you from some of the requirements (e.g., delivery quotas) that retailers may impose upon you.

Adding an e-commerce channel does not necessarily require that you abandon retail. In fact, like diversifying your supplier network, your ability to reach customers directly can help to build your brand and provide leverage to negotiate more favourable terms with the store you want to be in.

Be prepared for more changes to come

The pandemic has forced the food and beverage industry to change more in the past three years than in the past two decades. Like many aspects of business and life, many of the kinks in global supply chains will continue to normalize — giving way for other issues to evolve.

You can prepare by thinking now about the looming impacts of net zero commitments on global shipping and logistics, the effects of climate change on access to raw materials and input costs, and more. Also, the potential benefits of increasingly powerful artificial intelligence and analytics capabilities to help you navigate the turbulent times ahead.

Contact us

To learn more about how you can navigate today’s supply chain challenges, contact: 

Nick Whayman, CPA, CA
Private Enterprise Partner
[email protected]

Jory Soubiran
Senior Manager
[email protected]