Just when we thought COVID was going to be the biggest crisis of the past decade, we have been plunged into yet another disaster: the war in Ukraine. The pandemic has already shaken supply chains around the world, pushing approaches to supply chain disruption into the spotlight. This new crisis is further aggravating the situation, increasing inflation in all markets, and food is one interesting segment that impacts large companies and individual consumers alike.
Why are prices actually increasing?
A key reason that food prices have recently risen is the increase in costs of key commodities. Indeed, Ukraine and Russia are significant sources of global exports. For example, 25-30% of the world’s wheat supply comes from these countries; the price of wheat has soared by 24% in the EU since the 24th of February 2022, the first day of the invasion. Russia is also a leading producer of soybean, corn, and, importantly, crude oil and natural gas – all for which prices have been spiking.
Logistics, essential in the food supply chain, is another area that has been severely disrupted globally. Freight rates had already been impacted by COVID and will increase from the rise in fuel prices and, in some cases, routes will be impacted for all modes of transport.
In another example, the cost of fertilizer – essential for crops and animal feed – had already been increasing as a result of higher demand during the pandemic; similar to households stockpiling with toilet rolls or governments with PPE, many countries decided to purchase more fertilizer to prepare for the worst. Now, interestingly, the challenge has shifted from the demand side to the supply side: Russia and Ukraine are both major suppliers of fertilizer, but commercial restrictions and land destruction are compromising exports of this key commodity.
Agriculture and farming professionals are now faced with the decision to either ration the use of fertilizer or pass on the increased cost to customers, resulting in higher prices for end products for consumers.
What can procurement professionals do to combat supply chain disruption?
As ever, not just in procurement, knowledge is power. Understanding your supply chain inside out will give you a much greater ability to understand and therefore negotiate prices with your suppliers. If you know that 30% of the price you pay for your food product is directly linked to an index (such as wheat or rice), then you are in a much better position to figure out the expected cost increase. This knowledge will also help you help your suppliers in reducing costs. For example, if you know that 30% of the price of chicken breast you buy is animal feed, then you can work with your supplier to find alternatives to traditional feed sources.
With the perceived threat of supply disruption, many organizations are already aiming to localize their supply chains as much as possible – just like throughout COVID. Now is a good time to start looking for more local alternatives or backup suppliers to your current global ones.
The silver lining: long-term lessons in supply chain management
There is, in fact, a silver lining from these difficult circumstances: just like in the response to the pandemic, we are showing more creativity than we thought we had, and this is going to have lasting positive benefits.
To start with, we’re shifting to more local suppliers to combat supply chain disruptions; this typically increases the use of small and medium-sized companies, which are more flexible and agile than many global organizations with heavy overheads and processes. This also supports ESG measures that encourage local economies and often diversity targets.
With commodities generally being more scarce, we are also being encouraged to use them in the smartest way possible. One example in food is changing the tolerance levels on vegetables to make sure we use more and waste less. Another example is reducing reliance on petrol-dependent plastic packaging, which encourages us to use less and use it better, to the full extent possible. All of these ideas help mitigate the impact of inflation while also potentially having a lasting impact in terms of ESG, as we use fewer resources and in a smarter way.
There are many elements outside of the price of commodities itself that can be leveraged to create benefits and counteract the impact of the latest crises. Working with your suppliers, you can explore ideas that can improve the process or the quality of what you buy. Do meet with them, brainstorm, and ask them what they believe would improve their operations and consequently your prices. We recently helped a client reduce its costs by a double-digit percentage, simply by working with the supplier to find a way to harmonize specifications of a single ingredient purchased across its business units.
These are the creative solutions we explore, implement, and sustain with our clients every day to respond to challenges, including global supply chain disruptions. Now, more than ever, it’s imperative that we use our creativity and best thinking to respond to what’s going on in the world around us.
To discuss this article or any food industry-related supply chain challenges, please contact Barbara Guignard or Eleonore de Montjoye.