The coronavirus outbreak is a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on every economy worldwide. What is becoming clear is that the pandemic has exposed poor supply chain contingencies within many sectors, not least the grocery sector. By Rob Stummer, Asia Pacific CEO, SYSPRO.
For our supermarkets, the panic buying phenomenon started a ripple effect that impacted every aspect of their supply chain. They were just unable to restock fast enough to meet the mass demand for consumer stockpiling and are still playing catch up.
Failure of the just-in-time approach
The process of getting grocery products from the manufacturer to the consumer, which has worked perfectly well with few issues for decades, is now seriously flawed. With the coronavirus impact on supply chains, just-in-time inventory and lean manufacturing has been exposed as a point of failure instead of a cost advantage.
The just-in-time approach saves money by avoiding the need to store inventories in large warehouses. It also eliminates a lot of the guesswork as orders are based on demand using knife-edge accuracy, instead of estimates. In many ways, this system is miraculous and low-cost food is the obvious outcome. This has made the supermarkets more profitable but has also significantly increased the risk to their supply chains.
Normally, when a product is out of stock on the shelves, supermarkets can restock the products with items from their onsite storage or warehouse. If they do not have any stock in-store, they will need to wait for a delivery from a distribution centre, but if there is no stock there, they will need to wait for the manufacturer to produce and replenish the stock.
A loss of resilience
There is a hidden cost that COVID-19 has exposed, which is a loss of resilience. Our global food system depends on the tendrils of international trade to criss-cross the world in an increasingly complex system of buyers, sellers, processors, and retailers, all of whom are motivated to keep costs as low as possible and their operations lean.
Growers and manufacturers know how much of a product they need to produce depending on what shoppers are buying and usually manufacturers have an accurate insight into how much inventory is required. However, the pandemic panic buying threw that inventory management strategy out of the window.
The issue was particularly compounded because Australia is remote from other countries and our major metro cities are far apart. Indeed, some of the manufacturers of the products or the materials used to produce them are not located in Australia or in the state or territory where they were needed. They failed to understand precisely where the available stock was so they could prioritise getting it to the distribution centres where it was needed most.
This is not just a matter of paying close attention to critical steps in the supply chain such as finding alternative sources of supply, recruiting more warehousing and delivery staff and safeguarding in-store replenishment. Or is it a matter of paying extra wages to secure flexible capacity to cover the peaks. These actions are, of course, important to ensure that retailers can fulfil peak demand. But it is just as important to manage consumer demand proactively.
The national stockpile
Even if the pandemic had not happened, the fact that the Australian population is growing at such a rapid rate will put a massive strain on food supply and if we remain so over-reliant on global supply chains we are putting ourselves at risk if there is another crisis such as a second wave of this pandemic or even a war.
One of the oldest government strategies to ensure greater stability and provide resilience during an emergency is that of maintaining certain food stockpiles. Countries which have adequate food stocks can weather global food price shocks, local supply shocks from failed harvests, income shocks (from economic downturns or exchange rate shocks), disruptions in trade due to export bans, as well as during times of emergencies such as war or a pandemic. As to what extent and how stockpiling can help build a more resilient food system continues to be debated globally.
Rethinking supply chains
Even as the food and beverage manufacturers, distributors and retailers address today’s short-term challenges, they should take the time to rethink their business models and increase collaboration to become more efficient and therefore less exposed to shocks. An ERP solution should provide an integrated inventory management system that offers full visibility throughout the supply chain to ensure that supermarket shelves are not left empty.
Embracing technology to manage warehousing and transportation will help retailers to reduce the burden on labour. Adopting machine learning in the forecasting approach can also help spot abnormalities fast so manufacturers and suppliers can adjust immediately.
I have every confidence that the Australian food and beverage industry will be able to handle this current crisis. The leaders in the food industry are crucial to the health and well-being of our people, both today and in the future. The leaders of the food industry need to navigate this current crisis collaboratively, as well as build and strengthen their businesses for the longer term.