COVID-19 INSIGHTS SERIES
The first wave of COVID-19 has created lasting change for the business world. Without adequate uptake of an effective vaccine there is significant risk of future waves of infection. In its COVID-19 Insights series, Arkaro offers some thoughts on business implications for leaders. For the first article associate contributor Rudi Burkhard reflects on impact to supply chains. For a free consultation on managing risk in your supply chain please contact Arkaro.
COVID-19 and the risk to food supply – Rudolf (Rudi) Burkhard
CNN reported on an FAO (Food and Agriculture Organization of the United Nations) report about the possibility of food shortages. The report contains a lot of things the World and all countries should and many they must do.
My assumptions: We (the World) have plenty of food, and we waste a lot! If the World behaves appropriately, there will be plenty to go around!
What can we do about the risk, and how does the risk occur?
That we waste a lot must be pretty clear to most of us, certainly those that live in the richer countries. Here is another report from the FAO. “Reducing food loss and waste: World Hunger is on the rise; yet, an estimated 1/3 of all food produced globally is lost or goes to waste.”
And here is what ‘The Guardian’ says about the current, Covid, situation: “‘A disastrous situation’: mountains of food wasted as coronavirus scrambles supply chain.”
The food supply chain is on the one hand enormously complex and at the same time really quite simple. What is missing is end-to-end information about the inventory of foods and the real consumer demand. Certainly, consumers are unaware of how much inventory there is in the system. Being unaware and reading reports such as the one on CNN will be disturbing to very many people around the World. What can very easily happen? Hoarding – just as it did with loo paper! Since food is probably more important than loo paper, food hoarding may become a really disastrous phenomenon.
I have experienced hoarding several times in business environments. Spandex (products like Lycra® and Dorlastan®) consumption volume grew very rapidly as these products penetrated many of the textile markets (hosiery, swimwear, underwear, outerwear, …). At least once the industry could not keep up with supply. Guess what. Smart business managers began to hoard these products. Hoarding increased pressure on the producers and gave them the impression demand was growing even faster than reality, so more and more hoarding. (Spandex producers did not have visibility of the (huge) amounts of Spandex in customers’ warehouses, who in turn had no idea how much fabric their customers had in their stock. Lycra® built 2 new factories concurrently and both came on-line at about the same time causing a glut of supply. The hoarders tried to return a lot of the stuff they ordered and cancelled many still unfulfilled orders. What a disaster. Had the supply chain been managed differently there would have been plenty to go around during the apparent shortage – a bit tighter a situation but certainly not the disaster we actually had.
Food (the many different foods) could all end up in a similar situation. Food is also more difficult to manage because a lot of it has a sell by date. After the sell by it becomes waste. The World has developed many ways to store and transport food so that many perishables can be available all year round. It’s a very sophisticated supply chain. Nevertheless, a lot of food is wasted.
Waste will happen if too much food is stored poorly and there is too much stored that way. There is a need for the supply chain to have ‘just enough’ in the various locations along the chain coupled with frequent replenishment so that food never stays on the shelf or in the storeroom for long.
There is probably a need for a visual of the supply chain – how much food is in the supply chain, where it is located and how long it will take to get to your store. This information might be an excellent application for ‘Big Data’. ‘Big Data’ transformed into useful information to guide supply chain managers and consumers.
From “FeedBack”: Supermarkets and shops have not yet solved the waste problem: “Despite many laudable initiatives to tackle food waste, supermarkets are failing to successfully reduce waste in their stores, supply chains and customers’ homes. Despite leadership from a few retailers, many still lag on the most basic steps to further their food waste reduction, such as publishing transparent data and converting food surplus into animal feed. And no supermarket is truly getting to grips with how their marketing and sales tactics cause waste in their customers’ homes.
The following information probably exists throughout at least richer countries’ supply chains. (Food inventory in homes is not available yet and will probably take a long time to implement!)
1. Inventory of every item in every stocking location – shops, regional warehouses, all the way to the stock on the way in farmer’s fields (is farm data available today?).
2. Consumption (including waste) and replenishments at each location.
3. Replenishment quantities ‘on the way’ to a shop or warehouse.
4. Average daily consumption of each item in a shop.
With this information the World could already today manage replenishment across the entire supply chain. The supply chain could be managed in such a way that maintains food in the appropriate places, preserve quality for as long as possible, have just enough in stores to supply the needs to both stores and customers. Tools also exist to continually manage stock levels in the direction of the optimum. The optimum that will vary over time. Such a system can also manage seasonality, promotions and other irregular demand.
To see the result of managing only locally I suggest you play the ‘Beer Game’. Many of you may know this game. It has been around since the sixties – so the knowledge underlying the game has been around for a long time. And yet supply chains still suffer the ‘Bull Whip’ effect. You can play the beer game on-line – there are several. Just enter “on-line beer game” into your search engine.
For some time now computers have become powerful enough to manage huge and complex supply chains. Now might be the time to apply the available knowledge to food supply chains. Th beer game simulation not only shows hoarding, it also shows how a lack of system information results in those locally responsible (for a shop or a distribution centre, a wholesale warehouse or production) inadvertently falling into hoarding. Local information looks like more demand, but in reality, demand is constant (except for just 1 demand change). You can also read the story of the beer game in the 5th Discipline by Peter Senge.
All of the above are ominous. Food is much closer to our basic needs than any of the above (except maybe beer!). If food is so important to us how will we avoid hoarding?
Countries, the USA and states within the USA have already demonstrated hoarding including what sounds like stealing from others. There is really no telling what will happen if the population suddenly believes there will be a shortage.
Another good source of information is Goldratt’s Book, “Isn’t It Obvious”. It is the story of a store manager that suffers a flood in his storeroom and therefore cannot store any product … except whatever is in the shop. Together with his friend in the central warehouse he develops a solution with 3 effects: His inventory is way down; his sales are way up and customers find what they want when the come into his store. The book is not about food, it’s about home textiles – sheets, tools, etc. The solution, though, is universal.
Historically the solution presented in ‘Isn’t it Obvious’ was applied at a small New York City supermarket. The manager of the store was at a disadvantage vs. his larger competitors. He applied the “Isn’t it Obvious” solution before the book was written. He doubled the variety in his store by replenishing and managing inventory as described in ‘Isn’t it Obvious’. His result was significantly greater sales and profits. The added sales easily offset the additional cost of more frequent replenishment. (Unfortunately, I cannot find the story … this is from what I remember).
The software tools are available (you need software because of the huge number of articles in your store). The tools will make food more available where and when it is needed, and they will cut waste … the World will be able to feed those with too little much better.
There is one fly in the ointment! PEOPLE! How do we stop people from suddenly hoarding food! If that happens it will be like a disastrous run on banks.
There are really only two ways to stop hoarding:
1. An excellent supply chain capable of ensuring supply where and when it is needed (the tools exist, just need to be implemented) so that nobody gets the impulse to write about a coming food shortage.
2. Countries are ready to ensure rationing of food as soon as the danger becomes real.
What do you think?