Five Things You Need to Know About the Food Supply Chain

Today’s complex food supply chain is riddled with roadblocks, from geopolitical unrest to climbing costs, labor woes and consumer pressure to package smarter. Transportation struggles are real. And you can’t ignore AI and digitization — or its risks.

How are these supply chain factors impacting profit margins, lead times and a basic ability to get products to shelves?

“Drastically,” said Dan White, industry consultant with SafetyChain.

More than ever, food and beverage processers need end-to-end visibility of their supply chains to ensure safety, reliability, security and accessibility.

QA Magazine sat down with White along with operational and technical experts Llaine Groninger and Karen Everstine at FoodChain ID to talk supply chain. Here are five things you need to know now.

1. Everything costs more.

Like most consumers who are cringing at grocery bills and rising mortgage interest rates, food and beverage processors also wonder, when will the financial bleeding stop? Across the board, manufacturers are stuck in a profit margin vice grip.

“Skilled manufacturing labor, outside of supervisory roles, has increased by 22%, and that is the largest jump we have ever seen,” White said. “Usually, labor costs in a facility are your highest budgetary expense, and it’s a very volatile portion of a budget because you have overtime, new hires, pay increases, benefits and so on.”

White said he believes many facilities are not fully aware of the true cost of production because of fluctuating costs and even intermediaries in the supply chain they might not know about. For instance, a facility sources packaging from Acme Goods in Texas without fully realizing that Acme gets its raw materials from three different providers in various states or across the border. The supply chain expands, and so do costs.

Meanwhile, there are costs producers do know about but can’t control like inflation and bigger price tags on ingredients and supplies. Not to mention, supply chain tariffs increase expenses and hurt U.S. manufacturers working with global suppliers.

“Producers need to build some inflationary padding into their contracts with retailers,” White said.

Herein lies the conundrum.

With consolidation across the grocery retail sector, goliath players rule contract negotiations. Food and beverage manufacturers that want a place on their shelves deal with the terms. “Pricing products with an appropriate margin is difficult because typically, companies are locked into six-month or yearlong pricing agreements,” White acknowledged.

The solution is negotiating terms that allow for adjustments if raw materials and transportation costs exceed a given percentage. Unfortunately, many manufacturers feel stuck.

Another answer: Reduce waste to capture falling margins.

“Know where everything goes,” White emphasized. “I meet with companies that honestly don’t know how much they give away or scrap and there are huge gaps.”

2. A risky trifecta: natural disasters, climate change and geopolitical unrest.

Civil unrest, trade tensions and outright war across the globe stall and sometimes stop supply chain routes completely.

“We will continue to see geopolitical unrest and disruptions in supply chain routes to the Middle East, which means longer waits and more cost,” said Groninger, director of subject matter expert operations at FoodChain ID.

She pointed to Ukraine as a key grain and sunflower seed and oil supplier. While the U.S. does not depend on Ukraine for grain, food producers requiring sunflower sources are forced to “nearshore” the product — introducing another trend.

Nearshoring means reeling in the supply chain to more regional providers. It’s not always possible.

With the sunflower example, Mexico is also a supplier of this ingredient.

“That would shorten your lead time, but when you switch suppliers, you must conduct testing and monitoring to qualify the new source,” Groninger pointed out.

Toss in climate change and unpredictable Mother Nature, along with some natural disasters — another layer of complexity in sourcing product and getting it from Point A to Point Z.

“Licorice root is only grown in a few places, and it’s almost like a weed that needs very dry soil, and one of the places it is grown is Azerbaijan, and it’s a challenge to get it from this region,” Groninger said.

Dwindling or unpredictable crop yields because of weather events or a shift in climate patterns are causing food and beverage processors to rethink their supply chains.

“Olives, cocoa, coffee, oranges, cumin and cinnamon — every year these harvest yields are lower, which is linked to the environment in general or pests and fungi, and it seems like we are headed into a period where we can’t expect those high-value crops to come through year after year like they historically have,” Groninger said.

3. Transportation bottlenecks create a liability.

“Four years from the beginning of COVID, we still haven’t prepared for all the shortcomings experienced during that time period,” White said, noting a shortage of about 60,000 U.S. truck drivers.

“If you can make a million tons of product but can’t send it anywhere, that is a liability,” White pointed out.

Food shippers are wrestling with rising costs, too.

According to a report by Tive and a survey conducted in conjunction with Food Shippers of America (FSA), the primary concerns driving supply chain challenges are freight marketing fluctuations and rising costs. The study cited underlying inflationary pressures such as materials, energy, logistics and labor as factors eroding profit margins for food manufacturers and distributors.

4. AI presents opportunity, yet digital transformation requires human intel.

Looking for long-term ways to manage labor qualms and elevate efficiency, digitization is in the conversation or already in play. But robotic lines and automated devices require a level of skill to implement and oversight that is lacking, White said.

“I went into a million-plus-square-foot facility, and you’d expect to see hundreds of people working. There were 12 individuals running the entire plant,” he said. “Every aspect was automated.”

The reason he was there: to solve an operational issue.

“Their employees weren’t sufficiently trained to operate the equipment they were given,” White said. “It’s like handing a Ferrari to a 15-year-old.”

AI isn’t going away, he added. “We should definitely be leveraging AI to determine product costing and historic packaging ingredients, for example,” he said.

Machine learning has a strong potential for advancing food safety, Groninger said. For instance, at FoodChain ID, experts use technology to “comb through the noise,” such as examining more than 200 pieces of information related to a product per minute. “Now, you still need a human looking over the results,” she said.

Everstine, FoodChain ID’s technical director, said, “The idea is to look broadly across data, and there is definitely a place for both [AI and human intervention] along that spectrum.

“We want these high-tech solutions, but it’s tremendously powerful to have your people be watching those data sources.”

Groninger piped in, “Now, we have to be able to not just analyze data and use AI to help, but we also need to make strategic decisions very quickly and communicate that to customers in a clear, concise way.”

Connected technology opens doors for bad actors, and Groninger pointed to farm equipment rigged with complex sensors and drones that capture field data to inform growing best practices — what areas of a field need watering or fertilizer and beyond.

What if someone hacks the system? What if the technology simply goes down?

As with any business, opportunity cost and reputational damage are at stake, not to mention risking crop yield.

“If this happens in a peak season to a grower/supplier, that could affect your ability to get goods in time,” Groninger said.

5. Consumers demand sustainable packaging and authentic ingredients.

Consumers are reading labels more carefully than ever before, Groninger said.

“Whether packaging or social responsibility, there is a lot that falls under the sustainability topic,” she said. “They don’t want to see foods that seem like they came from a chem lab, and they don’t want to see excessive packaging.”

There’s a move toward reusable straws, “and single-use packaging is a problem worldwide,” she added, noting that Singapore banned the use of single-use plastics.

“This can absolutely affect your supply chain because we use it day in and day out,” Groninger said. “Think about little beverage boxes or brik packages with the attached plastic straws. If you have to replace those with paper, that’s a big deal.”

At the end of the day, the consumer rules.

Groninger said, “Consumers have expectations, so they will push.”