The secretly-strategic-shortage-solving function

Tuesday 31 July 2018

Article

Much of the recent press around CO2 shortages has the feel of a silly-season news story that generates clicks at a quiet time in the news business. Coming in the middle of a hot summer in the UK, it certainly looks like unfortunate timing for drinks businesses that should be delivering solid like-for-like growth. However, look a little deeper and we see some repeated lessons from this and other recent shortages that highlight the value of the strategic side to procurement:

1. It’s not enough to understand just your direct suppliers
   Most FMCG businesses have a good understanding of their direct suppliers, but a much more limited view of what drives their suppliers’ businesses. One of the causes of the CO2 shortage was a shutdown two steps up in the supply chain in ammonia plants. We find that those businesses that look further up the value chain for supplier concentration, weak links and evidence of ‘early warning’ signs, are better prepared to avoid such issues.
2. Regional provenance can be a double-edged sword
   Ingredient provenance has been used extensively in own-label to differentiate premium tiers, to great effect. It was emphasised in several years’ of M&S advertising to the point of parody. But when provenance coincides with geographical concentration, manufacturers are vulnerable to price spikes. This has been felt recently in Madagascan vanilla, source of 80-85% of the world’s natural vanilla, as explained in these excellent Economist and FTarticles. Developing alternate supply sources isn’t an option for many smaller businesses, but the global giants of FMCG should be thinking about where supporting different agricultural supply bases helps both manage input costs and support CSR credentials too.
3. Innovation always trumps the shrinkflation response
   Rising commodity prices and stubborn price-points have resulted in shrinkflation, sometimes with unfortunately consumer responses (see Toblerone). Other categories change the game, substituting high-value with lower-value ingredients – adding a dose of innovation that can mask any shift in the bill of materials. In desserts, trends such as “alternative” Christmas puddings, red-velvet and salted-caramel move the focus away from inflating raw materials such as dried fruit and cocoa. "Flexitarian" meat products are commanding premium prices, but with more of the product comprising cheaper vegetable inputs, offer better margins, too.
4. Virtual / vertical integration secures the most strategic of inputs
   In some categories the nature of the supply chain means alternatives simply cannot be sourced. Growing Christmas turkeys, for instance, relies on access to sufficient volumes of day-old hatched poults, in a narrow window around Easter. Control of the hatchery – the tightest part of the supply chain – is key. Businesses such as Bernard Matthews and 2 Sisters have invested in vertical integration or virtual integration to manage volumes & thus pricing later on downstream.

Procurement always has ambitions to be a truly strategic function, which we fully support. But it's often not set up to succeed. It needs to be plugged into core business processes such as innovation, customer service and finance / decision-support, and resourced with the right capabilities to do the research, evaluate the options and make the case to the rest of the business. With this, FMCG businesses can turn “problems to react to” into opportunities for margin, differentiation and ultimately, growth.