Dare to Disrupt: COVID-19 Reshaping Food Supply Chain and Logistics

By Sofia Cordero and Ryan Pederson

December 16, 2020

Although the impact of COVID-19 has affected businesses across all industries, companies in the Food & Beverage space have experienced a unique and wild journey navigating financial and operational changes within their organizations. Food manufacturers, distributors and retailers were forced to adapt to higher customer demand, battling capacity constraints, increases in transportation costs and challenges to maintain workforce productivity.

Due to high demand many companies were faced with two major disruptors: First, inventory shortages and unusually long supplier lead times cause challenges to maintain proper inventory levels and stock. Secondly, the industry is experiencing tight capacity in trucking and drivers pushing up transportation spot rates. For some food manufacturers and distributions these capacity constraints pushed businesses to consider outsourcing in order to meet the high demand. The surge in consumer purchasing and fluctuation of expected customer demand created an imbalance for businesses at the start of the pandemic. Although this chaos was not expected, these shifts in the supply chain forced companies to enter a “change mode”, driving decision makers to revisit their existing business models and focus on long overdue financial and operational changes to stay ahead of the competition.

Mazars Insight

Inventory is the essence and profit driver of a food manufacturer-distributor, and proper inventory management and visibility is essential to stay relevant or even create a competitive advantage in the marketplace. During these challenging times, decision makers should consider the assessment of the organization’s current technology and determine if enhancements should be made to support higher demand to anticipate inventory turnover and update restock thresholds. Businesses often delay this due to the costs associated with a new technology; however, challenging times have forced decision makers to prioritize the exploration  of their options. Before jumping into a new technology, businesses should do an analysis and selection process to determine the appropriate technology that will not only help the manage the current environment and trends resulting from COVID-19 but will also support the future of their organization its long-term plans.

This is the time to think outside the box, be creative to turn this unfortunate worldwide crisis into an opportunity for business transformation. Assessing the issues of inventory shortages and transportation constraints is crucial. Businesses need to focus on process improvement as inventory visibility to satisfy evolving customer needs, more demanding order traceability and shorter delivery lead times are key to staying competitive in this current environment. Businesses reassessing their existing operating model should consider doing a route optimization analysis to determine current capacity, and ways to maximize utilization of existing fleet vs capital outlay for new capital expenditures. Customers’ expectations have changed; fast delivery is top of mind, and businesses need to consider maximizing route capacity and assessing logistics efficiency and effectiveness of the routes on a regular basis. Freight network optimization is an important part of the logistics process. Tracking routes and analytics will highlight variations with customer demand by geographic location, frequency of deliveries, order frequency, and more. These analytics and data help business optimize and build a standard transportation cost per route, to include fuel costs, tolls, parking costs, which can be used to determine future contribution margin, and support businesses forecasting strategies.

Mazars Insight

Businesses may also want to consider an outsource model to cover overflow by partnering with third party logistics (“3PLs”) providers to increase capacity. It is critical for business to do a cost/benefit analysis to understand both direct and indirect costs in order to make informed business decisions. An outside third-party logistics partner can help support the business and provide specialized/customized services without interfering with the existing internal logistics model. Additionally, performing an indirect spend would serve as a tool for decision makers to be quantity an estimated rate of return to make informed business decisions.

The COVID-19 pandemic has caused a shift in consumer purchasing trends impacting the food and beverage sector, accelerating the shift from brick and mortar sales to e-commerce. While spending at brick and mortar retail has rebounded as states re-opened, the lasting impact of COVID-19 can be seen as e-commerce and online retail sales levels remain elevated in comparison to previous years. Consumers continue to opt for online ordering with curb-side pickup or home delivery as a way to continue to socially distance, avoid large crowds, and deal with long wait times due to capacity limits. As COVID-19 cases continue to rise nationwide, consumers will look to stock their pantries with shelf-stable goods and other household essentials, while increasing online shopping, limiting the number of trips to the grocery store and potential exposure.

Mazars Insight

This shift in consumer trends has caused companies to evaluate their online presence and focus on engaging consumers in a digital environment. Many companies will need to examine the need for increased investments in technology to keep up with the acceleration of e-commerce. Companies can look internally for solutions to improve the fulfillment process and demand forecasting to keep up with spikes in consumer purchasing trends.

Additional disruptors many businesses have experienced as a result of the pandemic include workforce management and productivity challenges. COVID-19 has generated fear and safety concerns for people across the globe, causing increased absences and labor shortages. Companies handling food products comply with strict safety guidelines to ensure products are handled safely and in accordance with FDA guidelines. As a result of the pandemic these guidelines have increased, which has imposed higher operating costs to businesses to ensure the safety and health of employees, including social distancing requirements, implementing health screening procedures and more.

Mazars Insight

These guidelines impact business operations, warehouse capacity constraints and changes to existing process flow (e.g. for a manufacturer the number of employees on a line, number of employees per shift, etc.). Companies have had to make operational changes, longer working shifts, modifications to existing warehouse space or consideration for additional space to increase capacity. Businesses should take this time to evaluate their existing space and perform a warehouse optimization analysis to maximize pallet positions with the existing space, automation of manufacturing processes, or evaluating the cost/benefit of using a third-party public warehouse to handle overflow. All these changes would require proper planning and analysis to showcase the best solution, highlighting both financial and non-financial factors.  Utilizing a public warehouse can increase capacity quickly without the need of long-term contracts. It also provides the flexibility to modify number of pallet positions needed based on demand and quantify the costs at any point in time. In this current environment with high real estate values, increasing rent prices and low vacancies, exploring a partnership with an outside public warehouse would result in lower upfront costs, as opposed to buying or renting a new facility, and could help the organization manage cashflow more efficiently.

The disruption caused by the COVID-19 pandemic has forced companies to re-evaluate their operational and logistics models. The pandemic has accelerated the need for innovation, leaving decision makers to adjust to changes in consumer trends, while creating a resilient and adaptable supply chain. Having the proper logistics infrastructure creates operational efficiencies, which ultimately yields to greater profitability. It is important for business to react quickly, and adapt to changes in the industry, which differentiates the business and supports their value proposition to customers.

 



Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.


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