Efficiency vs. resilience: Food supply issues in the COVID-19 age
Professors assess the coronavirus' effect on the weakest link in the supply chain — inflexibility.
Every time you walk into a grocery store and look with dismay at the half-empty bread aisle, the box-less pasta shelves, the empty meat coolers, please remember this: One reason this is happening is because we’re so darn efficient.
“We have developed this incredible food supply system over the past 150 years or so,” says Tim Richards, the Morrison Chair in Agribusiness. “We’ve become amazingly efficient at feeding millions of people at the least cost possible, but we’ve found that efficiency comes at the cost of resilience.” And, like the virus that shocked our food supply in the first place, shortages and price increases are likely to be with us for some time.
Awry and demand
Inflexibility in the food supply chain starts in the same location as the food itself: on the farm. “Most farmers become so specialized when they become large that they only have contracts to supply Walmart or Kroger or Sysco,” Richards says. Walmart and Kroger require food to be delivered in ways that consumers can manage it, while Sysco, a food-service supplier, is selling to restaurants and institutions, such as hospitals and schools that buy in bulk. For Sysco, demand tanked when stay-at-home orders closed schools, restaurants, and other facilities that would use a case of lettuce or a 50-pound bag of onions.
The shift created packaging problems. “Most of the food that is sent to restaurants is sent in bulk quantities,” notes Mohan Gopalakrishnan, associate professor and chair of supply chain management who is known as Dr. G. “Food banks and grocery stores need food in quantity, but not bulky packaging, so that’s something that the processing now has to take care of.”
Meanwhile, pandemic buying — and hoarding — made it tough to keep retail grocery shelves stocked, Dr. G adds. Plus, supply and demand have taken on a hard-to-manage lumpiness due to Covid-19. According to Supply Chain Management Research Professor Thomas Kull, this is due, in part, to the bullwhip effect, which reflects the fact that supply chains react to the local information that people have in front of them.
He points to the run on toilet paper that blind-sided grocers and big-box stores as lockdowns began.
It’s not that everyone called each other and said, ‘Alright, let’s get out there and buy toilet paper.’ It’s that we’re all human. We all have similar needs and had the same reaction to COVID-related stay-home orders.
Meanwhile, he continues, imagine a TP manufacturer who doesn’t watch the news, so he assumes his product is a surprise hit with consumers and starts to ramp up production. The manufacturer orders more pulp from the pulp suppliers, who order more trees cut down. Then, when the run on TP ends, order cancellations start hitting the manufacturing plant, the pulp suppliers, and the folks who cut down the trees. Minor changes on the consumer side can create massive impacts upstream.
Along with these supply and demand issues, there’s the virus itself insidiously reaching into the meat processing plants and other food production we need to keep running.
A recent New York Times article noted, “There are about 800 federally inspected slaughterhouses in the United States … but a relatively small number of them account for the vast majority of production. In the cattle industry, a little more than 50 plants are responsible for as much as 98% of slaughtering and processing.”
“Consolidation cuts both ways,” says Richards. “It’s always good to have more efficient companies than less efficient ones, but that first plant that went offline in Minnesota took out 5% of hog production in the U.S. That’s crazy.”
As production falls due to plant closers, farmers have less demand for their livestock and poultry, but these are living things that can’t be shelved until demand rises. “Pigs are going to continue to grow,” Kull says. “You can’t slow it down. The food chain is like a freight train: It has inertia built-in.”
As a result, prices paid to farmers and ranchers have fallen. That’s what’s happening on the incoming side of the slaughterhouse. On the outgoing side, demand is still high, but supply is down because of worker illnesses as well as new sanitation and social distancing demands on plant managers. Consequently, Richards predicts, consumer prices will rise.
This is likely to occur with food that doesn’t move through a butcher, too. The guest worker program that supplies immigrant labor to fruit and vegetable growers “will be inherently harder for growers to take advantage of because of the natural barriers put in place by Covid-19,” Richards continues. He points to a grower he knows who needs 900 people every year to harvest strawberries. If the grower can’t find a way to guarantee worker safety in the face of the pandemic, he’s planning to plow under his strawberries.
When they talk about shortages coming down the pipe, it’s all going to be about labor.
Already, the U.S. Bureau of Labor Statistics has reported the largest one-month rise in food prices seen since February 1974, more than 46 years ago. In April, meat, poultry, eggs, and fish cost consumers 4.3% more than they had in March, while fruits and vegetables rose 1.5% and bakery products jumped 2.9%.
Changing the channel
The supply chain may not be all that flexible, but people are, and many have already found workarounds to the problems Covid-19 introduced. For instance, many cities are seeing a new kind of retail outlet: restaurants selling food and supplies to make up for lost sales of their finished dishes.
While picking up Thai food at a local restaurant, Supply Chain Management Professor Scott Webster saw this first-hand. “The restaurant owner was selling antiseptic wipes in large boxes and other items,” says Webster, who’s the Bob Herberger Arizona Heritage Chair.
You can’t buy these wipes in the grocery store or other retail outlets, but the supply is there, and, in this case, it’s available to a food-service channel.
Webster bought the wipes and went back the next day for hand sanitizer.
Dr. G notes that online shopping is up as much as 56% over last year, according to one study. Richards says that Covid-19 has accelerated online purchasing of groceries by some 10 years or so. “The United States has been slow to buy groceries online relative to Europe and the U.K.,” he explains. In the U.K., online shopping accounts for some 10% of grocery purchases. Here in the states, it’s been under 3%. “Now, because we're being forced to buy food online, people are going to find out that it's truly convenient.”blockquote class="indirect-quote"> While it’s great the consumers are finding new ways to get the goods they want, suppliers should make changes, too.
Ahead, Kull sees food producers looking for ways to build redundancy into their supply chains. He doesn’t think that redundancy will be linked to capacity but to alternatives for immediate shipment and consumption. “Maybe meat producers will think about cold storage — something they’re not using much now — or dairy producers may look for alternative containers to store milk as a backup plan,” he says.
Richards thinks Covid-19 will “teach the people that operate the supply chain that they need to cross that bright line between retail and foodservice. It’s in their best interest to develop some sort of interoperability so that if demand fluctuates in one, we can easily move food from one side to the other.” He also thinks this is something supplier — particularly large food distributors — will do voluntarily because they see the need and opportunity. As a case in point, Sysco is already offering an order-for-home option online.
Meanwhile, Dr. G sees producers paying more attention to the whole supply chain, even the smaller links. He recalls a recent telephone conference where one participant was in the wine industry. Despite the jump in recent demand, that manufacturer was able to adjust his supply chain for bigger items, such as bottling and key ingredients, but the smaller companies that supply flavors presented problems. “Are we taking care of the smallest suppliers? Is the health of the smallest suppliers at risk? That’s an area people will need to look at,” Dr. G says.
The cost of contingency
Food supply changes are ahead and needed. To help organizations evaluate them, Richards and Webster will be researching the cost of inflexibility in the food supply chain.
Webster says that it will be aimed at trying to answer these questions: If a producer spends a little more money upfront, can he or she lower the impact of a rare event like Covid-19 by a significant multiplier? Would the benefit justify the investment?
He points to Southwest Airlines as an example. That airline required manufacturers to adhere to a standardized cockpit design so that any pilot could fly any plane. “That provides flexibility if a particular crew is caught because of a storm or some other event. Another crew is trained for the same cockpit,” he explains.
Richards adds, “I think what we're going to show through our research is that adding flexibility is going to be what we call a profit-maximizing thing to do. It's not something we need to force producers and distributors to do. They're going to realize this for themselves.”
As Dr. G points out, “No one wants our supply chains to break. We just need them to bend.” And, going forward, he says, “Resiliency is probably the new mantra.”
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