F&B supply chain issues force price raises, product reformulation and R&D dilemmas

14 Jul 2022 --- The continuous headache for companies that don’t know if ingredients for their products will arrive on time – or arrive at all – has forced them to do everything but remain still to adapt. During this critical time, businesses must put forth effort to innovate, cut back on some products and face other, tough financial choices.

However, there are multiple different solutions to the same problem. Nothing showcases this better than the example of R&D. A study conducted by supply chain specialist TraceGains found that there is an even split between companies opting to double down on innovation funding and accelerate their efforts (36%) and those opting for research budget cuts (35%).

“Brands have always struggled to manage the internal tug-of-war between the innovators and the cost-cutters. And the latest shocks to the supply chain have only brought that dynamic into sharper focus,” Paul Bradley, senior director of product marketing at TraceGains, tells FoodIngredientsFirst.

“Companies have the best chance of success moving forward if they can get those two factions to work together. There’s no reason why R&D can’t produce new and innovative products while better managing costs. And that depends on healthier supplier relationships, better tools for R&D sourcing and a more diverse supplier pool,” he underscores.

“Supply diversity is the only way forward,” highlights Bradley.Supply chain diversity
Bradley explains that brands “can’t afford to maintain the status quo” when deciding to keep their old supply chains or opt for simplified and diverse ones. 

He concedes that the next-generation supply chain must be built on a flexible network of various suppliers – putting all the eggs in one basket is no longer a viable strategy.

“Supply diversity is the only way forward,” highlights Bradley.

“If the pandemic and the turmoil in Eastern Europe have shown us anything, it’s that the days of relying on a small set of redundant suppliers or suppliers centered in a single region – such as China – are numbered,” he outlines. 

(Almost) unanimity on inflation
The study by TraceGrain – which analyzed over 300 food, beverage and supplement brands in the US – shows no divide regarding whether inflation has affected business operations or not.

Nine of every ten respondent companies said that higher prices “shaped how they do business today,” with two third being forced to raise prices in the last two years.

“As consumers, we feel the pain of supply chain issues each time we walk out of a grocery store,” explains Gary Nowacky, CEO of TraceGains.

One statistic that shows why consumers are facing higher prices is that 47% of polled businesses admitted to being unable to produce enough to meet consumer demand. Demand outpacing supply is a recurring problem this year; the latest example is in the dairy sector, where labor shortages constrain outputs.

Forced recipe reformulation
When asked how many recipes or product formulas companies had to change in the past 24 months, 37% of companies say that they changed over 20 recipes – with over 20 being the largest possible response in the survey.

Twenty-two percent of companies changed zero to five recipes, 13% changed six to ten recipes and 12% opted to reformulate 11 to 20 of their products.

One of every two companies surveyed admitted they even had to halt the production of certain items.TraceGains has found an even split between companies opting to double down on innovation funding and those opting for research budget cuts.

“Forward-thinking CPG brands have used this unfortunate time as a wake-up call to modernize antiquated operations and those who already have are much better positioned to mitigate disruptions with as little impact as possible,” says Nowacky.

Externalizing manufacturers
Another trend that is expanding is the use of contract manufacturers by companies in an effort to get out of the labor business and focus on new initiatives and product development.

“Working with a co-man allows a brand to eliminate labor costs and cut back on other production costs, including the expensive upkeep of machinery and facilities management. Private label brands, for example, have been incredibly successful by relying on co-mans,” explains Bradley.

“More recently, we see brands turning to co-mans as part of an effort to become more agile. Having a strong co-man network can help brands adapt to changes in customer demand, or even to supply chain disruptions that might push a brand toward manufacturing capabilities that don’t exist in-house.” 

“A lot of brands would rather just focus on being great brands that create great products, and a well-designed co-man network makes that possible,” he concludes.

By Marc Cervera