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F&B supply chain disruptions: causes, consequences, and solutions

Discover the disruptive supply chain and cargo risk issues impacting F&B companies and solutions to manage the key risks.
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By Sarah Koo , 

Regional F&B, Retail Wholesale Industry Leader, Asia

01/06/2022

Not only have the pandemic and the war in Ukraine posed significant disruptions to the supply chain for F&B companies in Asia, the recent trend of resource nationalism (e.g. palm oil export ban in Indonesia, poultry export restrictions in Malaysia, wheat export ban in India) also pose serious challenges to F&B businesses’ survival and profitability.

These challenges are made worse by climate and environmental threats such as extreme weather, pestilence, crop failures, and produce contamination. Meanwhile, geopolitical risk and trade tensions have increased the associated risk of goods in transit, which create uncertainty and shipment reliability concerns when dealing with overseas suppliers and customers.

Inflation escalates risks for the F&B industry

Further compounding the F&B industry’s supply chain issues, rising global inflation creates additional pressure from rising material and production costs. A case-in-point is global food price index (FFPI) hitting an all-time high in March 2022, driven by a hike in vegetable oil and dairy prices.

Food inflation is also attributable to the increase in labour costs, freight charges and the pandemic.  The burden of rising costs ultimately will be transferred to consumers, who will continue to assess the most effective value perceived vis-a-vis price, when comparing different options.

Focusing on the region, food inflation in Malaysia — a major food exporter in Southeast Asia — saw a 4.1% year-on-year (y-o-y) increase in April 2022, which was significantly higher than the 2.3% increase in core inflation, as reflected in the Consumer Price Index (CPI).

The rise in food prices outpacing general inflation is also being seen in other Asian markets. In Singapore, food inflation registered a similar 4.1% y-o-y increase in April 2022, exceeding the 3.3% increase in core inflation.

Factors such as persistent logistic disruption, constricted commodity supply, and inflation can quickly aggravate losses for F&B businesses if uncontrolled, challenging their recovery and growth prospects.

Possible causes of disruption affecting F&B businesses and contingency solutions

In the 2021 Marsh F&B Industry Survey Report, roughly 1 in 3 respondents were concerned about the increasing supply and vendor production delays due to logistic disruptions, while almost 1 in 7 have suffered from supply disruptions when sourcing from multiple overseas markets. 

To offset increasing supply chain disruption risks and manage disruptions and vulnerabilities, F&B businesses must consider strategic risk and contingency planning as part of their operations.

Supply chain disruption

Key challenges

  • Food or raw material shortage
  • Logistic capacity constraints; rising logistic and labour costs
  • Food packaging material demand (last-minute alternative sources and suppliers could compromise product quality)
  • Food contamination and health risk (due to lack of familiarity with new suppliers’ quality control)
  • Cross-border and domestic logistic provision and supply chain disruptions 

Recommendations

  • Diversify sources/suppliers locally and internationally.
  • Find suppliers with better terms.
  • Build relationship and trust with new suppliers.
  • Expand customer base for better business continuity.
  • Look towards neighbouring markets for opportunity.
  • Explore possible new market segments.

Geopolitical conflicts

Key challenges

  • War (e.g. Ukraine conflict) leading to increased agricultural commodity prices
  • Port closures and blackades can make transit difficult if not impossible.

Recommendations

  • Be prepared to engage alternative professional logistics carriers should the main provider be unable to meet your needs in a contingency.
  • Ensure sufficient insurance arrangement.
  • Transfer cargo risks or basic cargo protection via a marine cargo insurer.

Inflationary pressures

Key Challenges

  • Rise in raw material prices and production costs.
  • Rising costs of freight and logistics, labour, and warehousing.
  • Higher final cost of food product overall, possibly affecting profit margins.
  • Accelerated and aggravated losses due to inadequate cargo insurance coverage.

Recommendations

  • Retool internal risk management and frameworks to handle inflationary pressures.
  • Review all business insurance policies and seek to ensure enhanced coverage.
  • Review plant and machinery costs as well as cost of stocks in plants and warehouses.
  • Prevent underinsurance of property due to mismatched declared values.

Addressing resource nationalism, solutions to mitigate risk are relatively limited as national hoarding and accelerated purchasing/storage of commodities can further compound inflation. Creative thinking around commodity substitution and diversification of supply chain may help in certain circumstances.

Enhancing F&B supply chain risk resilience with Marsh

Keeping in mind that factors arising from the macro-environment — such as inflation and the pandemic — are beyond our control, F&B companies must proactively take steps to mitigate risks and potential losses arising from these risks to the best of our ability, including undergoing individualised risk analysis and implementing tailored risk mitigation and risk transfer solutions that complement the organisations’ risk philosophy and risk management framework.

Marsh has helped over 15,000 companies in Asia — from small-medium enterprises to large corporations — obtain competitive and cost-effective insurance coverage mitigating a spectrum of risks.

To get a tailored analysis of the key risks affecting your business and explore how risk management can help enhance your business resilience, get in touch with a Marsh representative today.

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