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Rebuilding a Broken Chain: How Agility Can Save The World

Published May 8, 2020

Written by: Erin McFarlane
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Erin McFarlane

Erin McFarlane is the Head of Strategy and Execution at Fairmarkit, a sourcing automation platform. Erin has over twenty years of experience in procurement and supply chain technology, and is passionate about sourcing, contract negotiation, and spend analytics.
 
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There were two stories in recent news that grabbed my attention.  All across the country, food banks are overwhelmed with demand.  Families in desperate need waited for hours for a week’s worth of supplies over Easter weekend, with lines of cars stretching for miles. The demand outstretched many facilities’ ability to fulfill, with some leaving empty-handed, or with less than they need.

Even for those with the means to pay, grocery store shelves are spotty and bare in places.  Stores run out of eggs, meat, vegetables, and milk in addition to the now-usual scarcity of toilet paper and Clorox wipes. The “panic” buying ended a few weeks ago, yet shortages persist.  We’ve all seen it as we don our masks and queue up 6 feet apart outside our local markets. At my house, we joke that grocery shopping has become an episode of “Chopped”: What can you make with a can of Spam, a wilted apple, and a box of Cheerios? I haven’t been able to get vanilla, flour, or dishwasher detergent in weeks.

The shift in demand isn’t obvious; people have always gone grocery shopping, so why are the shelves bare? Is it possible that my neighbors have eaten every meal at a restaurant until today? We are buying more groceries, sure, but not that much more!

The reality is that the current grocery supply chain is incredibly lean and efficient. Striving to decrease food waste and reduce the cost of goods, the process of ordering is optimized to a remarkable extent.  Complex ordering systems estimate demand and precisely fill shelves according to past trends. Most grocery stores have limited “backroom stock” to only the most vital products, having shifted to a direct stock method. Items coming in on a truck go straight to the shelves, maximizing floor space and decreasing expenses. 

On a quarterly conference call in February 2017, Whole Foods EVP of operations Ken Meyer explained that the company’s order-to-shelf initiative cleared backrooms of all items except “never-outs” or items continually re-stocked. He stated, “It’s creating a powerful, efficient process, from the way the goods are received in the back door to bring them right out to the shelf.” Target similarly implemented their “Goods to Person” initiative around the same time, which resulted in a 9% reduction in backroom storage – and the ability to expand the store’s shoppable footprint, especially in urban areas where space is at a premium.  In addition, this precise method of distribution reduces the total time it takes to bring stock to consumers. This method has been widely adopted across the industry over the last few years, resulting in lower prices, improved efficiency, and larger consumer-facing footprints.

Behind the scenes, the entire system depends on data-assisted ordering, which is based on historical demand. ERP systems determine the ideal inventory level of a particular item based on prior sales, adjusting for trends and seasonality. Purchase-of-sale systems deplete that inventory, and orders are created automatically to backfill to the precise level of stock needed, SKU by SKU. When the demand changes dramatically, the system orders enough to refill to the prior stock level, but adjusting the “ideal” stock level doesn’t happen immediately.

So, when you walk into the store, especially national chains and urban grocers, there are holes and bare shelves. 

Once the initial “panic buy” of toilet paper stopped, why haven’t the stores simply restocked them and ordered more? It’s been over a month since people walked out of Target with 400 rolls of paper towels, yet some items remain in short supply. That much of a sustained demand increase doesn’t make sense. Automated ordering isn’t to blame for that. It’s baffling until you consider that bulk orders of these goods used to be made by schools, hotels, restaurants, theme parks and businesses—and those packages and distribution channels are very, very different from the route a 12-pack of Charmin takes to your cart.

Dumping Milk and Burying Produce

On the supply side of the economy, there’s an even stranger picture. Without restaurant and commercial purchasing, farmers are dumping and composting ton after ton of food.  From produce to milk to eggs, perishable food is being deliberately destroyed because the producers don’t have a market for it. 

To people working outside of the supply chain, none of this makes sense.  Why don’t those farmers just sell their produce to the food banks?  Why don’t they simply sell to the grocery stores? 

These producers had a supply chain which was directed toward the restaurant, government, and commercial industries.  According to the USDA, the National School and Lunch and Breakfast Programs are the largest consumer of liquid milk in the US, distributing over 1.8 billion pints to children in the last year.  While smaller versions of the lunch program are operating, the volume has plummeted, and suppliers who specialized in the program are dumping their milk. Produce farms are facing similar issues; they package in 50-pound bags and sell to restaurants like Applebees, Chilis, and McDonald’s—restaurants that are experiencing an unprecedented drop in demand. Restaurants accounted for 25% of pork and bacon purchases nationwide, and there have been processing plant shutdowns, resulting in overcrowded pig farms.

It’s a broken supply chain, and food/grocery isn’t the only one.

Re-tooling packaging and distribution is a massive task. The machines which handle packaging cost millions of dollars and take months to implement. Theoretically, producers could switch to manually repackaging, but worker shortages and the need for intense safety measures present a real barrier to that kind of agility.

Many suppliers and distributors are questioning the wisdom of making dramatic changes to their packaging and distribution systems—if the pandemic “blows over” in a few weeks, and everything goes “back to normal,” those heroic measures would be a further drain on an already stressed or decimated bottom line.

If, however, demand doesn’t go back to normal, if restaurants don’t reopen, or reopen in a limited way, the supply chain will need to adjust permanently. If this crisis continues into the fall and into 2021, or if it starts and stops in jerks and waves, we will continue to see rolling shortages and oversupply. This uncertainty cries out for agile, elastic solutions.

Creating an Agile, Resilient Chain

COVID-19 has exposed the vulnerabilities of our highly specialized and extremely lean supply chain. The good news is that we don’t (currently) have a supply problem. Farmers can grow the amount of food we need to eat and manufacturers can make the products we use every day. We just need to fix the connection between the two and make that connection elastic enough to handle ongoing fluctuations. In the long term, that level of agility will give us a stronger, more stable system that can accommodate all sorts of disruptions, from natural disasters to economic shifts.

In the short term, agile actions can be taken to fill gaps. On a national level, the administration is providing funds to struggling suppliers, and the national guard has been mobilized to collect surplus food from farmers and distribute it to food banks. Last week, the U.S. Agriculture Department said it would spend $3 billion to buy fresh produce, dairy and meat that will be sent to food banks. Short-term, this sort of effort is absolutely necessary to ensure that producers stay in business and that people get the food they need.

On a smaller scale, there is exceptional innovation happening in the grocery and food industry.  Companies across the country have already made incredible shifts: just as alcohol distributors have begun making sanitizer and fashion companies are now producing masks, farmers, distributors, and retailers are undergoing a remarkable transformation. 

My local grocery store has been purchasing commercially packaged items and repackaging them in-store for consumer consumption. Innovative restaurants have begun to hold “Farmers Markets” and offer pickup service for their excess meats and produce. These creative solutions are not only a lifeline for struggling businesses but can be a blueprint to a newer, more resilient economy. 

Longer-term, we need to address the vulnerabilities exposed by the current crisis. The odds are that we will be facing instability in the supply chain for quite some time. Even if the pandemic resolves quickly, and people can get back out, many companies will not recover. Primary and secondary suppliers may not come back online, and we can, unfortunately, expect waves of bankruptcies in the coming months, no matter what happens with the medical crisis. Simply waiting for things to go “back to normal” is a recipe for disaster.

The organizations that will thrive in the future are those who embrace change and agility. They will target their single threads of demand and supply, and work to diversify. Manufacturing and distribution will learn how to make rapid shifts in the most Darwinian environment possible—change or die.

It’s not time to throw out the technology that made our supply chains so lean, either. Data models that rely entirely on historical data, without the ability to adjust for trends, need to be made more elastic. Deep learning and feedback loops can detect small changes in demand and shift ordering to keep backroom stock down while adjusting for changes in demand. 

Big data can provide incredible connections between suppliers and customers, and can enable organizations to make the kinds of major shifts that are required to respond to a crisis. Robotic process automation (RPA) and artificial intelligence (AI) are capable of doing research on your supply chain that an army of humans couldn’t accomplish. Fairmarkit has seen an unprecedented surge in usage of our vendor recommendation engine, which identifies suppliers automatically for goods and service purchases; other agile software providers can help to bridge this gap.

We can rebuild the supply chain together, and we can make it elastic, resilient, and equitable together. Bring on the technology and embrace the innovation!

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