Supply chain disaster planning

Steve Dombroski, supply chain vertical lead at QAD*, explains why companies and manufacturers must prepare for the impacts of climate change, unforeseen events like natural disasters, and other unavoidable supply chain obstacles.

When people think of crops, they usually imagine raw produce: biting into an apple, throwing a corn cob on the grill, or tossing chopped tomatoes into a salad. However, the raw fruit and vegetables people see in the grocery store produce section are a tiny fraction of overall crop production.

In fact, most of these crops are actually used for by-products. For example, apples and tomatoes are used for juices, sauces, marinades, and many other products. When it comes to corn, by-products include everything from food products to nappies and bioplastic spoons.

Regardless of their use, crops depend on the right weather conditions to thrive. Climate change affects the weather, which in turn impacts crops, and this creates downstream effects on supply chains.

Case study: the tomato supply chain

The tomato supply chain is particularly illustrative of challenges faced by the food and beverage industry, as well as other sectors. About 90% of the US canned tomato supply comes from California. In fact, one in every four tomatoes in the world comes from California. Rising temperatures, changing weather patterns, droughts, and water constraints, however, will cause major limitations on tomato yields, which are set to decline by at least 6% by 2050.

Many places in California are under strict water restrictions, impacting both the growing and manufacture of crop-based products. Combine a lack of sourcing inventory and heavy manufacturing restrictions with maintained demand, and the result is soaring consumer prices (and many unhappy people).

The water shortage is disrupting a very succinct flow of moving product once the tomatoes are harvested, as many processing steps include the use of water. If processors are faced with downtime, they need to have alternatives in place, such as intermediate storage of the fruit. This has many manufacturers questioning whether they can keep up with demand.

The threat of climate change

With raw materials – in this case crops – being destroyed by climate change, companies must attempt to disaster proof their supply chains, end-to-end. One strategy is to diversify suppliers, particularly for critical raw materials or goods. Coming back to tomatoes, there are hundreds of different varieties grown for commercial production and widespread consumption. However, with scarcity, not only are raw tomatoes going to increase in price, but so too will tomato by-products.

Weather and climate change impact the source materials themselves, tomatoes being just one example. Wildfires have had dramatic impacts on the wine industry, for example. An effect commonly referred to as smoke taint leaves grapes with a less-than-ideal flavour, devaluing wine that may once have sold for US$100 per bottle and leaving it to be exclusively added to blends selling for US$5 per gallon (3.8 litres).

California’s wine industry had roughly US$43.6 billion in retail sales during 2021 alone, and with wildfires growing more and more common along the US west coast, businesses need to be prepared to make last-second changes and ensure they have a solid risk management plan.

Not only do wildfires have a history of making wine grapes burnt and bitter – thus dramatically de-escalating end product value – but they can also decimate facilities. For example, when wildfires ripped through Napa Valley in 2020, multiple wine manufacturers either managed to take the hits in their stride and find solutions, or simply went out of business.

Turning to competitors: risk management

For the burned and inoperable wine manufacturing facilities, business decision-makers had to utilise contract manufacturing and co-packers to remain in business. However, any company’s ability to pivot in the face of disruption depends on its level of connectivity, including agreements with competitors.

Take one hotdog production facility in Florida: after a hurricane disrupted production due to on-site facility damage and reduced access to power, the company relied on a competitor in Georgia to help pick up the slack. Another hotdog facility in Indiana had to pause operations due to ongoing investigations into a tragic fatality resulting from a facility fire; the company relied on a competitor in Chicago to help with inventory and production.

It is incredibly important to include contract manufacturers in your supply chain planning process. This will allow for the easy creation of alternate plans and scenarios when the primary facility is unable to deliver product.

Responding to other disasters

Few companies have been immune to Covid-19 impacts. Now, more than ever, companies, as well as government policies and initiatives, are enforcing increased digitisation efforts in supply chains. One Covid-impacted disaster saw a frozen fish company’s food service business begin to fail due to decreased demand for its finished product. Despite the drop in demand for this fish (which was utilised in the manufacturing of retail products), the company was able to strategise and sell excess supply to surviving restaurants instead.

Disasters and disruptions will continue to happen. They come in all shapes and sizes and – whether dealing with a pandemic, drought, floods, blizzards, or fires – businesses must develop top-down contingency plans, beginning with the value chain. The value chain starts with its focus on the end customer and works its way back to the manufacturer. Customers are demanding ethically and sustainably made products. Therefore, businesses need to know where products are physically touched or moved and where they can be impacted by some sort of disruption.

Supply chain systems have to be adaptive enough at each point in the value chain to be able to make an alternative decision on what is going to happen during any disruption. Supplier relationship management, as well as the integration of existing legacy systems like enterprise resource planning and warehouse management software, helps provide holistic views of supply chain operations. Increased digitisation is the future of any supply chain – it is time to stop delaying the inevitable.

* QAD is a leading provider of adaptive, cloud-based enterprise software and services for global manufacturing companies.