SUE NEWTON: Hello and welcome to today’s podcast, which focuses on one of the food and beverage industry’s biggest challenges: supply chain risk. From climate shocks and poor harvests, raw material shortages and increasing costs to geopolitical instability, cyber threats and shifting regulations, supply chains are under extreme pressure. I’m your host, Sue Newton, head of WTW UK Food and Beverage Practice, and I’m really pleased to be joined today by my colleague Simon Lusher, who heads up our Global Food and Beverage Practice.
We will be discussing the biggest challenges businesses in the sector are facing today, and exploring the practical steps you can take to build resilience. Simon, can we start please, by looking at the current supply chain risk landscape. Can you give us a view on them, how it looks at the moment.
SIMON LUSHER: Yeah, hi, Sue. Thank you for inviting me on. Yes the supply chain risk landscape for food and beverage. So often when we’re in industry forums with other industry experts and we’re getting the conversation about supply chains, I am told by those who think they know that food and beverage supply chain is quite simple compared to say, a motor trade supply chain.
But the food supply chain is highly volatile. Basically, everything we eat, even if it doesn’t look like it, tends to derive from something that’s been grown, whether that’s plant or animal. And it’s therefore subject to environmental inputs that are hard, if not impossible, to control. So we’re talking about climate risk, extreme weather.
Too much of rain is a flood, that’s a problem. Too little is a drought, that’s also a problem. And this heatwaves and all of this disrupts agricultural production.
And that’s before it’s even got out of the ground. So that is the foundation of the food and beverage supply chain. So we’ve got a problem at stage 1.
And then supply chains, OK, perhaps they’re not as complex as the motor supply chain in terms of multiple tiers, but they can be very long. You go into a London restaurant and order some breakfast, you’ll be hard pushed to find anything on the menu that doesn’t involve avocados. And for decades, there have been entire economies in the Caribbean that have been built on the amount of bananas we eat in Europe.
So supply chains are long. We can’t sustain or feed ourselves with the food we produce, and people want to eat exotic goods. And that takes a lot of organization, a lot of infrastructure to get that produce into our country.
And that means we’re exposed to geopolitical and economic risks, tariffs, protectionist policies, and that physical damage risk along the supply chain as well. Transport hubs can be affected by natural catastrophes, trains derail, ships sink. All of those exposures are a problem.
And then there are operational and technological risks. So the food supply chain, food manufacturing is susceptible to cyber attacks. There’s often a problem with labor shortages, strikes, and bottlenecks in supply chain.
And then we also have the problem or another challenge with regulatory and ESG risks. So food needs to have sustainability credentials. Food safety is an issue. And growing a problem in the food supply chain is food fraud as well. So yeah, all of these add up to what I think is a very volatile, very complex supply chain.
SUE NEWTON: Yeah, very challenging, very challenging to manage. And I suppose if we think about identifying the key risks in a business’s own supply chain, the first step is to understand the critical dependencies in that particular supply chain. Can you tell us a little bit about that, Simon, and how businesses can go about that?
SIMON LUSHER: That is the biggest challenge. To identify risks in your supply chain, you need to have a very detailed understanding of what that supply chain looks like. And I think that’s quite a hard thing to achieve.
You can do supply chain mapping. I mean, most companies have probably got reasonable visibility over their tier 1 suppliers. I say tier 1, what I mean by that is the suppliers that they have the direct relationship with.
But some of those tier 1 suppliers are going to be relying on ingredients from another supplier. So we’ll call that tier 2. And that supplier might also be reliant on ingredients. So we’ll call that tier 3. So the further away you get from tier 1, the harder it is for the business relying on that supply to understand what their supply chain looks like.
So what you’re going to have to do is talk. Have a close relationship with your tier 1 suppliers. Understand what their supply chain is as well. This is time consuming and complex, but it is worth doing.
So yeah, audit them for information. Have a close relationship with them. And then also identify where your single source ingredients are coming from, what route they are taking, what their journey is. Then you can plot infrastructure and transit exposures, map vulnerabilities. If you have that map, then you can have a much better sense of where your vulnerabilities are, how to identify those risks. And once you can identify them, then you can manage them.
SUE NEWTON: OK, That’s great. Thank you. And I guess one of the things to think about is, the impact on your customers that your suppliers can have, the impact on your key customers, and which suppliers can actually seriously disrupt the relationship you’ve got with your key customers as well.
SIMON LUSHER: Well, I think that’s a good point. People perhaps concentrate too much on downstream supply and forget about the upstream, so the customers at the end of it. Obviously, if you can produce a product but you can’t get it to your customer, then you’ve got the same problem you’ve got. If you can’t produce the product, you still can’t sell it. So yeah, that’s very important.
SUE NEWTON: And just moving on to some practical advice really, I guess, which is hopefully a way that we can help. Thinking about how to manage supply chain risks, how to get confidence in the resilience of suppliers. What are the key standards do you think that businesses should be looking for from their suppliers and how to go about finding that out, I guess, Simon?
SIMON LUSHER: Well, I think we’ve talked already about supply chain mapping. I think once you’ve done that, then you can look at how you can build resilience into that supply chain. So diversify your suppliers as much as possible.
You want to avoid single sources. So you have alternatives. At the same time, you’ve got to do that while managing the relationships you’ve got because that’s extremely important. So that’s not an easy thing to do. But you atleast need to have, a plan B for when things go wrong. So avoiding single source or having a contingency plan is a good start.
Keep supply as local as possible. I think nearshoring is becoming more common, but, of course, in the food industry that’s not always easy because, as we mentioned before, people want food produce from different countries. You’re not going to get an avocado grower, a banana grower in Kent, particularly even with the best greenhouses. So you’re always going to be exposed to long supply chains, but where possible for other ingredients, keep them as local as possible.
And plan ahead. I mean, I think you should share as much information about your business with your suppliers as you can, sales forecasts, etc. So they can plan with you and avoid shortages
and hold stock buffers where you can as well. But, of course, lots of foods are perishable, so that’s a different challenge for certain types of businesses, but where you can make sure that you’ve got enough stock to survive a disruption.
And what we’re also seeing, that’s becoming more and more relevant and becoming more and more sophisticated, is the use of technology in the supply chain. Digital tracking, we’re seeing and it’s not happening in Europe, I know it’s in the States. There is a yeast product they’ve done that’s been edited, gene edited. So actually it’s like a barcode that you can put in food that enables you to trace it so you can trace it back to its origin, link it to a batch, which is going to be, a huge advantage in managing food safety, preventing food fraud, etc.
Real time monitoring. We’re seeing a lot more of that going on in containers and food products, which is going to help track the supply chain, give you early warnings about any disruption, and letting you roll out those contingency plans. And AI as well is also, the tools are getting more sophisticated for supply chain mapping and predictive analysis of where things could go wrong using real time data. So all of that helps.
SUE NEWTON: Yeah, and I guess having a process in place to understand how resilient your suppliers are, particularly your critical suppliers, how resilient they are, what their risk management standards are and even something as simple as making sure they’ve got the right level of insurance in place, really, understanding that they’ve got what they need to have in place to protect you if the worst happens.
SIMON LUSHER: Yeah, absolutely. And we see that a lot in supply contracts now, especially on the product contamination side. So on the food safety side that liability is passed back to the supplier.
SUE NEWTON: Yeah, and what about their business continuity standards. What do you feel about understanding with suppliers what their business continuity is and how resilient they are and really how to go about that?
SIMON LUSHER: Well, I think that varies greatly. And I suppose the size of the business that is in a supply chain probably makes a big difference about how sophisticated they can be with the technology they’re using for business continuity. How much resource they can give to it. But anybody in the supply chain, should have some sort of business continuity planning.
SUE NEWTON: Yeah, and in terms of getting the procurement team involved, I think that’s important, linking up the supply chain team and the procurement team so that at key moments, taking on new suppliers, renewing contracts, that these things are part of the vetting process to make sure that you’re taking on suppliers who aren’t going to cause you a problem further down the line really.
SIMON LUSHER: Well, absolutely. And a lot of the big companies won’t accept a supplier unless they’ve passed a certain audit. So the procurement team can control that and make sure certain standards are met, which is becoming more and more important as ESG regulations continue to develop and food safety, etc. So yeah, agree with that entirely.
SUE NEWTON: And we’ve seen some incidents that have hit the news in terms of reputational damage caused to businesses in the sector from incidents at their suppliers. What are your thoughts around that? And obviously, that’s a very difficult situation when it happens. How can businesses try and prevent finding themselves in that position I guess?
SIMON LUSHER: Well, it’s extremely difficult, isn’t it? because I mean, the supply chain is, as we said, so difficult to map. I mean, with reputation, communication is always key. But to prevent it, you need to have a good understanding of those suppliers, but things come out of all sorts of different directions.
I mean, a few years ago, we had that big issue with the CO2 shortage. One fertilizer plant decided to close for routine maintenance and there was a lack of CO2 available in the market. And that’s a problem for the meat industry. That’s a problem for the salad industry.
Dry ice is made out of CO2, so perishables that are being shipped with that. And suddenly, you’ve got empty supermarket shelves. And the whole sector’s got a reputational damage there from not being able to supply because one fertilizer plant closes down. I don’t think anyone predicted that.
And I think it’s important to learn from those mistakes. I mean, we’re now looking at the possibility of that happening again, because there’s a big plant in the UK that might be going out of business soon, and it’s just asked the government for some help. So learning from mistakes, understanding what the entire supply chain looks like, auditing your suppliers, making sure they’re compliant. All of these things help.
SUE NEWTON: Yeah, and auditing as in physically visiting the more important suppliers, actually having a system in place where a regularity you’re out there visiting and actually seeing things.
SIMON LUSHER: We’ve seen that with big physical damage losses to factories. They’ve had to rebuild them from scratch, and they go back to their customer and say, OK, we’ve rebuilt and we’re ready to send you produce again and ingredients again.
And the customer says, well, we don’t want it because we’ve not yet audited your new factory. OK, we signed off the old one, but we’ve not seen the new one. So we’re not buying anything from you until that audit has happened. So yeah, that’s regularly happening.
SUE NEWTON: Yeah, and just moving on to insurance and what insurance is available for supply chain disruption. And I guess also what’s difficult to insure. Can you give us your thoughts on that?
SIMON LUSHER: Well, there’s lots of insurance available for supply chain, but it’s all piecemeal. So you will buy supplier and customer extensions in your business interruption under your physical damage and business interruption policy. So your property policy, you can buy a certain amount of cover under your marine transits and cargo policy.
Political violence, political risks insurance will have an element of supply chain cover, and some of these can then be bolted together into a trade disruption insurance policy, which is probably the closest we come to a bespoke supply chain insurance. But what we don’t yet have is all-risks supply chain, contingent BI. And the reason we don’t have that is because the data is not available yet for insurers to model supply chains. And if they can’t model it, they don’t what the risk is and they won’t offer the insurance.
But I think that’s going to change soon as because the data is getting better and better. Since COVID, more and more companies are adopting supply chain risk management software tools, which is capturing some of the data the insurance industry has been missing out on. So I think we’re shortly going to see a big change in what the insurance industry can offer for supply chain. But at the moment it’s piecemeal and it’s not good enough to be honest.
SUE NEWTON: OK, that’s great. Thank you. And it’s positive that it’s hopefully moving in the right direction soon. And if there’s one piece of advice you would give to businesses in the sector, Simon, in terms of strengthening supply chain resilience, what’s the one key take away you’d like to leave with people.
SIMON LUSHER: I would say assume your supply chain is going to break because at some point, it probably will. And prepare for that breakage. And the problem obviously you’ve got is you don’t where it’s going to break.
So map it exactly as possible. Conduct regular risk assessments. Simulate various disruption scenarios and get your contingency plans to prepare for that breakage.
SUE NEWTON: OK, that’s great. That’s great piece of advice. Thank you. And I guess one from me which we’ve already mentioned, but I think is kind of a key takeaway for me, is making sure that you do have a system in place to understand the resilience of your critical suppliers. And to link up your procurement team to your supply chain team and make sure that they’re part of that risk management process as well really, which I think can make a big difference.
That brings us to the end of today’s podcast. Thanks, Simon, for your insights. That was really, really great, and thank you to you all for joining us. If you enjoyed today’s discussion, please subscribe, rate, and share this podcast. Thank you and goodbye.
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