Commodity Risk is No Picnic: How Food and Beverage Supply Chains Can Eat Risk Lunch

It’s time for picnics and barbeques — summertime favorites like corn on the cob, fruit pies and ice cream. But those summer staples could be less available and cost more than in prior years. Agricultural commodities in common foods and beverages (such as corn, wheat, vegetable oils or dairy) have experienced low crop yields and skyrocketing costs. This is a time for supply chain leaders to prioritize sustainability and resilience strategies to reduce these risks. The food and beverage (F&B) industry is impacted by climate disruption, like drought, beyond just low crop yields. Climate risk can impede how we transport, manufacture and even staff our supply chains. Last year, grains were delayed or disrupted because waterways were too low to transport barges. Hydropower used in manufacturing facilities was constrained due to drought. And, labor capacity was disrupted due to the number of unsafe workdays, caused by high temperatures, for outdoor workers or workers in unairconditioned spaces.1 Today, these themes continue, showing how your summer picnic fare could be at risk: One-third of global corn is currently in a drought zone across the United States, China, Europe and South America. In the United States, nearly half of all dairy cows are raised in drought zones. Nearly one-third of Spain’s agricultural region is currently classified as a drought emergency and 60% of Spain’s main crops like wheat and barley are affected by drought. The Panama Canal has just implemented shipping restrictions and higher tariffs due to drought affecting the water levels and limiting shipping capacity through the channel. Soybeans, grains, and bananas are the most common agricultural commodities traded through the Panama Canal. Gartner’s Supply Chain Executive Report: Supply Chain Adaptation Responses to a Changing Climate (subscription required), shows that 72% of supply chains expect climate to impact their ability to drive supply chain strategy in the next 10 years2 (see the first figure below). Current issues most supply chains (57%) indicate as among the top challenges to climate adaptation are the inability to link cause and investments to benefits and too much focus on short-term decision making and profitability2 (see the second figure below). F&B supply chain leaders are making more disruption-based decisions than all other industries. Gartner’s 2022 Industry Line of Business (LoB) Buying Behavior Survey shows 19% of manufacturers still citing supply chain disruption as its largest challenge.3 At the same time, the U.S. Bureau of Labor Statistics Consumer Price Index consistently shows F&B supply chains face higher inflation and more volatility in price than any other industry, even energy. All of this is no picnic, but we see many F&B companies demonstrating innovative strategies to improve the sustainability of our food supply and take actions to reduce climate impact on agriculture. Reducing greenhouse gas emissions is a way to improve carbon footprint and address how climate — and particularly drought — is straining food chains. Examples and best practices for F&B supply chain leaders to reduce these risks involve: Ecosystem collaboration. Sustainable supply chain practices. Risk planning and risk mitigation processes. Ecosystem Collaboration Challenges of this magnitude take collective efforts to solve by expanding from one-to-one or one-to-many networks to many-to-many networks (see figure below).4 Examples include both internal and external collaboration such as suppliers, customers and even peers/competitors. Many companies are collaborating as competitors to innovate for sustainability, packaging and commercial innovation, as well as to leverage knowledge and ideas of others. Working closer with both suppliers and customers will enable improved business continuity, aligned priorities and, ultimately, a minimization of the impacts of disruption. Hallmarks of great collaboration include: 5 Frequent and meaningful communication. Data and information sharing. Alignment on common purpose and goals. Sustainable Supply Chain Practices Predicts 2023: Rethink Supply Chain Strategy for Interconnected Risks and Opportunities (subscription required) shows that while most supply chain leaders (72%) recognize the negative impacts that climate change has on supply chain strategy, less than half (44%) recognize how climate change creates risk to supply.1 This poses an opportunity to educate key stakeholders of the risks of climate to supply and to include in risk planning. Sustainable practices can be to educate, invest and act for more end-to-end sustainable supply chains. Educate key stakeholders on how climate impacts supply and ultimately business results by establishing science-based sustainability targets and by developing risk planning and scenario modelling to proactively anticipate impacts and possible strategies. Invest in risk modelling enabling technology like digital twins, AI or IoT to increase visibility/traceability and improve decision making for sustainable outcomes. Include climate modelling capabilities in risk evaluations. Act as a climate advocate by supporting regenerative agriculture practices that improve crop yields, prevent deforestation, improve living wages for farmers and conserve water. Risk Planning and Risk Mitigation Processes Gartner 2023 Technology and Decision-Making Survey showed 21% of F&B supply chain companies making decisions due to supply disruption compared to just 8% across all other industries. Optimize processes to reduce instances of risk and ability to react.6 Optimize processes like: Sourcing strategies.7 Supplier collaboration. Trend monitoring. Product and recipe rationalization, reformulation, segmentation and substitution.8 Reduce the rate of disruption by diversifying risk strategies. Learn more at Shaping Disruption: A New Strategy for Supply Chain Risk Management (subscription required). Further build your risk capabilities by doing the following: Define risk appetite (how much you’re willing to take) and tolerance (how much you can endure). Increase oversight and communication and develop time to survive/recover metrics. Risk modelling/planning/cost to serve modelling. Now is the time for CSCO’s and supply chain leaders in F&B to focus on improving the industry’s impact on climate, securing a more certain future food supply and minimizing supply chain cost and disruption. Let’s imagine getting back to a world when a summer picnic’s biggest concern is ants or mosquitoes and not the food supply itself.   Reference (accessible to Gartner clients): Predicts 2023: Rethink Supply Chain Strategy for Interconnected Risks and Opportunities Supply Chain Executive Report: Supply Chain Adaptation Responses to a Changing Climate Survey Analysis: Vertical Industry Line-of-Business Buyers, 2022 Supply Chain Executive Report: Realizing the True Potential of Ecosystem Partnerships Maverick Research: Biomimicry: How Honeybees Can Inspire Future Supply Chain Design CSCO Playbook for Supply-Constrained Markets Enable Value and Manage Risk Through Compendious Supplier Onboarding Supply Chain Executive Report: Tame Complexity With an Operating Model Life Cycle   Claudia Clemens Sr Director Analyst Gartner Supply Chain Claudia.Clemens@gartner.com   Listen and subscribe to the Gartner Supply Chain Podcast on Gartner.com, Apple Podcasts, Spotify and Google Podcasts