Pricewaterhouse Coopers (PwC) said its new publication entitled From vulnerable to valuable: how integrity can transform a supply chain aims to create awareness about how supply chain disruptions threaten shareholder value and provides advice on best practices to put in place to reduce these risks.
Risks
Food and beverage supply chain disruptions can include highly publicized instances of product recalls, delays in product launches due to safety and quality concerns, or late deliveries because of shortages and shipment problems.
According to the report, companies are under pressure from consumers, regulators, and the global investment community to look after their entire value chains, especially where international sourcing of raw materials and food ingredients is involved.
And the publication stresses that it is becoming increasingly apparent that today’s consumers are likely to reject the products of companies whose operational decisions are seen as harming the environment or exploiting farm and factory workers, whether at home or in far-flung locations.
Financial implications
Jim West, advisory managing director at PwC, claims the steep cost of volatility in supply chains was reflected in the analysis of 600 companies’ performance between 1998 and 2007 in a study conducted for the report.
“We found that the average stock return of affected companies was 19 per cent lower than the benchmark group over the same period and, in addition, those companies suffered sharp declines in return on sales and return on assets,” he continued.
West maintains that supply chain management can no longer be viewed solely as an operational issue but one that directly impacts financial performance and shareholder value.
Risk indicators
Speaking to FoodProductionDaily.com about prescriptive remedies to lessen disruptions, he said that food and drink manufacturers should broaden supply chain responsibility to include a cross-functional team of personnel who understand all aspects of the supply chain and can develop leading rather than lagging risk indicators.
“In the current economic slump, suppliers’ margins have been decreasing due to the fact that their unit volumes are diminishing while their overhead costs remain substantial, and these pressures may force some suppliers to declare bankruptcy.
“Food processors need to be cognizant of their suppliers’ financial and operational status so that if they do appear vulnerable a switch in time to an alternative provider will ensure continuity of ingredient supply,” argues West.
He claims that an example of an early warning sign of a transparency problem with a supplier might be a case where the price of a food ingredient has shot up due to the consequences of a harsh winter but that price increase is subsequently not passed on to the food manufacturer.
“In this instance, a food company should question whether the more costly ingredient is being replaced with an inferior product or whether the supplier was operating off a huge margin to start with,” said West.
Quality assurance
He concedes that maintaining an integral value chain is not ‘an easy fix’ as in the case of the recent peanut butter product recalls. Brands can be vulnerable to a lack of quality assurance (QA) testing by their supplier.
To try and offset these types of risks, West claims that companies should evaluate up close the QA processes of their ingredient providers and ensure that they are as rigorous as those in their own processing plants.
“Food and drink companies should ensure that their values and the values of their suppliers are completely aligned,” he added.
The Pricewaterhouse Coopers report can be downloaded here.