How the food and beverage industry is hitting the breaks on inflation
How the food and beverage industry is hitting the breaks on inflation
Inflation has continued to dominate news headlines globally in 2022. Whether it’s at the grocery stores or in utility bills, households across the world have been feeling a pinch in their pockets this year. One of the most alarming aspects of this issue is the spiraling cost of food and its impact on individuals and businesses. And as consumer sentiment plummets and consumers tighten their belts, the food and beverage (F&B) industry is facing immense pressure. In this blog, we turn our attention to the macroeconomic uncertainties impacting consumer behavior, and how food and beverage manufacturers are responding to shifting demands and supply chain constraints with the aid of technologies.
Rising food costs and inflation-wary shoppers
Reasons behind the rising food prices are interlinked and complex – much of it due to the volatility of global events and the resulting uncertainties. The lockdowns and travel restrictions enacted during the height of the COVID-19 pandemic affected the agriculture industries of some regions that relied on migrant labor, resulting in decline in output. Supply chain disruptions that followed, in turn added to transportation costs. When the war in Ukraine broke out in early 2022, food prices surged. The FAO reports that the food price index peaked in March 2022 – over 30% higher compared to the same period in 2021. Cereals and vegetable oil show some of the biggest increases. Both Russia and Ukraine are important agricultural producers and exporters contributing to approximately 30% of global wheat exports. Ukraine is the biggest exporter of sunflower oil, while Russia is a major exporter of fertilizer. After the war broke, fertilizer prices rose and there were severe supply disruptions. Energy prices also increased, impacting many activities such as manufacturing, processing, packaging, and logistics. These factors have contributed to a spike in inflation rates, which has reached record highs – the highest ever since the early 1980s.
As the F&B industry grapples with all these developments, consumer spending habits are also changing. Many people are trying to stretch their budgets, grocery lists are getting shorter, and there is a growing preference for cheaper brands. Economizing is the priority rather than convenience, indulgence, or even nutrition. Higher prices for vegetables, milk, meat, and seafood mean that many people will no longer have the option of buying nutritious food. They will instead opt for cheaper, and often unhealthy processed and canned foods.
Food manufacturers, supermarkets, restaurants and bakeries are adjusting their operations to counter the impact of inflation on their bottom line. Soaring energy bills and the high cost of raw materials and ingredients mean that meals are now more expensive and portions are smaller. Restaurants are also forced to adjust recipes to keep their prices low where possible. Value brands, discount stores and cheaper supermarket chains are seeing higher demand in some countries. Issues over pricing have resulted in temporary product disappearances from supermarket shelves until retailers and suppliers reach an agreement. Recently, there were no Heinz products on supermarket chain Tesco’s shelves as the former stopped supplying the retailer over a pricing dispute.
Technology enabling F&B manufacturers to weather the (macroeconomic) storm
Shortages of food and raw materials, higher logistics costs, safety standards and reliability (especially when working with multiple suppliers or changing suppliers), deep skills gap and labor shortages, and cross-border transportation disruptions are some main challenges facing the F&B industry. Temporary export bans on food products, such as the recently enacted palm oil export ban in Indonesia, can also affect operations. Retailers in the F&B industry need to keep pace with these developments in numerous ways. This includes diversifying providers, opting for less costly alternatives to pricier food ingredients where required, ensuring that products have the right food labeling, introducing more affordable meal kits to meet the nutritional needs of consumers, and reviewing operations to adapt to emerging realities. As the food and beverage industry continues to face uncertainty and multi-faceted risks, many manufacturers and retailers are also turning to technology to tackle the very real possibility of a global recession.
Product Lifecycle Management (PLM) technologies
Centralized technologies like Product Lifecycle Management (PLM) solutions enable F&B companies to introduce more efficient product development processes, reduce manual workloads, gain data that helps them to refine products for customer retention, and more. A Product Lifecycle Management (PLM) solution is a centralized solution that offers manufacturers full visibility of their product development and supply chain management processes, which in turn allows them to deliver new products to market faster at lower production costs. A PLM system will manage the information flow through the Product Development process and enable easy tracking of processes such as recipe development, supplier selection and evaluation and sampling. It will serve as the repository for all product and product development related information, and also record the history of the iterations, approvals and other key milestones in the development process. A correctly configured PLM with integrations in place for sharing information with downstream systems such as ERP and PIM would enable companies to significantly reduce the effort, cost and time needed to take a new product to the market or make revisions to an existing product.
Take for example the story of KDP, a leading flavored beverages producer in North America and the Caribbean with over 50 product brands. The company has adopted Infor’s PLM solution to develop new products more efficiently based on the best possible formula and commercialize them faster, comply with regulatory requirements, and navigate new nutrition labeling regulations. The beverage developer typically begins the development of new products with prototypes that have multiple ingredient formulas. KDP’s new PLM solution has helped the manufacturer ensure that all its formulas meet the standard quality requirements. The solution not only manages the process of selecting the formula before it progresses to the development stage, but also alerts the regulatory department, so that they can check if it is legal to use all the ingredients and proportions in the formula in the region where the product will be sold.
The PLM solution has enabled KDP to:
- Eliminate five manual data entry processes for KDP’s scientists
- Reduce the time taken to create the product’s nutrition label by 50%
- Reduce rework associated with checking facts on the nutrition label by 88%
- Cut down operational costs by 53.8%
Demand Planning & Forecasting (Business Planning) Systems
A Business Planning System can combine information from budgets, current demand and past sales history and generate forecasted sales and related business profitability based on various business scenarios. This information can then be used for planning price revisions, distributor and retailer promotions and campaigns etc. taking into account associated costs as well. A well-configured and robust Business Planning software would help food manufacturers and distributors to quickly identify, predict or react to changes in market conditions and take appropriate measures to mitigate any business risks. Similarly, this visibility enables manufacturers to take advantage of favourable market conditions with minimum effort, cost and time.
Another success story comes from My Food Bag, a New Zealand-based recipe and meal delivery service which focused on sourcing local, natural ingredients to encourage healthier eating habits. The company actively monitors global trends, collects feedback on their recipes, and adjusts and creates recipes that fit the evolving palette of its consumer base. To accomplish these lofty ambitions, My Food Bag has adopted Infor CloudSuite Food & Beverage ERP along with the Infor Product Lifecycle Management for Process (Optiva) to develop a single source of truth, helping the brand to:
- Gain visibility of cost of each ingredient in every recipe, which they then align with customer feedback to refine their recipes
- Set in place a more accurate, robust recipe management system with controls and parameters. Prior to the implementation, this was a very inefficient and manual process.
- Access better visibility and understanding of end-to-end profitability for product development
Enterprise Resource Planning (ERP) systems integrated with Electronic Data Interchange solutions, Manufacturing Execution Systems, and Warehouse Management Systems
The typical order to cash process could involve multiple software solutions including Enterprise Resource Planning (ERP) systems which would manage the order taking, purchasing, manufacturing (if applicable), distribution and sales aspects of the business. The ERP could be coupled with Electronic Data Interchange (EDI) solutions for quick and accurate exchange of data with customers and suppliers, Manufacturing Execution Systems (MES) which support automated data capture from the production floor, and Warehouse Management Systems (WMS) which are used for managing the receipt, storage and issuing of raw materials and finished goods in an optimal manner.
End-to-end supply chain visibility of suppliers allows manufacturers to identify any issues with the supply chain before it impacts their warehouse inventory. Knowing where the suppliers are concentrated helps businesses’ identify and manage operational risk in the areas of regulation, reputation, and delivery. An integrated ERP solution that is configured to meet the unique requirements of the bsiness, can also help manufactuers pinpoint in real-time which products are in stock through integrated and detailed inventory tracking, leading to accurate ordering information and to the reduction of overstocking and waste. An ERP solution can also help CFOs to see the current state of their financials and model future scenarios, giving them full control of their cost and revenue forecasts, which is critical during any crisis.
Having these systems correctly configured and integrated would result in multiple benefits:
- Minimizing effort, time and cost across the process;
- No redundancy of data and elimination of errors;
- Providing traceability across all transactions–from ingredient supplier up to the finished product with minimal cost–which is essential for food and beverage businesses today;
- Monitoring and minimising waste across the processes such as purchasing, production and distribution; and
- Reduction in cost through efficient planning of purchasing, production and distribution. In particular, well-planned purchasing of commodities can bring about significant savings.
Product Information Management (PIM) Solutions
Maintaining of mandatory Product Information in a PIM ensures cost effective and error free compliance with industry regulators and regional authorities for published information such as nutrient, allergen content and labelling regulations.
Business Intelligence (BI) and Reporting Software for Data Analysis
BI and reporting software, if correctly setup, would enable manufacturers to setup dashboards to monitor key performance indicators and other business metrics so they can pick out any deviations. This enables the business to quickly identify potential issues and take corrective measures swiftly. Businesses can analyze external signals using data and analytics to price products more accurately and drive innovation in product sizing and packaging based on consumer affordability and intent to pay. Measuring reaction to inflationary repricing by tracking sales metrics, customer reaction, inventory levels, and competitor’s pricing moves can become the foundation for a regular price optimization program. In addition, it can also help identify and capture new pockets of growth with suggestions on diversification of the product portfolio, targeting new customer segments, and much more. Manufacturers can combine this intelligence with supply and inventory inputs and commodity requirements to optimize their overall spend, as well as make optimal purchasing decisions.
Plant Maintenance Systems
A properly configured plant maintenance system (sometimes include as a module in an ERP solution) would allow the engineering teams in factories optimize maintenance costs through preventive maintenance schedules and automated ordering of spares and consumable as well as providing analytics on un-planned stoppages and breakdown to identify potential issues.
As an F&B company, your needs – especially at a time such as this – will be complex. Whether it is diversifying your supply chains while adhering to strict nutrition/regulatory standards, introducing new products, or recession-proofing your operation, technology will an invaluable tool when turbulence hits your business.
Industry & Solution Strategy Director, Infor