Though it has been more than a year since it hit, the pandemic is still impacting the food and beverage industry today.
The National Restaurant Association says that since March of 2020, food service sales have fallen by $255 billion and as many as 110,000 restaurants have permanently closed in the U.S.
The food and beverage industry has also been impacted by school closures and the shift to online learning because of the pandemic. Heading into summer break, only about three out of every 10 counties across the U.S. were meeting Centers for Disease Control standards for full in-person classes.
Unsteady supply and demand patterns and rising absenteeism are also challenges that are still affecting food and beverage manufacturers. With much of the world slowly beginning to ease back into a more normal state, what is the outlook for the food and beverage industry today and beyond?
Supply chain segments reveal industry challenges
To better understand the challenges the food and beverage industry is facing, it is helpful to break down the industry supply chain into four segments: planning, sourcing, production and distribution. Here are how those areas have been affected:
- Planning – It’s difficult for manufacturers to plan effectively when they don’t know what their supply and demand are going to be. With continued production issues, absenteeism and an unsteady supply and demand, planning within the industry has become much more challenging. As a result, this has put a strain on maintaining proper service levels. Supply and demand fluctuation have impacted inventory, which directly affects service levels, supply chain effectiveness and forecasting. When service levels start to decline, it points to a sure sign of problems within a supply chain. On the beverage side, there was a brief period at the end of 2020 where things improved, but then it flattened out again. The food service side has continued to be down in part because of schools and restaurants not being at full capacity and because of shifts in consumer behavior.
- Sourcing – The availability of packaging has been a big challenge within the industry. There is a continued shortage of corrugated pallets and raw materials. When suppliers simply can’t get products to manufacturers, meeting customer demand is difficult, affective service levels. The media is reporting that with raw materials being unavailable, companies must sometimes barter or trade for materials just to meet demands.
- Production – Cycles are continually up and down. And with unsteady supply and demand, conversion costs in the food and beverage industry are even more complex. Lost sales and more challenging forecasting make it difficult to determine conversion costs and to reduce waste. Beverage manufacturers are also facing anywhere from a 30 to 50 percent weekly absenteeism rate, which exacerbates the situation. Manufacturing leaders have said that a fear of COVID has caused a rise in employee absenteeism. That causes manufacturers to only be able to run their most successful SKUs and cut back to operating a limited number of production lines. According to the Institute for Supply Management (ISM), “absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that are limiting manufacturing growth potential” in the food and beverage industry in 2021.
- Distribution – This is the area that has probably been affected the least in the food and beverage industry. Most manufacturing companies have an ample amount of delivery assets in trucks and trailers. One area where this impact will change, though, is if gas and oil prices continue to escalate. That will then be passed on to manufacturers and end users, which will force manufacturers to have a more expensive back end to their supply chains.
A future of slow and steady growth
While the food and beverage industry has experienced some improvement, there really isn’t going to be a big change anytime soon. The foundation of the beverage industry now lies with spirits – especially seltzers – and with big labels in the soft drink and dairy markets.
On the foodservice side, online grocery shopping grew by 110% in 2020 over the previous year. This doesn’t appear to be changing. The same issues that exist now – unsteady supply and demand, business closures, manufacturing absenteeism – will continue to challenge manufacturers. There will be slow and steady growth as COVID vaccinations continue to become more available, but the industry is not going to change overnight.
Look to three key areas for manufacturing growth
Food and beverage manufacturers who are struggling can be proactive in trying to create a more positive outlook. Sometimes the obvious things that are vital in the world of manufacturing can get overlooked. While companies facing financial challenges often do need a transformation – digital or otherwise – to get back on track, answers can also often be found with some self-examination.
Here are three key areas manufacturing leaders should focus on to reduce losses and increase revenues:
- Start with conversion costs: The first thing that struggling manufacturers should do is to pay attention to their numbers. Conversion costs are where everything should start. Leaders should have established numbers that will alert them when it’s time to make a change in the way they do business. When your conversion cost numbers hit a certain level, it should trigger a change in operations. If the numbers drop any lower, the longer manufacturers ignore them, the more damage it will cause. A change in operations should really start at the first warning level before the conversion cost numbers continue to worsen.
- The second step for food and beverage manufacturers to help navigate through the pandemic and beyond is to pay attention to service levels. Ask the question “How is our service to our customers?” It may sound simplistic, but that question is often overlooked. We recently visited a food manufacturer that had a service level of 40 percent before leaders decided to get help and make changes in their operations. That means that only four out of every 10 orders were on time. The others were either late or were never filled. This company should have addressed its service level issues when they were at 90 percent, 80 percent or at numbers far above the 40 percent that it had become.
- The third step toward setting a brighter course for food and beverage manufacturers involves engagement. Leaders must establish criteria regarding how they are engaging with employees. We hear numerous complaints from industry leaders that their absenteeism rates are skyrocketing and that they can’t complete orders. That’s when leaders need to ask themselves “How long has it been since I was on the shop floor? How long has it been since I walked the floor and engaged with employees and made them feel like they were valued?” When we ask those questions to leaders, we are often told that they don’t have the time to do that. They must make time to engage with employees in order to understand where issues are coming from and to identify solutions.
Examining financials, analyzing service levels and engaging with employees will help leaders know where their manufacturing company is and whether it’s time to make a change. These steps also reveal the layers of the organization along with their potential challenges, giving manufacturing leaders more insight into the state of their operations.