When the White House is holding daily briefings and social media feeds are flooded with apocalyptic messages, it can be tough for a brand to know where to invest its energy. While a business needs to address concerns about sanitation, the food industry has always had a bead on that and, thus far, there has been little evidence to suggest that COVID-19 is spread through consumption.
The real issues almost all brands need to worry about are things silently happening as they frantically craft the proper messaging and do whatever else they do when panicked. The problems currently taking down brands have to do with two issues: their co-packer and the supply chain. Here’s what’s happening, and here’s what brands need to do to protect themselves.
COVID-19 has changed everything
For starters, everybody’s projections are off right now. No one would have predicted back in January there would be a run on toilet paper and cans of chicken noodle soup. No one knew co-packers would be running exponentially higher runs of some items while other once hot items are no longer in demand. Who would have guessed the market, which for decades has been steadily becoming more globally open and interconnected, would be suddenly and unceremoniously shut down? Brands that relied on a rare ingredient from China found themselves emptyhanded due to supply chain constraints, basically decimating their production capacity in a matter of minutes.
Markets have changed. Supply chains have been disrupted. Reputations have been built or destroyed in a nanosecond. It’s sink or swim time.
The big challenge: Limited or hard-to-source ingredients
In this new normal, brands are experiencing ingredient sourcing crises even for common ingredients. If a product is reliant on a limited or difficult-to-source ingredient, brands must be proactive. This is what we told a client who is dependent on a particularly difficult-to-source ingredient, a certain type of nut powder only produced in China. This client not only was reliant on this rare ingredient, but also only had one source for the ingredient. We advised them to order several months’ worth of the raw ingredient while it was available and store it in a warehouse near their co-packer. That client is doing great and has everything needed for uninterrupted production.
A few weeks later, we heard from another brand that was also dependent on the same rare nut powder. They had four suppliers lined up, but none were able to deliver.
Supply chain integrity is critical
One of the things we’re seeing is a great variance of vulnerability from brand to brand. Some brands produce products with ingredients that are much more easily sourced from a variety of suppliers than others, and these brands are able to relax. However, brands that are extremely limited in ingredient sourcing—non-GMO or organic, for example—are especially vulnerable to glitches in the supply chain at this time.
Here’s the bottom line: No brand should be single sourcing at this time. If a brand has a turnkey arrangement and its co-packer handles ingredient sourcing, it’s that brand’s responsibility to make sure they have redundant suppliers at the ready. If in a tolling arrangement and buying the ingredients, brands need to make sure they have multiple suppliers lined up and ready to go in case one supplier dries up.
But how does one find suppliers? Smaller brands typically go through a distributor that takes on some of the pain of ingredient sourcing. When a brand grows to a certain size, it becomes more cost-effective to go directly to sources. It’s a common challenge to be unsure when to go through a distributor or to start looking for sources for direct ordering, and, when you do start exploring options, how to tell a good supplier from a bad one.
The following are good sources for suppliers of raw ingredients:
- Ask your co-packer where they get their ingredients or who they know (and recommend)
- IFT (International Food Technologists)
- Hire an expert in ingredient sourcing
In a tolling only arrangement, brands always had the extra burden of sourcing their own ingredients, but the pandemic has just upped the ante for any bet placed. It’s always been a bit risky; you have to purchase the ingredients, which means you have to find your own suppliers, and you’ve always had to deal with issues like projecting how much of each ingredient you’ll need, and making sure you factored in ingredient prices, all of which fluctuate.
But now brands have much bigger challenges on their hands. COVID-19 has changed global markets and affected availability of ingredients, price and reliability of transport. The pandemic has upended the supply chain, which vastly complicates a brand’s end of the deal. Sure, you’ve got a great relationship with your co-packer, but that relationship is going to go up in flames if you suddenly can’t get enough of a key ingredient and runs are delayed. Co-packers have always been concerned about run schedules, but now, with multiple brands facing multiple supply issues, run scheduling is more important.
Don’t be the brand who holds up the line. Holding up production long enough will put your relationship with the co-packer on the line. Being proactive in these uncertain times means having several backup suppliers for rare raw ingredients and buying more of those ingredients than needed if you can safely store it in a warehouse near your co-packer. Don’t be the brand who goes out of stock because you didn’t protect your supply chain.
More than a handshake
It’s easy to dismiss formalities in this crazy time, especially if your brand is currently desperate to find a new supplier or co-packer. It can be tempting to accept a handshake arrangement and hope for the best, but brand owners need a contract, even if it’s a one-pager, to ensure they don’t get burned. At the very minimum, be sure to get the following documented in writing:
- What will happen if there’s a recall?
- Who is responsible if the co-packer makes a mistake?
After getting that signed, a brand owner needs to start negotiating a real contract—one that accounts for pricing and sourcing of ingredients, run times and warehousing. It’s necessary to have something that passes muster in court and will protect your brand. Things go wrong in this business, and you need to be smart about any commitments you make.
A crisis continuity plan is a must
Be the ultimate Boy Scout: always be prepared. Brands that like to wing it are suddenly finding out their super special ingredient is no longer available, has quadrupled in price, or is on a 60-day backorder. Or they’re suddenly finding that their co-packer signed a lucrative deal with some big firm to produce medical supplies and no longer has capacity to make their product. Those brands are out of luck because they didn’t plan ahead. They don’t have a secondary supplier for that rare ingredient. They don’t have a backup co-packer to turn to and because they were unprepared, they are out of stock and lose their shelf space.
Getting shelf space is hard enough the first time but getting it back a second time is even harder because you may now be viewed as unreliable and in most cases, it’s more expensive. Expect to pay extra to get that shelf space back again.
What if your co-packer has a Smithfield situation? They didn’t provide adequate social distancing and sanitation for their workers, had an outbreak, and now are shut down. Who is going to make your product? In these uncertain times, you need to be prepared to turn on a dime.
You don’t want to be pounding the pavement for a new supplier or co-packer while your hair’s on fire. You want this plan in place long before you need it. Brands that have contingency plans are the ones who will make it; those that don’t are playing Russian roulette.
When minor changes aren’t so minor
Say your brand has products that are dependent on a rare or foreign-sourced ingredient and didn’t have a backup supplier identified. Your co-packer is close to running out of that ingredient, so you are panicking about whether you’re going to be able to continue making your product. You didn’t plan ahead, and you’re almost at the end of your rope.
What to do? Is it time to reformulate? You think, “Maybe it’s a good time to introduce that new formula, because then we can use all ingredients sourced here in the U.S. That’s my solution!” Before you go too far down this road, use caution when reformulating a product during a crisis.
Changing ingredients changes a lot of things, and you need to make sure your co-packer will accept the ingredient changes. If your co-packer is the one sourcing your ingredients, you need to change the contract and discuss ingredient pricing and give the co-packer time to adjust. If you are only paying your co-packer for tolling and you provide the ingredients, you still need to provide the updated production process and make sure the co-packer has no objections to the changes. You must update packaging and approvals. The list of changes associated with an ingredient change is enormous, not to mention how it will affect your target markets that are used to your existing products.
Before considering changing everything to accommodate one difficult-to-source ingredient, be sure you’ve exhausted all possibilities for finding that one ingredient. Talk to an ingredient sourcing expert before you monkey with changing your entire product.
Be the brand that brings flowers
A couple years ago there was a shortage of hemp seeds, an ingredient one of our clients needed for a product. Everybody we knew was scrounging around for hemp seed suppliers, and we were sorting through the extensive network of suppliers we regularly work with. We noticed one of our clients was having no problems getting hemp seeds. When we asked him how it was possible for him to secure hemp seeds his reply was simple: “Because my father was this supplier’s first client.”
In this industry, loyalty is power. You may think your relationship with your suppliers is purely business, and as such you can be as rude or polite as you want to be without affecting the relationship, but that’s not the case.
In today’s market, when brands are jostling for position on the co-packer lines, those that have good relationships with the suppliers and co-packers are the ones who are getting first service. The competition is stiffer than ever, which means you need to:
- Be reliable;
- Pay your bills on time;
- Get the co-packer everything they need to run your product and do it professionally and pleasantly; and
- Communicate politely and with gratitude.
This last one is more important than you might think. You may think money alone is what is buying their services. You pay and they produce. In this climate, the arrangement is not as straightforward because co-packers have more work than they can handle. If you’re a jerk every time you communicate a request or make a change request, you can bet they’re taking notes. And when the pleasant, grateful, loyal customer who has been a pleasure to work with for over a decade asks them to give them line time, you can bet they’ll grant them run time over a rude client.
The next time you need to discuss an oversight or make a change request, be sure to sandwich that request or criticism between two expressions of gratitude. Thank you for working with us. We know you’re slammed. We noticed this little thing, which we’d appreciate if you could address. Thank you for always being so attentive to issues like this and such a joy to work with. Respect has always been a necessity in this business, but in today’s market, it’s even more essential.
How much of a relationship is too much?
Before you go yanking chains of co-packers and suppliers by engaging in deep negotiations before you’re ready to pay them for their services, know there’s a fine line to walk.
Let’s say you have a good co-packer already, but you are one of the smart brands that realizes you need to have backup suppliers and a backup co-packer. The wisest thing to do is to employ a third party to investigate options and create a backup. Then you can reach out and develop friendly—yet noncommittal—relationships with your backups. If you find out your co-packer is overcapacity or your supplier is running dry, you have relationships established with the right people.
Keep calm and stay safe
These are crazy times, no doubt. The entire food industry is trying to figure out what’s going on, what will happen next and how to prepare so they aren’t left behind. Take a deep breath, be proactive and enlist the help of experts on anything overwhelming that tempts you to bury your head in the sand.
Brandon Hernandez began his career in food safety at Zateca Foods (now Teasdale Latin Foods) after earning a B.S. in biology from Colorado State University. Hernandez is the co-founder of Whole Brain Consulting – a robust team of experienced food industry experts that provide a wide range of services, from co-manufacturer sourcing and contract negotiations to R&D, food quality, food safety and supply chain, logistics and operations management services.
William Madden, co-founder and senior partner of Whole Brain Consulting, has worked in the food industry for the past 20 years. He specializes in big-picture operations, supply chain management and contract negotiation between food companies and contract manufacturers. Madden has helped everything from start-ups to multimillion-dollar businesses find perfect-match contract manufacturers, setting them up for long term success. He is also the author of the book “Separating the Con Man From the Co Man – A Guide to Contract Manufacturing.”