Why Businesses Must Develop Top-Down Contingency Plans in the Value Chain

Disasters and disruptions will continue to happen. That's why businesses must develop top-down contingency plans, beginning with the value chain.

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When most people think of crops, they usually think of the raw fruit like biting into an apple, throwing a cob of corn on the grill, or tossing chopped tomatoes in a salad. However, the raw fruit people see in the produce section of grocery stores is a tiny fraction of overall crop production. In fact, most of these crops are actually used for byproducts. For example, apples and tomatoes for juices, sauces, marinades and other products. When it comes to corn, everything from food products to diapers and plastic spoons are corn byproducts.

However, crops depend on the right mixture of weather to thrive, and with climate change comes weather issues, and with weather issues come crop issues. All of this has downstream effects on supply chains. Companies and manufacturers have to prepare for the impacts of climate change as well as unforeseen events like natural disasters and other unavoidable supply chain obstacles, from sourcing to final delivery to ensure they can meet consumer demand amidst supply chain challenges.

The tomato supply chain is particularly illustrative of these challenges. About 90% of the U.S. canned tomato supply comes from California. In fact, one out of every four tomatoes in the world comes from California, but thanks to rising temperatures, changing weather patterns, droughts and water constraints, there will be major limitations in tomato yields, declining by at least 6% by 2050. Many places in California are under strict water restrictions, and this impacts both growing and manufacturing crop-based products. Combine a lack of sourcing inventory and heavy manufacturing restrictions with maintained demand, and the result is soaring consumer prices and many unhappy people. The water shortage is causing disruption in a very succinct flow of moving product once the tomatoes are harvested. Many processing steps include the use of water. If processors are faced with downtime, alternatives need to be in place, such as intermediate storage of the fruit. This has many manufacturers questioning if they can keep up with their demand.

With raw materials, in these cases crops, being destroyed by climate change, companies have to attempt to disaster-proof their supply chains, end-to-end. One strategy is by diversifying suppliers, particularly for critical raw materials or goods. Returning to the story of tomatoes, there are hundreds of different varieties of tomatoes grown for commercial production and widespread consumption. However, with tomato scarcity, not only are raw tomatoes going to increase in price, but so will tomato byproducts.

Weather and climate change are impacting sourcing material themselves, tomatoes only being one example. Wildfires have had dramatic impacts on the wine industry. Most commonly referred to as smoke taint, grapes are left with a less than ideal flavor, devaluing wine that would once sell for $100 per bottle and exclusively being added to blends that sell for $5 per gallon. California's wine industry had roughly $43.6 billion in retail sales last year alone, and with wildfires only growing more and more common along the west coast, businesses need to be prepared to make last-second changes and ensure they have a solid risk management plan.

Wildfires are also known to decimate facilities. For example, when wildfires ripped through multiple facilities in Napa Valley in 2020, wine manufacturers had to either take the hits in stride and find solutions or simply go out of business.

Turning to competitors: Risk management

For the burned and inoperable wine manufacturing facilities, business decision makers had to utilize contract manufacturing and co-packers to remain in business. However, any company's ability to pivot in the face of disruption depends on its level of connectivity, including agreements with competitors.

Take a hot dog production facility in Florida as an example. After a hurricane disrupted production due to on-site facility damage and power access, the hot dog company relied on a competitor in Georgia to help pick up the slack in the meantime. Another hot dog facility in Indiana had to pause operations due to ongoing investigations involving a tragic fatality as a result of a facility fire, and the company relied on a competitor in Chicago to help with inventory and production. It is immensely important to include contract manufacturers into the supply chain planning process. This will allow for easy creation of alternate plans and scenarios when the primary facility is unable to deliver product.

Responding to other disasters

Few companies have been immune to the impacts of COVID-19, and now more than ever companies and government policies and initiatives are enforcing increased digitization efforts in supply chains. One example of a COVID-19-impacted disaster was with a frozen fish company whose foodservice business began to fail due to a depletion in demand for its finished product. Despite the drop in demand for this fish that the company utilized in the manufacturing of retail products, they were able to strategize and sell that supply to surviving restaurants instead.

Disasters and disruptions will continue to happen. They come in all shapes and sizes and regardless of disaster type (a pandemic, drought, floods, blizzards, fires, etc.), businesses must develop top-down contingency plans, beginning with the value chain. The value chain begins its focus on the end customer and works its way back to the manufacturer. Customers are demanding ethically and sustainably made products. Therefore businesses need to know where products are physically touched or moved and where they can be impacted by some sort of disruption. Supply chain systems have to be adaptive enough at each point in the value chain to be able to make an alternative decision of what is going to happen during any disruption. Supplier relationship management as well as the integration of existing legacy systems like enterprise resource planning (ERP) solutions and warehouse management systems (WMS) helps provide holistic views of supply chain operations. Increased digitization is the future of any supply chain, and it is time to stop delaying the inevitable.