Today’s headlines are continuously reporting on shortages of transportation, energy, raw materials and labour. Many companies in food manufacturing are struggling with supply chain issues and – related – cost inflation. A-INSIGHTS put together a simple cost calculation to demonstrate the impact of supply chain shortages on cost price and provide you with direction on how you can weather this storm.
The impact of supply chain shortages on cost price: the case of French fries
Current cost inflation and supply chain shortages are unprecedented. This is due in part to a sudden surge in demand following the COVID recovery, but also to monetary inflation and structural underinvestment in critical sectors such as container shipping, mining and fossil fuels. The question arises: how will this affect your business?
Let’s use a simple example to quantify the impacts on the cost price. The production of French fries is a resource-intensive process: in addition to potatoes, which are the biggest cost for a French fry (about 50%), the main input costs are gas, energy and container transportation.
These three components only make up 15% of the normal cost price of a kilogram of French fries, but their cost has increased significantly. Just these three factors alone can cause the cost price to go up by 50%.
This scenario does not even take into account other direct inputs which we know have inflated cost levels too (e.g., edible oils used for frying, increase in labour costs and higher road transport costs), or the lower quality of the potato harvest this year.
Disruption in the food supply chain: how to tackle cost price inflations
What we aim to show with this example is that cost inflations are very significant in all scenarios. So significant, in fact, that the current food system cannot continue to operate as it did.
The disruption of food supply chain is so sudden and so significant, that it requires us to rethink and rearrange current food systems.
The disputes between large food producers and food retailers are a clear signal. If not, the discussion will soon be not about price, but about product availability and continuity of supply.
Your company should consider a longer-term strategy and tactics and take into account:
- Increasing monetary inflation, related market interest rates and labour cost inflation
- A significant labour shortage in many professions and industries
- Prolonged high prices for gas, energy, transportation and logistics
- Fluctuating raw material availability and prices
A-INSIGHTS drafted 4 steps that will help your business weather a storm like this. The four steps are:
- Improve the alignment between procurement and sales strategies to reduce risk
- Account for price variability in your operating model
- Prepare a strategy on cost reductions and organize them in waves
- Bring everything together a robust, flexible multi-year financial forecast