Food executives forecast that commodity prices in December 2022 will still be about 8 - 9% higher than today. Three out of four of executives foresee limited or no room to pass on increased raw material costs. With the exponential change in cost prices the current food system cannot continue to operate as it did. It’s important to prepare your business for what’s to come and tackle the impacts.
Disruption in the food supply chain
Due to a sudden surge in demand following the COVID recovery, monetary inflation and structural underinvestment in critical sectors such as container shipping, mining and fossil fuels, current cost inflation and supply chain shortages are unprecedented. Not to mention the impact of the war in Ukraine.
The disruption of food supply chain is so sudden and so significant, that it requires us to rethink and rearrange current food systems. Your company should consider a long-term strategy which takes into account fluctuating raw material availability and prices, prolonged high prices for gas, energy, transportation and logistics, significant labor shortage in many industries, increasing monetary inflation and labor cost inflation.
Four steps to tackle the impact of supply chain shortages
A-INSIGHTS has outlined 4 steps that will help your business ride out a storm like this one. The four steps are:
1. Improve the alignment between procurement and sales strategies to reduce risk
Map the key inputs to your organization that are most affected by the current market situation, from commodities to indirect factors such as interest rates;
For each key input, gather information on how it is sourced and what options you have for it (think contract periods, hedging, price index clauses);
Map out how your product is sold and compare this with procurement: what is back-to-back aligned, what degrees of freedom do you have with respect to customers?
Determine your key risk areas and what you should do to reduce risk or exposure
2. Account for price variability in your operating model
Consider your hedging options for currency, energy & gas, foreign exchange (on a regularly basis), and for sourcing key raw materials and other production inputs;
Review the instruments in your sales contracts for passing on input price variability and inform yourself on any instruments you are not applying;
Proactively define a strategy for labor cost increases and factor it into your business.
3. Prepare a strategy on cost reductions and organize them in waves
Create an objective baseline for your organization’s cost effectiveness through a financial benchmark, and conclude on and quantify potential improvements;
From there, organize the actions you can take to reduce costs in waves. In the first wave, put things that don’t hurt as much and have a quick impact, or need to be done anyway. The other waves should be a progression of both the time it takes to implement and the long-term negative impact they have;
Create alignment across the leadership team on the lever you can pull, and when to pull them. This installs a feeling of control and stimulates trust (also towards stakeholders), while reducing anxiety when things go awry: you already have a plan.
4. Bring everything together a robust, flexible multi-year financial forecast
A financial forecast that takes into account a number of price variability and cost reduction scenarios;
A cost price model that allows you to constantly know your cost price at the latest price levels;
A model that gives you insight into the variable margins in your business, on a weekly basis
Implementing these steps will enable you to create support and understanding in the organization, as well as the alignment you need to execute effectively.
Want to know more about the impact of cost price inflations?
Download our Industry Insights Report on the Cost Price Inflations in 2022 and find out how you can prepare your business via the button down below.
