The challenges of using true demand through the supply chain
Looking at previous customer purchase data might seem like an obvious source of information upon which to base your forecasts. But it’s not quite as straightforward as you’d think ...
Supply chain
Baby formula crisis in the US: myopic production planning
The United States is deep in the throes of a nationwide baby formula shortage. Myopic production planning magnified by the absence of safety stocks are only two pieces of the puzzle at the root of the crisis.
A straightforward planning model
If a supply chain manager was asked to imagine the simplest, most predictable industry for end-to-end planning, they would likely describe something that looks a lot like the baby formula market. The consumption is stable, it has no seasonality, and the market is both well-defined and highly quantifiable. In addition, there are only a handful of players that together hold a dominant market share, catalogue turnover is low, and consumers are extremely loyal to their brands in what is largely a non-discretionary consumer good.
The baby formula supply chain should be a model of accurate demand plans, low working capital, and excellent service. And yet the United States finds itself in the midst of a widespread shortage of baby formula, the latest in a steady stream of supply chain crises to dominate the headlines.
No competition on a low-income side
The US baby food sector is an oligopoly market, where four companies – Abbott, Mead Johnson, Gerber and Perrigo – hold more than 80% of the market. However, for low-income consumers, the market is almost a monopsony: nearly half of all baby formula in the US is allocated to low-income families by the federal Women, Infants and Children (WIC) program, and in 34 out of 50 states, Abbott Nutrition is the only supplier of the program. When Abbot Nutrition was obliged to close its facility in Michigan after revealing “shocking conditions,” the impact on the supply of baby formula across the US was devastating.
Get maximum value from your supply chain program
“Try breastfeeding! It’s free and available on demand.”
A tweet from Hollywood veteran Bette Midler suggesting mums should start breastfeeding as it’s free of charge generated a cascading effect of reactions. Easy to think but not easy to implement! While breastfeeding is recommended by health authorities, mums can face a variety of problems – not least the fact that they receive just 12 weeks’ parental leave, meaning that they’d have to return to the workplace at least a month before their hungry infants can be introduced to solid foods.
The World Health Organization states that if a mother’s own milk is not available then the next best thing is the milk of another woman. Formal breastmilk-sharing programs (i.e., milk banks) are available in the US. However, most of the milk is distributed through hospitals for preterm babies to help lower the risk of serious health complications, leading to a rise in informal breastmilk sharing. Potential contamination, as well as the exposure of babies to harmful medications or drugs, are potential risks in such cases. The result is that baby formula is relatively ill-suited to product substitution.
Planning Mistakes with Real Consequences
As with so many other supply chain crises since 2020, the pandemic is a key root cause. The pandemic caused parents to stockpile baby formula in the same way that other people stockpiled toilet paper. Because of this, the demand for baby formula skyrocketed in the spring of 2020. This stockpiling became, effectively, a safety stock – not one for use in times of crisis, but one that was depleted slowly by most families long before the baby formula shortage. After all, much like toilet paper, the end consumption did not change due to the stockpiling rush.
Anticipating this depletion, manufacturers were in no hurry to restore their former inventory levels, imagining that demand would be suppressed over several months.
This oscillation would, on its own, complicate the production planning of manufacturers used to a steady, unwavering demand signal. Adding to the challenge of demand planning is that they clearly underestimated the demand caused by an uptick in births in early 2022, and a “dramatic decline” in rates of breastfeeding among stressed mothers.
For these reasons, inventory in the broader baby formula supply chain was already lower than usual when Abbott was obliged to shut its factory down to comply with the FDA verdict. Manufacturers myopically not taking major risks into account now puts the health – if not lives – of infants in danger.
Abbott’s competitors
By failing to prepare, you are preparing to fail.- Benjamin Franklin
The competitors of Abbott Nutrition (Mead Johnson, Gerber and Perrigo) could have ramped- up the production in February, when Abbott’s Plant was closed, or even before, in a response to the inventory shortage. Indeed, supplies of baby formula were scarce for weeks before the crisis hit, while the first reports on infections arrived in September 2021. The FDA could have alerted competitors to increase inventory levels yet stayed silent. “We knew this would create supply problems but had no choice given the facility conditions,” said FDA Commissioner Robert Califf, in what he described as a “suboptimal” decision.
Since then, Abbot’s competitors claim to have maxed out production, running around the clock. That the shortages are worsening despite this effort, as well as the emergency airlifts of European baby formula, demonstrates just how tightly capacity hewed to the very stable overall demand. Just as with saturated logistics infrastructure, this is yet another example of a hyper-efficient supply chain under stress.
America’s trade policy and regulations
The solution to import baby formula from abroad is a natural supply chain fallback. But even then problems can arise: FDA nutrition regulations are so stringent that the import of baby formula from Europe is overly complicated not due to product quality – the nutritional value of European baby formula is arguably better than US formulations – but to labeling requirements. Many parents are now even taking the outsourcing into their own hands, ordering products from Europe through third parties. Canada, a major dairy producer, does not export baby formula to the US due to restrictions in the recent free trade agreement, yet ironically Canada has a healthy export business to China on the other side of the world.
“The U.S. is a captive market for domestic dairy producers like Abbott,” said Scott Lincicome, the Director of General Economics and Trade for the Cato Institute.
During times of crisis, the lack of alternative supplies becomes a pretty big problem.
Rethinking Critical Supply Chains
Like vaccines, protective equipment, and semiconductors, baby formula is the latest supply chain issue to hit the headlines. The others left people wondering if global footprints are worth reconsideration, and to what extent reshoring production would help. In the case of baby formula, trade restrictions and non-tariff barriers made for an intensely domestic footprint.
To some extent, practitioners and politicians must realize that almost every supply chain is both essential and risky in some way. Global footprints have longer windows for long-tail disruptions to occur, but domestic footprints come with capacity, systemic and oligopoly risks. Of course, most supply chains don’t even fit neatly into these categories.
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