How global supply chain flux impacts the food and drink manufacturing industry

We’ve seen disruptions in sourcing, transportation and manufacturing on an unimaginable scale. Although globalisation is not in full-scale retreat, it’s changing.

Manufacturers are likely seeing greater fragmentation driven by protectionism, a subsidy environment affecting the balance of trade, and persistent inflation dragging on economic growth and trade volumes internationally.

Some manufacturers are looking at how they might better plan for future friction, volatility, and increased costs. Some examples of the challenges were recently discussed in a recent NatWest webinar; these included:

• Unwinding joint ventures in Asia in case there are future problems between Taiwan and China.
• The war in Ukraine creating questions around the supply of critical materials such as nickel and titanium, as well as an energy crisis.
• How non-tariff barriers are bringing friction into some supply chains after Brexit, with just-in-time manufacturing becoming more of a challenge to implement.
• How the pandemic changed or cut off many supply chain routes, creating volatility for some.

Make UK research says 79% of companies cite supply chain vulnerabilities as a strategic risk to their business over the next two years.

How are global shocks impacting the food and drink industry?​

Significant inflationary pressures​​ (raw materials, energy and labour) have pushed up the price of food and drink, as we’ve seen on supermarket shelves. The cost-of-living crisis has forced many consumers to trade down to more budget-friendly products, with high end chains such as M&S and Waitrose bringing out wider ranges of low-cost essentials to retain market share. The increase in input costs combined with the reduction in disposable income has put a squeeze on margins for many food and drink manufacturers, especially smaller operators that don’t have the same bargaining power as their larger counterparts.

When supply chain challenges arise, food and drink manufacturers may also face difficulties in co-ordinating and managing their operations effectively. Increased lead times, inventory management issues, and production disruptions can lead to reduced productivity and efficiency, potentially impacting overall output and profitability.

What risks are facing food and drink supply chains?​

With global and domestic populations increasing the resulting demand for food is only going one way. With between 30% and 50% of food consumed in the UK being imported, global supply chains are likely to remain the predominant direct risk to the food and drink industry. The UK needs to improve its domestic supply, instead of relying on ever increasing imports and potentially unstable global supply chains. This unreliability is mainly caused by the following factors.

Political instability​

The ongoing crisis in Ukraine​​ resulted in disrupted trade routes and increased costs, not just for raw materials but also increased the cost of producing the products. Despite energy prices starting to fall, many food and drink manufacturers are struggling to manage rising costs. ONS research from 2022 suggested 60% of the F&B sector reported being affected by the rise in energy prices, compared with 38% across all sectors, which demonstrates the impact of being an energy-intensive business.

Climate change risk​

In the UK and across the world, the accelerated pace of climate change, the global Covid-19 pandemic and population growth have placed additional pressure on the resilience of food supply systems. In the UK, these events have exposed the fragility of domestic production, and as the impact of climate change increases, with changes in temperature and precipitation patterns, yields and production levels will worsen. The shortage of tomatoes in the winter of 2022–2023 is an example of global supply chain fragility due to bad weather in Spain and Morocco

Net Zero targets​

Decarbonisation and sustainability​​ remain a key priority for many businesses, and the carbon footprint of supply chains is becoming ever more important. This could rule out importing from certain countries due to their distance from UK manufacturers and the carbon footprint associated with transporting produce or due to those countries lagging behind on environmentally friendly practices. This could result in a reduction in the number of viable suppliers in a food chain providing further pressure to supply and availability.

One key challenge for many food and beverage manufacturers is the ability to understand the impact of their day-to-day activities and how this contributes to their carbon footprint. Actions taken by businesses to reduce their carbon footprint will likely make them a more desirable company to work with in their supply chain and therefore will contribute to competitiveness as well as potential cost-savings. NatWest Group is serious about supporting manufacturers on their climate journey and recently announced £1bn additional lending to UK Manufacturing to support Net Zero transition.

Plant and animal disease​

This can impact both global and UK supply, where over the last 12 months we have seen restrictions on trade with the spread of avian flu in the UK.

Quality control issues​

Supply chain disruptions can also impact the consistency and reliability of final products, particularly where manufacturers are forced to switch to new suppliers to meet demand if availability becomes an issue from existing supply chain. Further complexity exists when there are certain standards to be met by new suppliers to ensure suitable food safety, labelling and traceability remain compliant.

79% of companies cite supply chain vulnerabilities as a strategic risk to their business over the next two years

How can manufacturers increase resilience in their supply chain?​

Manufacturers can ensure increased resilience in their supply chain by adapting their supply chains through these four areas:

1. Diversification:​ We saw this during the pandemic when some manufacturers moved to source from more than one country/ supplier. This has now become the norm.
2. Procurement: ​As well as cost, quality, and delivery, larger manufacturers are also basing procurement decisions on whether the supply source is reliable and resilient.
3. Monitoring technology:​ Data and AI could help manufacturers pick up any changes to the stability of the supply chain.
4. Nearshoring and onshoring:​ Countries including Turkey have benefitted from some manufacturers moving away from Asia, which is closer to the UK and within the customs union. Products that might have been made overseas could be manufactured in UK industrial parks or clusters.

How supply chains may change in the future​

We’re seeing a shift from just-in-time and lowest-cost supply chains to more focus on inventory management and resilience. As businesses look to optimise their supply chains for resilience, diversity and efficiency, supply chain management has become a discipline. This combines investment in platforms and systems for more visible and timely data, and investment and support for people working in this area.

There is a financial risk to engaging with new suppliers and supply chains. Supply chain finance techniques could help with monitoring creditworthiness and risk of disruption. Cost is an important consideration for manufacturers looking at the trade-off between local supply chains that might be more expensive and the lowest cost supplier. Increasing inventory levels also puts pressure on working capital – there’s an important balance to strike.

With sustainability targets in sharp focus for manufacturing businesses​​, adapting supply chains to a more regional or local focus could reduce carbon emissions. There are also interesting innovations emerging for sustainable supply chain finance. In brief, this is where a supplier receives a rating with the principle being the better the rating, the lower the cost of finance.

Some large retailers and manufacturers have already started to implement sustainable supply chain finance techniques. It’s early days but this methodology could have a deep impact on financing rates across the supply chain and driving emissions down.

There will also need to be a greater need for collaboration across the supply chain and food system. The UK must secure its supply chains, bring all aspects of the value chain together to ensure long-term UK food security and sustainability.

NatWest is working with food manufacturers and suppliers to drive sustainable agriculture through incentive structures to help farmers address the short-and medium-term costs of the transition to regenerative farming. One example is our partnership with McCain Foods through Lombard, the asset finance division of NatWest Group​​. This programme offers preferential payment terms and financial support to enable farmers to transition to more regenerative farming equipment. Offered by Lombard the programme will be matched by McCain Foods to support their farmers to adopt regenerative agriculture practices.

While there continues to be ongoing supply chain challenges, it’s important to acknowledge the power of adaptability and resilience across the sector. It’s during these times of volatility that through collective wisdom, collaboration and sharing of best practices manufacturers can find innovative solutions to navigate increasing instability in global markets and build a resilient supply chain, fit for the future.