Lack of effective supply chain planning in food & beverage can have life-or-death implications.
The closure of the Abbott Nutrition facility in Michigan last February may have ignited the nationwide infant formula shortage, but this was (and still is) a fragile supply chain that could have broken for any number of reasons. It will happen again.
This blog explores the problem as well as some helpful supply chain planning technology from Abbott’s perspective. But first, let’s review the Abbott plant timeline and then note some structural challenges that plague the infant formula supply chain.
- September: An FDA (Food & Drug Administration) inspection at the Sturgis, Michigan plant results in one infraction related to testing.
- 21 September: Two years later, the FDA inspects again, this time noting that personnel working directly with formula didn’t follow hygiene protocols. On that same day, the FDA learns of an infant sickened by bacteria after drinking formula manufactured at the Sturgis plant. Ultimately no cause-and-effect relationship is established between the child’s illness and the plant’s products.
- 20 October: A whistleblower at the plant alleges that Abbott has been releasing untested infant formula and ignoring some cleaning practices. The FDA interviewed the whistleblower in late December.
- 16 November: Walgreens warns demand for infant formula is up and suppliers are struggling to quickly meet orders.
- 6 December: The FDA begins planning for an early January inspection of the Sturgis plant. This was pushed to 31 January after Abbott informed the agency of a COVID outbreak.
- 31 January: FDA finally begins its inspection of the Sturgis facility. The following day the agency confirms the presence of a dangerous bacteria and notes other violations.
- 17 February: The FDA says it’s investigating four reports of illness including one death. Abbott announces a voluntary recall of several powdered formulas manufactured at the Sturgis facility.
- 28 February: The agency announces a second death and Abbott expands the recall.
- 22 March: The FDA says Abbott did not have a control system to prevent microbe contamination.
- 20 April: Yahoo reports that Abbott considers the recall a “short-term hindrance” and maintains its full-year profit estimate.
- 10 May: Major U.S. retailers implement purchase limits on infant formula.
- 12 May: The White House weighs in. President Biden meets with executives from baby formula manufacturers and retailers.
- 13 May: CDC closes its investigation on Abbott, while Abbott says it has flown millions of cans of baby formula powder into the U.S. from its facility in Ireland. The FDA says the U.S. will temporarily accept infant formula from foreign manufacturers.
- 17 May: The U.S. House initiates $28 million in emergency funds to help respond to the shortage and improve industry oversight. Reckitt Benckiser, the second largest U.S. milk formula supplier, plans to boost baby formula production by about 30%.
- 18 May: Biden invokes the Korean War-era Defense Production Act to help manufacturers increase supply.
- 4 June: 256 days after the first FDA inspection, Abbott reopened its baby formula production plant in Sturgis. The plant is responsible for half of Abbot’s U.S. production.
- 6-10 June: Nestle, Delta Airlines, Germany and others participate in a “Reverse Berlin Airlift,” flying formula into the U.S. from abroad.
The purpose of that detailed timeline was to demonstrate that this story has quite a few players and even some cloak-and-dagger. Yet, at its core, is it really anything more than an instance of lackadaisical compliance at a single plant and delays in remediating the resulting violations? Ask yourself this question instead: how did one plant going offline for a few months cripple a $4 billion supply chain? There’s more going on. Consider:
- COVID. As was the case in many industries, the pandemic created dramatic swings in demand. Early on, families stockpiled formula because, well, everything was being stockpiled. That demand spike was followed by a predictable dip as households worked their way through their pantries full of formula. In the spirit of a lean supply chain, manufacturers reduced production and were not prepared for resurgent demand in the past year, driven in part by an uptick in births and more families opting for formula over breast milk.
- War. Ukraine is a key supplier of sunflower oil, an important ingredient in infant formula.
- Poor Collaboration / Regulatory Red Tape. Some foreign-produced infant formula meets or exceeds the FDA’s nutrition guidelines but not its labeling rules, and as a result can’t be imported.
- Inventory Control Challenges. There are two aspects worth noting:
– Product substitution tactics are problematic because infants tend to develop a strong affinity for a specific formula.
– Theft is up 60% since 2015. A 2020 survey of 61 retailers from the National Retail Federation showed that organized retail theft costs stores an average of $719,548 per $1 billion dollars in sales.
Finally, infant formula affordability programs sponsored by the federal government distort normal supply/demand forces. We’re not arguing the merits of these programs. We’re simply noting that implications for planners are significant. In brief, the Special Supplemental Nutrition Program for Women, Infants, and Children, commonly called WIC, creates state-level monopolies for just a few suppliers.
In the U.S., just four companies control roughly 90% of the market. As you would expect, they maintain a small number of production facilities to keep costs low. This limits supply options and creates a barrier to entry for start-ups. Combine this with tariffs designed to protect domestic manufacturers and you begin to see why the loss of a single plant can be catastrophic.
What Can Planners Do?
First, set aside the structural anomalies we just touched on and focus on the potential for disaster with a lack of effective supply chain planning in food and beverage. The skewed incentives in the infant formula ecosystem are the responsibility of policymakers, not planners. Planners must make the best of market realities while being vocal and transparent about all relevant challenges.
The fragile and fickle infant formula sector required hyper-vigilance using a comprehensive digital supply chain platform. In terms of specific functionality, let’s start with traceability, in some ways the unsung hero of the Abbott saga. Supply chain traceability is a strategic initiative for organizations that want clearer visibility into every level of their multi-tier supply network in order to share more information with their customers, partners and stakeholders. Product recalls are an unfortunate fact of life, and stakeholders rightly expect them to be implemented quickly and correctly.
Another critical capability is scenario planning using a digital twin of the supply network. This technique provides answers to two critical questions: what would happen if, for example, Sturgis went offline for six months, and what would be the best response to meet demand and maintain stakeholder confidence? Airlifting formula from overseas is an option, but is it the best one either alone or as part of a multi-pronged response to ensure adequate supply? Typically, there’s more than one “right” answer, and digital supply chain platforms with strong “what-if” modeling features provide the best answer based on many factors analyzed concurrently, including current strategy and the situation on the ground.
Compare this proactive approach to President Biden’s response when asked if the government should have anticipated the formula shortage earlier: “If we’d been better mind readers, I guess we could have, but we moved as quickly as the problem became apparent to us.” Scenario planning removes the need for mind reading because it’s predicated on the inevitability of supply network disruptions.
Finally, an inventory planning and optimization solution can be used to achieve inventory goals and make automatic updates when strategies change. In the case of the life-and-death infant formula market, stakeholders might decide to run less lean. In short, inventory planning and optimization allows you to balance investments against goals using advanced modeling to evaluate multiple strategies and compare outcomes.
Epilogue: When It Rains, It Pours. And Sometimes Floods.
June 16, 2022
Abbott baby formula plant closes again because of flooding
Abbott Nutrition has halted production at the Michigan plant that helped drive a nationwide baby formula shortage after storms pummeled the region and caused widespread flooding. “While this is an unfortunate setback, it’s a reminder that natural weather events can also cause unforeseen supply chain disruptions,” said an FDA official.
Unforeseen? You can plan to overcome supply chain issues that you can’t (yet) see. That’s what supply chain professionals do, often with the help of modern digital solutions. To discuss the many ways to improve your supply chain planning in food & beverage, reach out to our experts today.