The Supply Chain Crisis will have a Long-Lasting Impact on the Industry

A period of severe disruption in the fresh produce industry could drive numerous and far-reaching improvements in the long run.

By Edward Vernon

Never before has the world heard so much about supply chains. Since the beginning of the Covid-19 pandemic in March 2020, the news about the disruption and turmoil in these interconnected global webs of entities that produce and deliver products has continued unabated. Even as people’s concerns of the virus have largely subsided, global supply chain woes have raged on, exposing both the fragility and inflexibility of these systems whose smooth functionality it now seems too many took for granted.

The fresh produce industry is uniquely vulnerable to logistical upheaval, which since the turn of the decade has included late deliveries, a severe shortage of truckers in the United States, and a lack of refrigerated containers globally. Whereas cars or computers can sit in storage facilities or shipping containers and be delivered significantly later than planned in the same condition, there is no such luxury with tomatoes or grapes. These issues have now combined with dramatically rising costs of almost everything from transportation to fertilizers to create major losses of products, sales, and revenue for the produce industry, and in many cases shortages of supply for retailers and foodservice.

In a survey carried out in the second quarter of 2022 by FMI-The Food Industry Association, more than 70% of responding retailers said supply chain disruptions would negatively impact their business during the year, up from 42% who reported that concern in 2021. The figure was even higher for suppliers, of whom more than 82% said they expected negative supply chain impacts and outcomes.

Ricky Volpe, an Agribusiness Professor at California Polytechnic State University, says this has certainly been one of the most challenging years in the modern history of our food supply chain, especially perishables. “Supply chain companies and retailers are adapting, but adaptation is a slow process and the problems that the industry is facing right now are very, very acute,” he says. “It’s really just kind of treading water.”

In the U.S. especially, a shortage of truck drivers has become an increasingly troublesome issue for the produce and retail industries. The American Trucking Association (ATA) says there was a record deficit of 80,000 truck drivers in 2021 – a 30% increase from before the pandemic. Even more worrisome, the ATA predicts that if current trends continue, the trucking sector is headed for a shortage of 160,000 drivers by 2030.

These shortages affect the fresh produce industry more than others, as it needs to transport its goods quickly and therefore has a different labor requirement, notes Rick Stein, vice president of Fresh Foods at FMI. He also points out that these labor shortages and other supply chain issues have come at the same time as increased consumer demand for fresh food from retailers since the start of the pandemic, with more people eating at home, thereby putting even more pressure on supermarkets’ supply chains.

Stronger partnerships

The supply chain crisis has undoubtedly been taxing for the fresh produce industry and retailers. But out of this adversity it seems that numerous positive long-term impacts will emerge. For one, partnerships between buyers and sellers at every level of the supply chain are strengthening, according to Ed Treacy, vice president of Supply Chain and Sustainability at the International Fresh Produce Association (IFPA). He anticipates that the stronger relationships, forged by being there for each other during difficult times, will ultimately lead to an overall lower reliance for many on the spot market and increased focus on long-term contractual partnerships.

Stein says that retailers are going to start thinking about their collaborative partnerships “in a more strategic way.” Stronger relationships will be formed with a more close-knit group of suppliers, and there will be a greater sense of loyalty between buyer and seller, he adds. This contrasts to the pre-pandemic period when it was a little easier to break a relationship if so desired. “If either entity let one of the other down there was the tendency to say, ‘if you can’t meet my needs I’m going to move on and pick the next best vendor.’ Now, I believe it’s, ‘let’s work through the issues.’”

In parallel with this greater loyalty will come a higher degree of transparency and data sharing, which will help both sides to better understand their partner’s situation and capabilities. It may also lead to greater flexibility in terms of sales channels and reduced dependency on one particular sector, such as foodservice.

“Fresh food buyers and sellers became very specialized in the last two or so decades leading up to the Covid pandemic,” says Volpe. “And it’s very easy to understand why. Transaction costs are a pain, and there’s value in having certainty in terms of supply and demand, but the supply chain clearly went too far in that direction. In California, specialty crop producers had become very specialized in terms of their marketing channel, and those that were heavily focused on foodservice had a lot of trouble. So, I do think that moving forward buyers and the sellers are going to maintain more flexibility, with contacts in both foodservice, food retail, as well as institutional sales.”

Greg Ferrara, president and CEO of the National Grocers Association, echoes this, saying that in addition to continuing to leverage relationships with local growers, independent retailers will continue to seek alternate channels for products – such as foodservice, which became a key source for products during the pandemic – as well as plan for their needs further in advance to assure ample supplies for their customers.

Ferrara adds that it is important for growers to work closely with retailers, being transparent and establishing a two-way street of collaboration to understand their needs and common goals in fulfilling consumer demand for fresh produce.

“Good communication is essential to a long-term profitable relationship, and everyone is facing similar operational issues in this current high-inflation environment,” he says. “Transparency is also essential for food safety and traceability, which are key to maintaining trust in the supply chain for consumers.”

Volpe also emphasizes that it will be essential for retailers to increase their use of data analysis in the future in order to inform their decisions. This data doesn’t need to be “particularly complicated and high level,” he says, but rather simple historical data on sales, prices, and purchase decisions.

“Nobody can predict the future. But there are relatively straightforward and empirical techniques that help you to see through the noise and understand where things are heading,” Volpe says. “I really encourage retailers of all sizes to make sure their decisions are data driven and data informed, because there are enormous costs that can be avoided simply by keeping track of how things are changing and what’s coming down the road.”

A technological spark

Technology is also certain to play a much greater role in the future, driven by the need to create more efficient and transparent supply chains. For instance, suppliers and retailers are getting better at accurately forecasting supply and demand, as well as logistical capacities, notes Stein. That’s helping them not only to reduce food waste but also implement better predictive analytics from the organizational level to the store level.

“Retailers have a tendency to be very demanding upon the suppliers in terms of what they wanted and when they wanted it. They wanted to shorten those timeframes, and they wanted to be able to add or make cuts to their orders at the drop of a hat,” he says. “And that all had to do with things that they weren’t able to forecast accurately. So, they had to make these changes, which were very disruptive to the suppliers. I think that’s getting better. There are now more tools, and there’s more of an understanding of the implication it has on the supply side.”

Another big bucket where greater use of technology is essential is in traceability, which Stein says has become a highly complex issue. The forthcoming rules under Section 204 of the FDA’s Food Safety Modernization Act (FSMA), which are set to come into effect in January 2023, require a much higher degree of traceability for perishable products, he says, and technology like blockchain will help in that regard.

Technology in the form of automation will also play an instrumental role in reducing reliance on labor, whether it be at the farm level, in supermarkets, or for transporting goods across the country. Self-driving trucks in particular look set to be the way of the future as truck drivers become increasingly scarce and expensive. Several big retailers including Walmart and Kroger have partnered with Silicon Valley-based autonomous vehicle startups like Gatik and Nuro during recent years. But, it is likely to take a while to make this vision a technological and regulatory reality and to significantly reduce dependence on human drivers.

Another trend that the supply chain crisis is accelerating is investment in vertical farms. A recent report by Fortune Business Insights predicted that the global vertical farming market would grow from an estimated $4.2 billion in 2022 to $20.9 billion in 2029. Many say these high-tech farms – which can produce more fresh produce with fewer inputs including water, labor and fertilizers – are the future. Being able to grow the produce closer to the supermarkets, thereby greatly shortening the supply chains, is a huge bonus for those who have struggled to transport fresh food across the country or across borders in recent years. High fuel costs are another factor that make growing closer to the retailer attractive. Further, growing in a controlled environment as the world increasingly struggles with the effects of climate change has become a hugely attractive prospect.

Phil Lempert, a food marketing consultant known as ‘The Supermarket Guru,’ says that the supply chain crisis has opened retailers’ eyes to how the future of produce will be different.

“Because of climate change, because of transportation issues, because of labor, they are realizing that what we have to do is start building indoor farms closer to the points of retail,” he says. “We can’t rely on 95% of lettuce in the U.S. coming from California and Arizona and being trucked for two or three days to the rest of the country. I think that the long term impact will be meaningful, and the retailers are investing in companies that have indoor farms and building relationships with them.”

Even though the range of fresh produce that can currently be grown efficiently indoors remains limited today, Lempert says that as more technology is developed, companies will be able to grow a greater array of fruits and vegetables in these facilities. And aside from that progress, he says retailers have an obligation and an opportunity to start empowering consumers to understand growing seasons.

A sustainable outlook

At the same time, the pandemic will have positive impacts in the realm of sustainability, notes Volpe, with supermarkets becoming much better at reducing perishable food waste as they address widespread shortages, maximizing sales outlets for whatever they can get their hands on.

“I think this has been largely out of necessity, because retailers, especially independent retailers, are faced with serious issues in keeping their shelves fully stocked. They have to turn that perishable produce into revenue, or else they’re going to be in even more trouble than the pandemic would suggest,” he says.

Treacy says the pandemic and subsequent impacts on the job market will have the added result of companies wanting to become preferred employers and more attractive places to work than their competitors. One way to do this is through improved Environment, Social and Governance (ESG) policies.

“I am seeing a lot more companies asking themselves how can they do more, and how can they benefit the planet? This is especially being driven by this labor market, because it is more and more competitive in trying to attract and retain employees. We as an industry have always done a good job, but companies are having to step up their game,” he says.

For now, logistical challenges continue to be top of mind for fresh produce and retail executives. Volpe predicts it won’t be until 2024 at the earliest when some of these major inflationary pressures and supply chain bottlenecks affecting the supply chain start to really subside. “When you talk about transportation and the structural, systemic issues that the food supplies here in the U.S. face, they’re not going away,” he says. “And I do think things will get worse before they get better.”

But when they do get better, an industry will emerge that is more resilient, efficient, transparent, technological and sustainable, supported by stronger relationships between buyer and seller. The supply chain crisis of the past couple of years has been an unprecedented nightmare for many working in produce, but necessity breeds invention, and it could prove to be an inflection point that drives a long-lasting and multifaceted improvement of the industry.

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