Food distribution – mitigating the “perfect storm” of disruption

Of all the challenges facing American consumers in 2022, rising prices and inconsistent availability of food has one of – if not the – widest-reaching impact.

There has been much written about why food is becoming more and more expensive – from weather-related disruptions, to food harvests, to major shortages in meat production labor during COVID, to the conflict in Ukraine impacting wheat imports. All of these factors have contributed to the March 2022 Consumer Price Report showing that prices for food – both groceries and food consumed at restaurants – experienced the highest full year price increase in over forty years.

One critical component of the food supply chain – foodservice distribution – faces a particular set of challenges. These distributors, who procure food from producers and deliver them to supermarkets, restaurants, and other providers, face disruptions in every component of their operation – from procuring food, to managing a network of refrigerated and non-refrigerated warehouses, to operating a trucking fleet and team of drivers to move and deliver these goods. The challenges in each of these areas include:  

• Food procurement: Not only are distributors facing higher prices, but traditional sources of supply are being disrupted by labor sources (e.g., those facing meat packing shortages during COVID), import disruptions (e.g., wheat from Ukraine), and other factors. Thus, distributors are not only facing the existing challenges in arranging inbound transportation (including capacity-constrained trucking companies, port congestion, and substantial increases in container shipping costs) but these challenges are compounded by the need to find new providers to cover new origin sources.
  
  
• Warehouse management: Food distribution warehouses, which have lagged in automation relative to retail and consumer products warehouses, are extremely labor intensive. Existing labor shortages in warehousing personnel are among the most severe in the workforce, and fierce competition for labor from the likes of Amazon and other retailers are driving wages up and availability down, further exacerbating the issue. But the food distributors’ labor challenges are not just about staffing at the right levels. It’s also about the disruption associated with churn. Warehouse productivity gets hit hard when you bring on new hires, whose learning curve can run for several weeks. If there is a lot of labor churn – either from associates leaving or from significant ramp-downs and then ramp-ups in volume – then productivity can drop precipitously, driving both higher costs and delays.
  
  
• Trucking: U.S. trucking operations have faced rising costs and operational difficulties well before the recent COVID-19 and economic disruptions. Since the pandemic, though, these challenges have multiplied substantially across every major trucking cost drive. First, with an increasing labor shortage, truck driver pay is at its highest levels ever and major firms are offering substantial salaries to new drivers. Second, diesel fuel costs are 60% higher than a year ago. And third, similar to the automotive market, the price of new trucks has been outpacing overall inflation rates, rising at its highest annual rate since the 1970s.

These three pressures are forcing food distributors to re-evaluate their commercial and operational strategies to maintain margin and provide some semblance of service levels to their customer. We are seeing these strategies playing out in three main areas:

• Labor – Labor has clearly become a primary asset of any distribution company. Beyond simply attracting and hiring enough qualified people, retaining qualified associates is a particular challenge. Refrigerated warehouses require a specific type of training, and employee churn can rob these distribution centers of the benefits of years-long focus on productivity improvements. Leading players in foodservice distribution have taken the long view to ensure focus on employee engagement, retention, and training programs to allow employees to grow successful careers within the company.
  
  
• Complexity – With logistics having a greater-than-ever impact on cost and service levels, players throughout the supply chain should take another look at operational complexity. For example, product assortment – often seen as a key differentiator to customers – may start to drive untenable cost premiums. Managing a fragmented vendor base, with a long tail of low volume, low velocity SKUs can substantially drive up procurement, storage, handling, and logistics costs. This may be a good time for distributors and their customers to re-assess opportunities to standardize on a smaller set of SKUs – such as by reducing customization requirements in packaging, shifting to private labels, and other options.
  
  
• Operational efficiencies – Leading distributors employ technology and sophisticated routing, dispatch, and fleet management processes to drive the best possible utilization of trucks, drivers, fuel. With the cost of all of these going up rapidly, the business case for an investment in more sophisticated transportation optimization approaches becomes much more attractive. Amplifying this issue in Food Services is the frequency of deliveries. Perishables – including fresh meat and fresh produce – require biweekly and even sometimes daily deliveries. Good route and fleet management can also help improve service levels and on-time performance for customers, which is particularly important when late and missed deliveries have become a growing problem in foodservice distribution in the last two years.

While the specific disruptions we have been experiencing may abate, the positive steps that foodservice companies are taking will position them – and the overall food supply chain – to be more robust and cost effective in the years to come. And all of this will ultimately benefit the 330 million Americans who consume food each day.