Supply Chain Pressures in a Pandemic

Supply Chain Pressures in a Pandemic

The past several months have indicated how fragile our supply chains are. No matter where you are in the world, you’ve likely experienced disruption and pain, in both personal and professional life, related to the forces of supply and demand. Some of the recent pain has been caused by huge changes in demand, pressure on logistics and infrastructure, changing emotions and has even been impacted by rules, regulations and restrictions. In some supply chains, returns to normal might be years away as demand has exceeded supply by magnitudes. We’ve seen examples where poor crop management has exacerbated the crisis. In the ingredient space, predictably this demand/supply gap has given rise to increased economic adulteration, which on the positive side, has created new opportunities for suppliers and brands to truly show they value long-standing relationships and are maintaining customer trust by providing stable and reliable, quality supply through these times.

This pandemic has also shed new light on the supply chain itself. It has illustrated that we are globally reliant on both ingredients as well as packaging supplies. This fact has been a somewhat unpleasant truth for the supplement industry, for years.  This industry relies heavily on imported materials, largely from Asia, especially China. The disconnect in this is that most consumers don’t realize this fact, mistakenly believing that ingredients are primarily grown and sourced locally. The pandemic has triggered a new awareness leading to new transparency with companies unable to hide the disruptions caused by long supply chains. Just-in-time solutions and limited inventory at the outset increased this vulnerability with many companies never catching up and having to creatively explain shortages to an irate and inconvenienced customer base.

Companies have responded in a few different ways over recent months. Some have repatriated supply chains, others have increased inventory levels or built-in new redundancy.

The sourcing issue though has now become both political and nationalistic, here in the US, as well as elsewhere. Buying nationally has become a new rallying cry, set against a backdrop of anti-China sentiment.

Companies are scrambling to localize where possible, and supply chain transparency has new momentum and value. This ‘act locally’ mindfulness has been leapt upon by companies of all sizes as our worlds have shrunk and early feedback suggests this message is resonating with both consumers and business partners.

Now, let’s deep dive into a few things happening on the macro and geopolitical scene.

Nationalistic sense and fervor have never been higher. As borders closed to travel, and international logistics became problematic, shorter supply chains benefited. At the same time, trade wars and rising tariff tensions have also benefited more predictable, local chains. Around the world, we have seen a massive repatriation movement – a pragmatic reality. In the United States, anti-China sentiment has exposed the vulnerability of many business segments, and the supplement and health ingredient space is exceptionally vulnerable. The term ‘Buy USA’ has become both a practical and emotional rallying cry over recent years, and the past few months has escalated both sentiment and actual behavior.

Whilst there is less direct ‘anti-China’ rhetoric in the consumer sphere in Europe, the trend for consumers looking to buy closer to home holds true, with distrust of large international supply chains still strong. While a distant memory for some, the 2013 horsemeat scandal was certainly a significant catalyst for growing consumer distrust in complex supply chains in Europe. Such distrust in international supply chains, coupled with a growing sense of nationalism in many European countries (Brexit and the rise of nationalism in France, Germany, and Italy are prime examples) has led to a strong ‘buy local’ narrative. The UK in particular has seen strong messaging from industry and farmers unions to ‘Buy British’ and TV ads urging shoppers to “trust the tractor”.   

FTC action
Coming back to the US, the topic of Country of Origin made new headlines several weeks ago in the US when the Federal Trade Commission (FTC) proposed to use its largely unused authority against unlawful ‘Made in the US’ claims, specifically prohibiting these claims unless (1) Final assembly or processing of the product occurs in the United States, (2) all significant processing that goes into the product occurs in the United States, and (3) all or virtually all ingredients or components of the product are made and sourced in the United States. The comment period for this guidance closed on September 14, 2020. The impact of this change of use of authority could have a considerable impact on the dietary supplements industry for the reasons cited above – many supplement ingredients are sourced abroad (often China) and there is a transparency disconnect since most consumers don’t know this. To be clear, this FTC guidance was not new rule-making, but was intended to codify existing standards. Experts have challenged that this guidance oversteps FTC’s authority which means there may be court challenges in the new future should enforcement change. Stay tuned.

Tensions with Hong Kong specifically changed trade practice with the Customs and Border Patrol (CBP) ruling that all goods produced in Hong Kong would now be required to be labeled as made in China and lose trade protections.

ECJ ruling
Meanwhile, a recent ruling by the European Court of Justice (ECJ) means that national measures requiring mandatory labeling of origin and provenance for foodstuff are allowed under the EU law … but need to be justified. Europe’s highest court stated that the EU’s harmonized framework for food labeling “does not preclude member states from adopting measures providing for additional mandatory particulars regarding the origin or provenance.”

However, the ECJ said such national measures need to be justified on one or several grounds, including the protection of public health and prevention of food fraud, adding that adoption of mandatory origin labeling is possible only if there is a “proven link between certain qualities of the food concerned and their origin of provenance.”

It is interesting that these occurrences should intersect and as one who doesn’t believe in coincidence, I’d suggest a broader movement is at play.

Buying local, regional, and national certainly makes increasing supply chain and value-based sense. But in a world of COVID, Brexit, and increasing US-China ‘trade wars’ it is a shrewd geopolitical move too.

~ Len Monheit, CEO, Industry Transparency Center