All posts by Jordan Early

Are we going to run out of chocolate?

Cacao crisis - are we running out of chocolate?

Last week I warned that the increases in value of the Swiss franc could spell troubled times for chocolate lovers. Unfortunately, this week I have more troubling news about our favourite sweet treat…

In its 2015 report, the Earth Security Group (a company that provides intelligence on managing global resource risks) points out that we are headed for global shortages in cocoa (the key ingredient in chocolate) as soon as 2020.

Where is the chocolate going?

A number of factors are thought to be contributing to the dwindling supply of cocoa. These include; increased demand from emerging markets (Indonesia’s chocolate consumption is growing at 20 per cent a year) and fears around what might happen if Ebola crossed the border from neighbouring Liberia and Guinea into the Ivory Coast. The Ivory Coast is the world’s largest producer of Cacao – boasting 38.7 per cent of global production.

However from a procurement perspective – it is the fact that cocoa farmers are shifting their efforts to other crops that I find the most interesting.

In order to understand the reasons why cocoa growers are shifting production to palm oil and rubber, we need to look at the intriguing nature of the cocoa supply market.

An agricultural oddity

The cocoa growing industry is an anomaly of sorts in modern agriculture – in that it is still dominated by small landholders rather than corporate enterprises. These small landowners produce over 85 per cent of the world’s cocoa supply.

The highly fragmented supply market for cocoa means that farmers hold little bargaining power when it comes to negotiating with the large buyers like Nestle and Barry Callebaut*.

As a result of this buyer dominated market, the price of cocoa halved between 2009 and 2011. In 2012 the Ivorian government introduced a fixed pricing scheme designed to keep its cocoa industry intact and prices started to recover.

Combine falling prices with the fact that cocoa growers are very poorly remunerated for their efforts, and the motivations for shifting production begins to become apparent.

Makechocolatefair.org suggests most cocoa farmers earn less than $1.25 USD a day, meaning they living in ‘absolute poverty’ as defined by the UN. The paltry sum they receive from large buying organisations means cocoa farmers have a high propensity to shift production to more profitable crops. It just might be what pulls them out of poverty.

Furthermore, farmers in these communities remain largely unconnected to the global information sources and the outside world. This is resulting in two worrying occurrences. The first is that sustainable farming practices and infrastructure have not been implemented in cocoa farming regions causing widespread land degradation. The second is that these small holders have no concept about the increases in the global demand for their product and the implications it could have for the price they charge.

“You can’t sustain a booming chocolate industry worth billions while the producers are living in poverty” – Alejandro Litovsky founder and chief executive Earth Security Group.

Cocoa is an old mans game

The combination of tough customers, poverty, low prices and changing climatic patterns is severely hampering the motivation of young farmers to move into producing cocoa. It is estimated that the area of world’s surface dedicated to cocoa plantations has decreased by 40 per cent in the past four decades.

Perhaps more concerning is that the Fairtrade organisation estimates the average age of a cocoa farmer is 50! If that’s not a telling sign for the future of the industry, tell me what is.

The Earth Security Group report highlights the challenge that chocolate producers face, and the need to change the dynamics of this supply market. Companies should look to spread the benefits of what is a lucrative industry downstream and back into the supply chain. Failure to do so will mean facing the future supply crisis, knowing that they hold at least some of the responsibility for the shortages.

* Never heard of Barry Callebaut? That’s where Cadburys, Hershey’s, Ben and Jerry’s and Magnum get their cocoa. The company purchases about 40 per cent of cocoa available to the open market.

The battle for sustainable palm oil

The battle for sustainable palm oil

In another life, I was an extra on Home and Away (an Aussie soap opera) something I was put onto by a university friend. Despite receiving critical acclaim (from my mother) for my role as the ‘front desk operator’ at the Summer Bay Gym, I decided to leave the bright lights of showbiz and pursue a career in procurement.

My university friend however, stuck with ‘the business’ and recently starred in the following online commercial for the not-for-profit group Sum of Us.

The commercial, which has now gone viral with nearly 2 million YouTube views, discusses the sustainability of the supply chain for PepsiCo’s popular Doritos corn chips. It starts with two starry eyed lovers sharing their passion for Doritos and ends with a stern message to consumers that PepsiCo’s use of unsustainable palm oil is not acceptable.

Palm oil – The Sustainable supply chain’s figurehead

Palm oil has been at the centre of the sustainable supply chain debate for years now. The production and use of this product in consumer goods has gained notoriety for its lack of supply chain transparency and alarming environmental and social impacts, some of which are listed below:

Environmental impacts of palm oil farming

  • Large-scale forest conversion
  • Loss of critical habitat for endangered species
  • Soil erosion
  • Air pollution
  • Soil & water pollution
  • Climate change

Social impacts of palm oil farming

  • Land grabs
  • Loss of livelihoods
  • Social conflict
  • Forced migration

(Source WWF)

In it’s defence, PepsiCo has refuted the claims made in the Sum of Us advertisement and restated the company’s commitment to ensure all palm oil used in its production is sustainably sourced. The company claims it is making moves with suppliers that will ensure all palm oil providers are compliant with PepsiCo’s Forestry Stewardship Policy by 2016. The organisation has made a further commitment to achieving zero deforestation in company owned and operated activities throughout its supply chain by 2020, a timeline that as drawn some criticism from environmental group.

Sustainability and Brand

The Sum of Us campaign once again exemplifies the inextricable links between supply chain performance (particularly purporting to sustainability and the environment) and overall brand image.

Perhaps the strongest indication of this link can understood through the quote below. In response to questions as to why the campaign focused solely on the Doritos product (and not PepsiCo or the palm oil industry in general) Sum of Us stated:

“We find that focusing on brands that have resonance with members increases the chance of the campaign getting exposure and being effective. Consumers may not know or understand how PepsiCo operates, or a palm oil trader or supplier, but chances are they’re very familiar with Doritos.”

An Ongoing Battle

The battle for sustainable palm oil looks set to continue with Greenpeace claiming the Roundtable on Sustainable Palm Oil (RSPO). The RSPO is a certification standard established in 2004 to minimise the environmental damage done by companies using palm oil, and it is falling well short of its stated goals. In a report, published in February 2014, Greenpeace launched the following – a criticism of RSPO members:

“On the ground, we’ve seen lots of RSPO members still doing forest clearing in the area, which is an indication of weak enforcement and a weak standard. RSPO, from my perspective, has been used for green washing by companies who want to expand their plantations into the forest.” (PepsiCo is a signatory to the RSPO agreement).

Simon Lord – group director for sustainability at New Britain Palm Oil, believes large organisations need to take greater responsibility for their role in the side effects of palm oil production:

“People have hidden behind the easy options and have pushed the problem down the supply chain, and conveniently forgotten that they are a player in the supply chain and have a duty to source responsibly.”

Are the standards for sustainable palm oil production a step in the right direction? Or are they merely a shield for large organisations to hide behind? Leave your thoughts on the palm oil industry below.

What is going on with the Swiss franc?

In a move that has hurt skiers, chocolate lovers and international investment banks alike, the Swiss National Bank (SNB) decided on January 15th to unpeg the country’s currency, the franc, from the euro.

What's going on with the Swiss franc?

Update – Since the time of writing the Swiss National Bank has signalled it will target a new exchange rate band, to find out more click here 

The repercussions of this decision have reverberated across the globe. Despite The Wall Street Journal reporting that J.P Morgan (an investment bank) stands to make up to $300 million USD as a result of the decision, the news for most financial agencies has been overwhelmingly bad.

Citigroup, suggested its losses will be in realms of $150 million USD and exchange agencies from New Zealand to New York City have hinted that troubled times and closures lay ahead after the unexpected currency shuffle.

Even English football has been impacted, with the jersey sponsor of West Ham United, Alpari UK (a foreign exchange dealer), filing for insolvency.

Currency changes and international finance have never been subjects I’ve been comfortably able to wrap my head around. So I have tried to tackle the unpegging of the franc from an entirely pragmatic point of view. What happened? Why did it happen? And what is the impact on procurement professionals?

Why was it pegged in the first place?

The Swiss government has traditionally been seen as a sound custodian of financial affairs, its stable government and balanced economy has seen business and investors flood the country with foreign cash. While this sounds like good news, the tide of foreign money drove up the value of the franc, which had a severe impact on the country’s significant export sector. Essentially, Swiss goods became expensive, too expensive.

In 2011, as European consumers remained dormant in wake of the credit crunch, the Swiss National Bank made a perhaps short-sighted decision to peg the value of the franc to that of euro, thus making Swiss goods more affordable across the continent.

Why did they unpeg it?

A number of different theories have been banded about as to why the bank elected to unpeg the franc – some of the more popular are listed below:

  • The SNB held fears that the consistent devaluation of the euro (in recent months and years) would be detrimental to the Swiss economy. This uncertainty is supported by political instability in some of the Euro zones more debt-laden countries.
  • The SNB was pre-empting the European Central Bank’s decision to introduce another quantitative easing program and decided that the printing of money required to carry out this program would further weaken the euro.
  • The SNB was responding to public concerns that the enormous $480 billion USD of foreign currency the bank now holds (as a result of its euro pegging) could lead to higher inflation levels, or even hyper-inflation.

Potentially, the bank simply wanted to unmake a poor decision it made in 2011. As the Economist magazine suggests, “When central banks manipulate exchange rates, it almost always ends in tears”.

What should procurement teams do? 

Whether the euro pegging was a good idea or a bad idea is now irrelevant, what we are left with is a situation where the Swiss franc is worth significantly more than it was two weeks ago. The valuation of the franc is likely to fluctuate further in the coming weeks, but experts are predicting it will remain high against the euro and other currencies.

Below are some points procurement teams should consider addressing when determining how this currency shift will impact their operations:

  1. Understand the exposure of your supply base to the Swiss franc. If you have got strategic suppliers based in Switzerland, their products and services have just got significantly more expensive, perhaps its time to look for substitutes.
  2. Understand your company’s internal exposure to the Swiss franc. The secure economy and friendly tax rates in Switzerland encouraged many international businesses to set up their European operations in the country. As a way to reduce their exposure to the now expensive franc, these businesses (as well as many native Swiss firms) may now be looking to ‘internally restructure’ as our friends in HR like to say.
  3. Prepare for a more competitive outsourcing environment. Swiss companies (and international firms with a Swiss presence) could try to minimise the impact of the strengthening franc by leveraging lower cost destinations and start outsourcing more work.

How is the changing value of franc impacting you? Fill us in on your concerns in the comments below.

Supply chain finance schemes: a worrying new trend?

Diageo under fire for increasing payment terms

Diageo under fire for increasing payment terms

The Forum of Private Business (FPB) has this week launched a scathing attack on beverage giant Diageo over its plans to extend supplier payment terms from 60 to 90 days in its UK business.

Diageo let suppliers know, via a formal letter, that the payment terms changes would come into effect as of February 1st 2015. The firm announced that the new terms make up part of a “different procurement process” the company plans to implement for future tenders.

Diageo justified the move by stating:

“Diageo continually looks for ways to enable us to invest in the growth of our great brands. This activity supports the long term sustainability of our business and yours.”

Speaking on Diageo’s move to extend payment terms, Phil Orford, the chief executive of The FPB said: 

“We are very concerned, but sadly unsurprised, to learn that Diageo is yet again extending its payment terms, a practice that is hugely damaging for small businesses.”

Countering criticisms that lengthening payment terms will be highly detrimental to small and medium size enterprises in the company’s supply chain; Diageo announced that it would offer supply chain finance programs to any businesses adversely impacted by the new terms.

Supply chain finance programs allow suppliers to access money they are owed more quickly by leveraging the favourable credit lines of larger buying organisation.

In response to this move Mr Orford claimed:

“The practice of big businesses using a supply chain finance scheme in order to extend payment terms and protect their own cash flow is a worrying trend that is spreading across sectors and industries.”

The FPB is now working with the Institute of Credit Management and Department of Business Innovation and Skills to have Diageo’s status as a signatory to the Prompt Payment Code revoked.

Does bad weather have the power to impact procurement?

It’s too cold… I can’t work in here… my hands don’t work anymore.

So uttered my girlfriend last night. Despite frantically working towards completing her PhD, the current freeze enveloping Granada had halted progress.

As millions of people in the US Northeast braced for blizzard conditions accompanying Winter Storm Juno, Europe is freezing through another winter with record snowfalls posted last week.

Could Storm Juno affect supply chains?

The impact of weather on output

The effect the cold weather had on my girlfriend’s ability to work reminded me of a chart I recently stumbled across online. Produced by the Bank of America; it details the monetary impact that severe weather events had on the global economy in 2014.

The chart shows everything from a major drought sweeping across the Californian agriculture belt, to a snowstorm in Tokyo last February that grounded 9,500 airline passengers

More than anything though, this chart highlights our utter vulnerability to weather events. Events that, at least for now, are completely beyond our control.

Severe weather has the ability to stop the transportation of goods, close down production plants and leave office workers stranded at home (or worse still, stranded in the office).

The Bank of America chart was produced in order to stimulate climate change debate at the Davos World Economic Forum (an excellent run down of the event can be found here).

Climate change’s impact on supply chains

Despite some ongoing rumblings to the contrary, the scientific community is in agreement that climate change is indeed ‘a thing’, that it is already happening and that humans are largely to blame.

All of this got me thinking. Procurement is perhaps more vulnerable than any other business function to the impact of severe weather and climate change.

I believe climate change has the potential to impact procurement operations in two main ways:

  1. Impact on the availability of raw materials. Most businesses rely on raw materials either directly or indirectly. Changing weather patterns will likely alter the ability of firms to secure a reliable, ongoing supply of these commodities. As the supply of raw materials becomes scarcer (even if only in the short term), prices are destined to climb.
  2. Impact on transportation links. We are seeing an increase in both the frequency and intensity of storms and severe weather across the world. These weather systems have a direct impact on companies’ ability to move goods across their increasingly globalised supply networks. Our drive for efficiency and appetite for lower inventory levels has left us all the more vulnerable to these delays.

So what exactly are we doing about climate change?

In 2013 a report was released that highlighted just how little some companies were doing to ensure their supply chains were prepared for the impact of climate change. The report showed that while 86 per cent of the 350 UK companies surveyed understood the risks climate change posed, only 14 per cent were taking a long-term approach to managing the phenomenon.

It doesn’t matter what industry you are in, climate change will impact your business.

A storm in Panama could double the cost of bananas in European supermarkets. If coastal settlements in the US Northeast continue to take battering’s from storm systems, insurance companies may be forced to rethink premiums. Oil producers need to understand the impact that storms and unsettled seas will have, not only on the production of offshore platforms, but also on the safety of their workers.

Does your business understand its exposure to severe weather and climate change? Is your supply chain at risk? Are you prepared for unforseen but inevitable events? Or are we about to see an increased prevalence of force majeure clause enactments?

Not your average product recall: improving retail safety

The safety expectations placed on suppliers in China are vastly different from those in the west. The growth of Internet giant, Alibaba has seen a new wave of  ‘made in China’ products reach the US, but are they safe?

Buckyballs craze - banned in the US

Buckyballs sweep the US

In 2009 a new toy stormed the US market. Buckyballs – tiny, highly magnetic spheres constructed of rare earth metals were a runaway success and registered $40 million dollars in sales over their first four years.

However, the same magnetic attraction that made the balls so much fun to play with, also made them incredibly dangerous if they wound up inside the human body. Despite only being marketed to adults, the small, candy like appearance of the product meant they had a habit of turning up in the digestive tracts of young children.

In his blog, Gastroenterologist Byran Vartabendian, gave the following horrifying rundown of what happens when the balls are accidentally swallowed.

“When two are ingested they have a way of finding one another. When they catch a loop of intestine, the pressure leads to loss of blood supply, tissue rot, perforation and potentially death.”

It was estimated that between 2009 and 2011, 1700 children passed through US emergency wards after having ingested the high-powered magnet.

In 2014 – the U.S. Consumer Product Safety Commission (CPSC), a US federal agency established to stop hazardous products entering US homes – recalled the product, claiming a ‘substantial risk of injury and death to children and teenagers’.

While this ruling signalled the end for Buckyballs (a then multi-million dollar product), its five years of success and profitability had inspired a number of competitors to emerge. Many of these competitors were selling the same dangerous product direct to US consumers through the Chinese online retail platform Alibaba.

Not your average product recall

This disparate, multinational supply chain presented a significant challenge for the CPSC.

In the past the agency would have simply issued a recall, shut down warehouses and monitored local stores to ensure no substitute products appeared.

Today however, the supply market for the high-powered magnets (as well as thousands of other toys) stretches well beyond US toy stores. The proliferation of online shopping has meant that controlling the purchase point of these products has become infinitely more difficult to manage. The CPSC’s chairman Elliot F. Kaye highlighted this recently when he said:

“Long gone are the days when we could pull stuff off of shelves,”

“We anticipate the next frontier will be outside of US borders.”

Working together for Product Safety

In response to this new challenge, the CPSC has announced a partnership with Alibaba. The agreement, the first of its kind between the CPSC and a foreign owned website, will see the two organisations collaborate to limit the movement of hazardous toys into the US.

The CPSC has given Alibaba a list of 15 Chinese produced products (including Buckyballs) that have been recalled from US shelves and requested that retailers on the e-commerce platform cease selling these goods directly to customers in the United States.

At the time of writing Alibaba was yet to detail how it planned to carry out the promises it has made to the CPSC, but a spokesman from the online retailer did state the company’s intention to:

“work (sic) collaboratively with the chairman and his team to do everything possible to protect consumers.” 

2014 was huge for Alibaba in the US

This commitment to product safety from Alibaba comes at a time when the firm is making significant headway into the US market and arguably represents the company’s dedication to ongoing success in western markets.

In 2014 the online platform became one of the world’s most valuable companies and its owner instantly garnered the title of China’s richest man – after it raised $25 billion USD in its US IPO.

In September of 2014 the company had an estimated market cap of $215 billion USD, a valuation outshone in the tech space only by Apple, Google and Microsoft.

As well as its success on the US stock exchange, Alibaba opened 11 Main – its first website dedicated to US consumers in July of 2014.

Is its size a hindrance to growth?

The greatest challenge for Alibaba’s plans to smoothly and safely transition into western markets is the sheer size of its vast online marketplace.

Alibaba is not only the world’s largest e-commerce marketplace, but it is also the fastest growing. The company has hundreds of millions of users, hosts, and merchants.

This immense size, combined with the fact that Alibaba doesn’t actually own any of the products being sold on its website, makes it nearly impossible to ensure product safety measures are anything but reactive.

A Sea of Counterfeits

This sort of criticism is not new for Alibaba. As recently as last year the company’s inability to effectively control the standards of its sellers came under fire. This time for the way counterfeit or ‘fake’ products sold by its merchants had been managed.

Haydn Simpson – a product director at counterfeit-tracker NetNames, claims his clients (mostly well known international brands), estimate that 20 per cent to 80 per cent of the products listed on Taobao (an Alibaba owned site) with their nametag are in-fact fakes.

In response to these claims, Alibaba last year spent more than $160 million USD attempting to remove fakes from its website. However even the briefest look on the platform shows that this initiative was entirely fruitless and counterfeit products can still easily be found on the website.

So how then is the CPSC – a US federal agency with a 2014-operating budget of $117 million USD, supposed to ensure product safety in this vast marketplace?

One thing is for sure, if they plan on tackling the problem15 products at a time, they’ve got a long road ahead of them.

Oil’s dropped, when will my flights get cheaper?

Oil is at $47 a barrel, shouldn’t we all be flying for less?

To answer this question I’d like to roll back the clock to 2012; a slimmer, less grey-haired version of me was working as a Procurement Specialist and had been tasked with renegotiating air travel, a category admittedly I knew little about…

Oil’s dropped, when will my flights get cheaper?

After perusing an article in the Economist magazine on the way to work detailing the falling price of oil and its impact on the economy, I foolishly assumed my upcoming contract negotiation would be a breeze.

I’d done my research. I knew that jet fuel accounted for between 30-50 per cent of an airline’s operating expenditure. So it stood to reason that if the price of this commodity fell, so too would airfares. I started doing some rudimentary savings calculations in my head and readied myself for a round of congratulatory high-fives.

Not so fast…

As it turns out, the link between oil prices and airfares is a little stickier than I first thought. The following points provide some background into why:

Airlines are now reluctant towards unchecked growth

In the past, airlines have seen lower fuel costs as an opportunity to increase their fleet, boost the number of routes they service and to reduce ticket prices.

While these knee jerk responses to low fuel costs made airlines money in the short term, as oil prices started to climb again, many firms were burnt (often to the point of no return) by the investments they made.

As one industry expert put it: “there are a lot of decisions that make sense at $80 a barrel that simply don’t add up at $100 a barrel.”

Having learnt from their past mistakes, airlines are now far more disciplined in their approach to capacity growth.

Jet fuel pricing is managed on a long-term basis

Whether it is locking in long term pricing agreements, or creating business strategies that are based on high oil prices, airline operating models are no longer designed to offer fare reductions every time the price of oil drops.

John Heimlich, the Vice President and Chief Economist of trade group Airlines for America, suggested in a recent conference call that the primary objective for airlines is to secure long term financial health and to implement measures that will help weather the next recession. He noted that spot discounting of fares would not aid in this endeavour.

In response to calls that the falling oil price should signal a period of discounted air travel John clever stated. 

“We don’t really hear people clamouring for lower prices of cheeseburgers when the price of beef comes down or lower prices of iPhones when the price of semiconductors go down.”

Not all costs are variable

Many consumers (and mainstream media outlets) assume that if oil prices fall by 50 per cent, so too should the cost of flying. This logic flies in the face of the most basic procurement theories, fixed vs. variable costs.

It’s true that fuel is, to some degree, a variable cost (see previous point). However, the majority of an airline’s operating expenditure is tied to costs that do not fluctuate with the price of fuel (wages, planes, airport taxes, food, etc.). This means that only a small percentage of a ticket’s price is subject to change based on oil price fluctuations.

Demand remains high

Airlines simply don’t need to reduce prices when demand levels are as high as they are.

An IATA (International Air Transport Association) press release published on January 8th indicated a 6 per cent growth in total passenger kilometres (a demand indicator used in the airline industry) for the month of November; similar figures have been recorded throughout 2014.

If flights are full at current prices, where is motivation for airlines discount fares?

The comments of American Airlines President, Scott Kirby, not only sum up this sentiment, but also make sound economic sense.

“Air travel remains a great bargain. We’ll continue to keep it a great bargain for customers. But in a strong demand environment, we don’t have plans to go off and just proactively cut fares.”

The airlines need to cash in

The airline industry has always been a tough place to make a buck. Warren Buffet articulated the cutthroat nature of the airlines when he famously stated:

“How do you become a millionaire? Make a billion dollars and then buy an airline.”

Airline bosses know that tough times will again befall the industry, so many are seeing the current boon in profitability as opportunity to prepare for the tough times that lie ahead. The following quote from B. Ben Baldanza, CEO, President, and Director of Spirit Airlines highlights this point.

“Lower fuel prices create a little bit of tailwind in the margin right now, which is good for us and probably good for the industry. But as long as demand stays strong, as we see it right now, we believe that, that (sic) we’ll take good advantage of that in the pricing environment as well.”

Well there you have it. While airfares may indeed decrease over the coming months, be prepared to discover (like I did) that they may not move as much as you initially thought. So you just might have to find another way to earn that high five from your boss. Here’s a hint to get you started.

2014 a year to forget for McDonalds Japan

From the Great Fries Shortage to McNugget-Gate – 2014 was a tough procurement year for McDonalds Japan.

McDonalds has had a turbulent time in Japan

Food rationing, emergency airlifts, contaminated meat scandals and cultural insensitivities. It sounds more like a review of a military organisation’s supply chain operations than that of a global fast food giant. However, as hard as it is to believe, these events all occurred in the supply chain of McDonalds Japan in 2014.

Procurement’s Butterfly Effect

The inherent relationship between external market forces and procurement performance was once again exemplified over the December holiday period as McDonald’s Japanese supply chain descended into crisis.

The issue began on the US west coast where 20,000 dockworkers have been locked in protracted contract negotiations since July of last year. Operators at the affected Pacific Coast ports have accused the dockworkers of deliberately slowing work in order to impact the turnaround times of ships.

In keeping with butterfly effect, this lethargy at the ports sent waves across the Pacific, waves that crashed into the supply chain of McDonalds Japan.

Delays at the ports caused shipping times for US produced french fries, destined for Japan, to stretch from two weeks out to more than four. This slippage caused a major shortage of the popular side dish in Japan, a country that imports more $330M USD of American potato products a year.

The sheer volume of potatoes required to services Japan’s insatiable appetite for fast food, combined with McDonald’s complex internal procurement arrangements, meant it was difficult for the company to quickly find alternative suppliers to cover this shortcoming.

The magnitude and impact of this series of events only becomes apparent when you consider that McDonalds Japan sources 100 per cent of its fries from the US.

By mid-December the impact of the delayed shipments started to be felt at McDonalds outlets across Japan with the New York Times announcing that the country had “entered the great French fry shortage of 2014”.

Drastic Times Call for Drastic Measures

In a move normally reserved for times of war or natural disaster, McDonald’s was forced to implement a rationing strategy to manage the distribution of its dwindling supply of fries.

In order to avoid “running out of fries” during the December/January holiday period, customers at McDonald’s 3135 Japanese outlets were limited to only small serves of French fries.

A note on the company’s website stated:

“Because we are currently having difficulty stably procuring McDonald’s French fries, we are offering them in the small size only,”

To sure up supply, McDonald’s took the drastic step of airlifting 1,000 tones of frozen processed potatoes into Japan. The firm has also established a longer-term solution that sees shipments of fries being dispatched from US east coast while the west coast labour discussions continue.

Fortunately for the fans of the golden arches, these measures enabled McDonald’s outlets in Japan to once again offer all three sizes of fries from January 5 onwards, signalling the end of a three-week period of rationing.

2014 a year to forget for McDonalds Japan

The Christmas fries shortage has rounded out a terrible year for the firm’s Japanese procurement operations. In July the organization faced an even more serious supply chain issue when it was found that expired meat (procured from Chinese supplier Shanghai Husi Food) had found its way into the production of the company’s popular Chicken McNugget product.

Despite the best efforts of one Kanagawa Prefecture store manager, who told his staff to bow more deeply than usual to customers who bought chicken products, concerns over the safety of McDonald’s food led to a 17.4 per cent drop in same-store sales during the month of July. Similar drops in sales were recorded for the proceeding months.

The crisis could have been better managed

The way the in which ‘McNugget-Gate’ (as it was so dubbed) was handled by management at McDonald’s has also drawn stern criticism in Japan. The President of FamilyMart, a leading convenience store in Japan that also held contracts with the disgraced Chinese supplier, made an apology to customers immediately after the contaminated meat story broke.

An apology from McDonalds President and CEO, Sarah Casanova, was not received until a week after the story broke and even then, was only delivered in response to a question posed at a scheduled earnings announcement.

 

Casanova was further criticized and accused of being insensitive to Japanese corporate practices when she portrayed her firm as a victim of the crisis rather than taking responsibility for the errors that had occurred in her company’s supply chain.

Brand and bottom line both take a hit

As well as impacting the firm’s brand image in Japan, it appears 2014’s supply chain slip ups will have a marked and lasting impact on the company’s financial performance.

On December 8th (prior to the rationing program) the company released a statement claiming Asia/Pacific, Middle East and Africa sales were again down for the month of November, directly referencing “the ongoing impact of the supplier issue on performance in Japan and China”.

What can we learn from all this?

From a procurement point of view, there is a great deal to take away from McDonald’s recent shortcomings. The impact that external market forces can have on a procurement team’s ability to secure supply, the risk of overreliance on single geographies and the fact that a company’s image can be tainted (pun intended) by the actions of its suppliers jump immediately to mind.

Fortunately for Japanese french fry fans, the rationing is now over, Big Macs will once again be accompanied by a sufficient supply of American fried potatoes and fast food dining in Japan can return to normal.

I bet the McDonalds procurement team is hoping for the same.