Dusseldorf Almost every food manufacturer is currently complaining about increased logistics costs. The freight capacities are scarce and expensive, the delivery costs have risen in double digits. This is one of the reasons why the manufacturers are demanding price increases in the annual negotiations with the retailers.
Edeka boss Markus Mosa has little understanding for these complaints. “The food companies are turning the facts upside down when they now complain about increased logistics costs,” he told the Handelsblatt. “These are homegrown problems,” claims the head of the retail leader.
With this, Mosa is again tightening the tone in the already escalated price negotiations. He accuses the companies of having saved their delivery logistics so much that they were no longer sufficiently resilient in the corona pandemic. So is the price shock self-inflicted?
“Before the pandemic, the supply chains of the manufacturers were efficiency machines trimmed for costs,” states Stephan Kunigk, Head of Consumer Goods at Kerkhoff Consulting. The processes in the supply chains have been simplified wherever possible. Many manufacturers, for example, no longer supply the supermarket chains every day, but three times a week, for example.
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The corporations have to position themselves lean for the stock exchange and minimize their working capital, explains Julian Maasmann, head of the consumer goods industry at the supply chain consultancy Miebach Consulting. That is why they have kept as few raw materials as possible, sometimes only for a few days.
Mondelez wanted to reduce procurement costs by 20 percent
Example Mondelez: Ten years ago, the US consumer goods group with brands such as Oreo and Milka began to reorganize its supply chain with the help of Lean Six Sigma under the then boss Irene Rosenfeld. That should save $3 billion over three years. This included a 20 percent reduction in procurement costs through partnerships with “strategic suppliers”.
But in the pandemic, the logistics, which have been optimized down to the last detail, turned out to be a sore point in many cases. Anyone who no longer has large warehouses and channels a large part of the goods “just in time” makes themselves vulnerable if supplies fail to materialize due to torn supply chains or if capacities have to be reordered at completely inflated prices.
For Edeka boss Mosa it is clear: From the retail point of view, many manufacturers have carelessly reduced and outsourced delivery capacities and now have to buy them expensively at short notice in times of crisis. And those who no longer have the capacities under control themselves will have problems when they run out.
“We also have to bear rising energy costs, but we don’t question our own warehouses and vehicle fleets,” emphasizes the Edeka boss. And he adds – also addressed to the corporations: “Because we want to continue to ensure functioning supply chains.”
However, from the point of view of experts, assigning blame is not that easy. “The pressure to reduce costs in the supply chain came not only from the shareholders, but also from retailers,” emphasizes supply chain expert Maasmann.
Manufacturers make themselves dependent on a few suppliers
So far, manufacturers have kept the number of suppliers as small as possible. Because the more quantity a supplier procures, the more discount there is. This was the only way they could survive in the face of increasing price pressure from retailers. But that has consequences: “Because manufacturers have minimized their own inventories, they are heavily dependent on their suppliers,” states Maasmann.
Corona has brought the closely timed supply chains to a standstill. It is undisputed that the world market prices for raw materials, packaging, energy and logistics have risen rapidly – mostly in double digits. No manufacturer could have foreseen such cost explosions to such an extent, nor could he have taken cost-neutral precautions against them.
But according to the assessment of a top buyer from a large retail chain, a number of manufacturers were also quite naïve. He attests some companies a “mix of unprofessionalism and dilettantism”. Many have secured transport capacities much too late and now have to buy them expensively on the spot market.
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If retailers now participate in the increased delivery costs, this can only be temporary. As soon as the costs for freight fall again, the purchase prices for retailers would also have to go down again, according to the purchasing manager. However, he experiences again and again that manufacturers want to permanently fix these increased product prices.
In order to avoid these disputes in the future, food producers must now change course. “Manufacturers need to make their supply chains more resilient to disruption. Since the pandemic, it’s no longer just about cost efficiency,” observes consultant Maasmann. According to a current Miebach study, resilience has become significantly more important, even if it costs more.
Verpoorten rents additional warehouses
“A lesson from the pandemic: Manufacturers have to rethink how global a supply chain can actually be,” explains Matthias Fleischer, Head of Supply Chain and IT at Nestlé Germany. He expects a change of course in the industry: “In order to spread risks, manufacturers will also rely on more suppliers in the future.” At the same time, there is a trend towards moving closer to the end consumer with sourcing and production.
This is already having an impact, the logistics warehouses in Germany are working at full capacity like they haven’t in a long time. Only two to three percent are currently vacant, according to an analysis by real estate service provider JLL. “Because companies are changing course in the pandemic and are keeping more in stock. They build buffers in the supply chain,” says Maasmann.
Manufacturers are increasingly hoarding raw materials and intermediate products. “They order more than they actually need,” observes Kunigk from Kerkhoff Consulting. Strawberries for yoghurt, for example, are stored frozen to protect against poor harvests.
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Eggnog manufacturer Verpoorten from Bonn also plays it safe. “We buy well in excess of current needs and have rented two large warehouses externally to ensure delivery capability. All of this costs money,” said Viktoria Verpoorten, purchasing manager of the family business, recently to the Handelsblatt.
This means that further trouble is programmed for the annual talks with the grocers – with possible consequences for consumers. “Additional warehousing increases delivery reliability, but also the costs,” Kunigk points out. “Especially for food, we will experience significant price increases.”
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