Reviewing Resiliency of Supply Chain Amidst the Baby Formula Shortage in the US
June 23, 2022
As we are now aware, the US baby formula shortage is an ongoing supply chain challenge. The question in everyone’s minds is, was it avoidable? And if so, how can we prevent this sort of thing from happening again in the future?
Because surely, the current situation where parents have to drive hours to look for baby formula was not what manufacturers, the FDA, and retailers could have wanted.
If you’re looking for clarity in this mess of contradictory information and panic around the subject, we will break everything down for you.
We’ve collated all the information you need to help you understand the problems with supply chain management systems that this baby formula shortage highlights. We also discuss the structural changes that can help improve supply chain resiliency in the future.
Examining the Acute Formula Shortage
The out-of-stock rate for baby formula in the US has ballooned to 74% nationally, with one in five states at 90%. The general baby formula shortage has also affected specialized formulas for allergic infants and older children. One such case is that of non-infant patients that require nasogastric feeding for nutrition. Canada has announced a shortage of formulas for infants with food allergies.
Supply chain shortages greatly affect consumers and end-users. To understand the gravity of the situation and how it escalated, we must first understand some historic details of the formula market.
The Evolution of the Baby Formula Market
The world’s first commercialized breast milk substitute, Liebig’s Soluble Food for Babies, was launched in 1865. The product became the first commercial formula in the U.S. in 1869, and was followed by Nestle’s Infant Food in 1870. But the real boost to formula’s popularity amongst mothers came after hospitals started to use it during the 1960s and 1970s.
While formula milk did meet its fair share of opposition and controversies, it was beneficial enough to gain widespread use for hundreds of years. Of these, the Baby Killer controversy led to a 1977 boycott of Nestle in the U.S. While the boycott was dropped in 1984, it had set the stage for the Infant Formula Act of 1980 and stringent FDA restrictions on imported infant formula products.
The 2008 Chinese milk scandal around melamine adulteration in infant formula and other products from Sanlu Group was similar and led to a boost in import volumes into China as the domestic brands took a beating. Even though imported infant formula was (and still is) considered safer by the Chinese consumers, the regulatory regime around formula imports to China have nevertheless been bolstered considerably with CFDA registration and additional safety and labeling requirements.
The US regulations that pertain to importing of baby formula are:
Amidst the chaos and noise of panic over the situation, it has become clear that the baby formula crisis is the culmination of multiple structural issues coming to a head.
Here is a breakdown of all the factors that have contributed to the crisis:
The COVID-19 pandemic led to supply chain and labor shortages across multiple industries worldwide. Of course, these shortages came with ample warning and were several months in the making.
Here are some facts to consider:
- Pre-pandemic and pre-2022 crisis, the average percentage for out-of-stock baby formula was 10%.
- Shortages due to the pandemic rose to 15% in September 2021.
- By May 2022, the shortage ballooned to 43% and has continued to rise.
The clear takeaway here is that while the pandemic may have caused some disruptions, it was certainly not the only culprit for the current crisis.
In the US, only four companies — Abbott, Perrigo, Nestle SA and Mead Johnson — control 90% of the formula supply, and 80% of baby milk powder production is shared by only two companies: Abbott and Enfamil.
The highly concentrated US market for baby formula might be due to the stringent import restrictions imposed by the FDA we pointed at earlier.
One other reason might have to do with the 1972 federal program known as the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) which mandated states to allocate the formula contract to the lowest bidder. In the current scenario, only two companies supply 90% of infants that benefit from the program. Over the years, the market has shifted such that the WIC program supplies formula to half the infants in the nation.
Notably, manufacturers with WIC contracts are given more shelf space in grocery stores. Higher visibility leads to more sales of their non-WIC products, ultimately giving the manufacturer a higher share in WIC and non-WIC markets alike. The non-WIC premium pricing more than makes up for the discounted WIC pricing. It is not a coincidence that they have held fast to their WIC contracts since the 1990s.
Lack of Substitutes
Another problem is the lack of substitutes for baby formula. After all, aside from breast milk from new mothers, there is no other way to circumvent the lack of formula in the market.
The Food and Drug Administration requires baby formulas to have minimum amounts of 30 different nutrients. Infant formula is the only suitable alternative to breast milk for the first 12 months of a baby’s life. Alternatives such as goat’s milk or cow’s milk are not suitable for babies as they do not provide complete nutrition.
Large Scale Product Recall and Plant Shutdown
Abbott’s role in the crisis is another crucial factor to consider.
The company has a 43% share of the baby formula market in the United States. The Sturgis, Michigan facility’s neglect of essential manufacturing and cleaning processes was the reason behind the large-scale product recall in September 2021, after reports of infants becoming ill after consuming their products.
The product recall and plant shutdown were the results of the FDA investigation in February 2022. The FDA says that Abbott had ample time to take action to recover in the months after the product recall, but little was done. By the time retailers and consumers realized the scope of the supply problem, it was too late.
Lastly, the critical factor that could have warned consumers of an upcoming shortage was the FDA itself.
The main question is, why were consumers the last to know?
The FDA claims it didn’t have enough visibility to sound an alarm. But the first case of bacterial infection was discovered in September 2021, with more instances reported in the following months.
The FDA also received reports alleging poor sanitation standards at the factory and the doctoring of records to hide inadequate quality checks. This was in October 2021, when cases of bacterial infection were already under investigation.
While the Abbott plant shut down took place in February 2022, it took several months for the shortage to be recognized by consumers across the country. Despite the federal government’s efforts to speed up formula shipments from overseas, the crisis continues to expand.
The delay from the FDA thus highlights the importance of its role as a food safety regulator. It also raises questions about the FDA’s responsibility in the current crisis and whether a timely response for recovery might have been the solution.
What we can conclude from the mismanagement in all these instances is the negative impact of structural problems in any industry or government body. Even issues months or years in the making can significantly affect supply chain management, which will trickle down to the consumer level.
Despite all of these problems arising over several months, consumers were the last to find out that it was happening at all. And, of course, they were the ones most affected. For a product categorized as essential nutrition for the infant population—one without substitutes—it should not have been the case.
Logistics wise, what can be done to improve supply chain resiliency or visibility?
Let’s look at some approaches.
How to Build a Resilient Supply Chain
To build supply chain resilience, it is crucial that we address the elements that strengthen its roots. These include resistance and recovery.
Resistance involves gaining better visibility and building strategies to predict and prevent disruptive events. This entails:
- Identifying vulnerabilities in your supply chain
- Using real-time data with the help of technology to measure and monitor operations
- Understanding your ability to tolerate redundancy and scope to increase production
- Agreeing on standard metrics and expectations between supplier-manufacturer relationships
- Relocating production close to home
- Distributing physical inventory across multiple warehouse locations
- Using real-time data with the help of technology to optimize operations
- Harmonizing platforms, product components, and plant technology
- Incorporating simultaneous instead of sequential processes
- Implementing capacity and inventory buffers
- Redesigning manufacturing processes to accommodate demand variability
Let’s see what we get when we apply these strategies to the formula shortage case.
For starters, maximizing total global capacity to limit the impact of the shutdown of a single production plant helps. Reducing market concentration to create a flexible supply chain also mitigates any issues faced by one entity. This might be in the form of reducing the import tariffs to allow global suppliers a share in the market.
On a similar wavelength, working with health administrators to develop suitable strategies during periods of shortages is crucial for essential products such as baby formula. This could take the form of how the FDA treats drug shortages. Identifying products that may fit into the essential food category and then, applying a similar shortage strategy to deal with formula shortages would help a faster and more effective policy response.
Visibility also involves educating customers about these issues. This can—and should be—be done on many levels, from manufacturers, retailers, pediatricians, and the FDA.
Here at Nest Egg, we’re working toward improving supply chain visibility through our intelligent inventory solutions in order to help drive informed business decisions and inform consumers. For example, we want to eliminate consumer frustrations around lack of visibility on issues that the suppliers, retailers and regulators are already well aware of.
A long-term solution to the matter involves combining visibility and resistance strategies to then improve the recovery approach and time taken.
Recovery involves conditioning the supply chain network for disruptions and improving recovery strategies. It involves:
- Diversifying supply chain network
- Achieving greater visibility and agility
- Creating a centralized incident management system
- And more.
Most approaches to visibility, resistance, and recovery put data-driven decision-making at the forefront. These must be followed by agility, infrastructure, manufacturing technology, and government interventions to improve trade and import tax policies.
It is also important than ever to look at strategies being applied in other present-day scenarios and learn from them.
What Is Being Done to Combat the Baby Formula Shortage?
Here are some steps that are being taken to recover from the baby formula shortage and build a resilient supply chain ecosystem for the future.
- Abbott has reached an agreement with the FDA to reopen their Sturgis plant and aims to bring formula back to shelves in 6 to 8 weeks.
- The FDA and U.S. health regulators have temporarily eased import restrictions on formula import to the U.S.
- The White House has announced measures to encourage expedited production, crack down on price gouging, increase formula imports, and more.
- The U.S. Federal Trade Commission (FTC) has launched a formula inquiry to examine the reasons behind the crisis and to suss out any deceptive practices involved.
Only time will tell what strategies work best, so parents no longer have to worry about finding empty shelves in their local grocery store, buying European formula from third-parties or making their own formula at home.
The Bottom Line
COVID-19 has tested the resiliency of the global supply chain. Even so, a unique series of events has contributed significantly to the current US infant formula crisis.
Visibility in concentrated and restricted/regulated markets can help address issues just in time to avoid acute supply chain issues. While recovery efforts have been deployed, lawmakers, regulators, retailers, and suppliers must take action to ease the burden on the consumers and improve supply chain resistance against future shortages.
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