Editor’s note: This story is part of a series highlighting takeaways from a March 25 event hosted by Supply Chain Dive, Manufacturing Dive and Food Dive. Register here to watch the replay on demand.
Food brands are rethinking product portfolios, often opting for fewer SKUs with a larger targeted push instead of a large category assortment, Mihir Tamhankar, principal at Kearney, said during the Food Manufacturing Summit, a March 25 event hosted by sister sites Supply Chain Dive, Manufacturing Dive and Food Dive.
He added that while some big corporations are practicing more aggressive SKU cuts, smaller businesses are still cautious about portfolio adjustments as they might not understand the trade-offs of opportunity cost.
This ties into a greater awareness of “good complexity and bad complexity,” Dheera Anand, partner at Bain & Co., said during the panel discussion. There is a difference between the complexity that drives the top line and consumer choice, versus complexity that is not yielding desired benefits, she noted.
“I think the other thing is, companies also are understanding that they can't just brute force this complexity anymore with the disruption and the [rising] cost of food and inflation and the cost of waste,” Anand said.
Food manufacturers are also being selective on buffer stock and hedging practices, especially on the commodity side, as the industry continues to face ongoing disruption, Anand said. In turn, brands are being very strategic about where they place buffer stock, inventories and investment dollars, especially when dealing with more risky items such as products with a shorter shelf life.
“So companies are stocking buffer stock, but they're doing this on long lead time, hard to substitute items, and have tighter buffers on short shelf life or highly substitutable items or fast-moving items,” Anand said.
Meanwhile, hedging on commodity inputs is a “well-established tool,” Anand said. However, the method is more sophisticated than it once was. Now, companies are looking at contracts more selectively, taking into account specific disruption scenarios versus a blanket hedge.
Managing buffer stock can be tricky, however, especially with high holding costs and interest rates, Anand noted. Handling risky items like perishables only heightens the complexity, especially when trying to avoid waste.
“So, I think there is a little bit of a calibration challenge that most companies are struggling with, but they're not able to get it exactly right in terms of where you hold the buffer stock and how to manage the trade-off between waste and agility,” Anand said.
