The courts are behind. Everyone is having trouble sourcing ingredients. And the global pandemic is creating huge changes in consumer demand.
It can all make it difficult for food and beverage companies to navigate co-manufacturer relationships and supply chain disruptions.
Boston-based Nutter Law Firm recently hosted a webinar on the topic “Biz + Bites: Dealing with Supply Chain Disruption for Food and Beverage Companies," and experts offered some advice for working through everything.
Jeremy Halpern, partner and co-lead of the Food and Beverage group, Nutter; Sarah Kelly, partner and chair of Litigation Department, Nutter; along with Jeff Grogg, managing director, JPG Resources, and president, Snackwerks, offered tips for navigating supply chain relationships right now.
Relationships are key
A lot of food and beverage brands are facing obstacles when it comes to getting their products produced by co-manufacturers, which tend to be facing their own obstacles, including social distancing requirements and unexpected demand.
Kelly said brands should try their best to work out any issues without resorting to litigation.
“A good relationship with your co-man is critical, because the last thing I think anybody wants to do right now is resort to the courts... which are not functioning [like normal],” Kelly said.
The best way to handle things is to come up with a creative solution or compromise. For example, brands can ask co-manufacturers to do a double run so that they don’t have to handle the next production run for twice as long.
Brands also should consider offering a co-manufacturer early payment, which allows the co-manufacturer to have some cash on hand during these unpredictable times.
Another option is having a co-manufacturers produce only primary SKUs for a while. Grogg said retailers will be understanding if you’re only able to supply your top SKUs.
“For efficiency and to ensure you stay in stock,” Grogg said, “you've got to take care of what matters most. And if you're nitpicking your suppliers over your tail SKUs, you're not going to get a lot of sympathy for that.”
This also might be a time to consider a longer expiration code, as long as it doesn’t create any safety risks.
Grogg said a lot of smaller companies have a shorter code solely because they think the quality drops off a little bit after their set amount of time. But if you have a short code, it means you have to move the product a lot faster — which may be an issue right now.
“There's a lot of places where as brands, we put a lot of focus and effort, and rightly so, but in times like these perhaps you can find some flexibility,” Grogg said.
It’s also important to remember that everyone is dealing with the current crisis and doing their best.
“Harping about being a week or two late is probably not productive,” Grogg said.
If a co-manufacturers just cannot finish a production run because of unforeseen issues, Grogg did offer another idea — simply ask them if there is another manufacturer they can refer your brand to until things are running smoothly again.
“In the food industry people tend to be pretty cooperative about things like that,” he said. “People want to help in times like this.”
And the risk of turning to another manufacturer right now, even if it means breaking a contract, is probably low, Kelly said.
“It's desperate times out there for a lot of people,” she said.
How to deal with ingredient shortages
It’s not just co-manufacturers that are having issues. A lot of brands are dealing with disruptions on the other side of the supply chain as well.
“Demand is up in so many parts of the food industry — so from one week to another you may have trouble sourcing any ingredient,” Grogg said.
While most companies aren’t seeing a shortage of every ingredient they need, they are seeing shortages.
“In reality what we're seeing more of is one of your 24 ingredients that didn't show up for production,” Grogg said.
He advises brands to get a little cushion on their ingredient inventory if possible so they can manage unpredictable disruptions. Another option is cutting out ingredients all together.
“If you've got a product with 28 ingredients, can you put it down to 16?” Grogg suggested.
Force majeure clauses can offer protection
Of course a lot of these issues may be covered under force majeure clauses, which, according to Wikipedia, is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God, prevents one or both parties from fulfilling their obligations under the contract.”
While most contracts have these clauses, they aren’t all created equal, Kelly said.
“Some force majeure clauses are very broad, and some are very narrow. It's very much a case-by-case basis,” she explained. “Clients put these in contracts routinely and they're difficult to negotiate ahead of time because nobody knows who's going to be affected.”
In the end, Grogg hopes this whole situation will inspire more brands to plan for major disruptions.
“Convincing young brands to plan for issues like this is always a challenge,” Grogg said. “This may be a scenario where people are more aware of that planning.”
For example, brands should, at the very least, have an informal list of backup ingredient suppliers and backup co-manufacturers.
“We do know brands who had that backup option and they've had to use it right now,” Grogg said. “You can at least [say], ‘Look we know what we're going to do if that happens.”
Brands also should have written guides in case someone has to step in and run things for awhile, for example if the owner is out sick.
“Founders tend to think, ‘The brand is me, and I'm the brand,’” Grogg said. “But if you're disrupted for a month, well your brand may be dead, unless you have a plan for that.”