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Top 4 challenges facing global supply chains

Top 4 challenges facing global supply chains
Managing global supply chains is increasingly part of the dietary supplements and functional foods business, and it isn’t getting any easier. Here are some of the challenges weighing on executives’ minds.

Despite what many U.S. consumers seem to think, their supplements' ingredients come from outside the U.S., and, increasingly, the finished products come from other countries as well.

There are many reasons for this shift—lower costs and processing efficiencies among them. The ongoing story of botanical discovery plays a role too, as most of the new super-this and super-that ingredients come from the developing regions of the world.

And while this shift has brought opportunity and growth, it has also brought a new set of challenges. After speaking with members of industry who manage global supply chains, we’ve uncovered some of the things that keep these managers up at night.

Supplier challenges

1. Exchange rates

Costs for U.S. buyers continue to rise because of the weakness of the dollar against other currencies, but nothing is constant. The lingering European debt crisis, the fiscal challenges here at home and China’s slow revaluation of its currency all play a role in fluctuating rates. The need to purchase ingredients months in advance of manufacture can make it challenging to source ingredients at competitive prices.

“The biggest issue with overseas supply challenges is the U.S. dollar. As the euro continues to soften, the only currency of safety is the U.S. dollar,” said George Pontiakos, president and CEO of BI Nutraceuticals. “But I’m concerned it will soften again. Currency is life.”

The strengthening of the yuan, something long urged by some U.S. policy makers, is not necessarily good news for U.S. supplement companies, which source somewhere in the neighborhood of 60 percent of their overall ingredients supply there. The yuan has strengthened from 7.74 yuan to the dollar in late February of 2007 to 6.29 in late January of 2012.

“Chinese ingredient costs continue to be on the rise across the board,” said Larry Kolb, president of US operations for TSI Health Sciences. “Inflationary pressures in these developing countries (primarily labor and currency costs) have been difficult to manage in 2011, and I see 2012 presenting the same challenges.”

2. Agricultural conditions

Ingredients made in a factory don’t rely on weather conditions for the most part. But “natural” ingredients have to come from Mother Nature, who hasn’t been cooperating lately. Extreme weather events are on the rise across the globe. The summer of 2010 was the hottest ever recorded in the Northern Hemisphere, according to the National Oceanic & Atmospheric Administration, and the agency said the summer of 2011 was the second hottest on record in the US. (Thank you, coal-burning power plants and their CO2 emissions, not to mention emissions of mercury—a significant stain on Atlantic farmed salmon. But we digress.)

One of the effects of global warming has been the increasing unpredictability of rainfall in many agricultural regions. Extremes of flooding and drought are becoming more commonplace, further burdening water supply systems, most of which were designed with more consistent rainfall in mind. Across the globe, growers seem to be making up the difference by pumping more from wells.

“The global water table is deteriorating markedly,” Pontiakos said. “Even fields that have been clean for centuries are now showing lead traces, arsenic traces, pesticide traces. We see aquifers starting to become problematic. We see it in the saw palmetto crop. The oil counts are lower and the crop is not as hardy and healthy, and it’s a water problem.”

The more tenuous agricultural conditions can lead to commodity shortages in their own right. But there’s an add-on effect; as basic food commodities become more expensive and less secure, agricultural policy makers, who still in many countries dictate what will be grown where, are motivated to move toward basic nutrition crops.

“They don’t really care if you are drinking green tea for digestive health right now,” Pontiakos said. “Social stability for them is food on the table. So a lot of land is now being reallocated from export crops to survival crops, corn in particular.”

3. Specter of shortages

“Shortages in ingredients derived from plants or animals are almost inherently going to happen because they are both finite in quantity and supply,” said Scott Steinford, president of ZMC-USA. “Factors from popularity in demand to weather conditions affect the overall supply and not all of the situations that impact supply can be foreseen.”

One issue that has affected the shortage picture in the U.S., still by far the biggest supplement market in the world, has been spikes in demand caused by mentions of ingredients on the Dr. Oz Show. Demand for astaxanthin, for example, skyrocketed in 2011 after a guest extolled its benefits on the show. Now Foods, which markets an astaxanthin supplement, saw sales increase tenfold. Some industry observers have speculated that the potentially overheated demand for ingredients whose supply chains cannot rapidly ramp up production could create artificial shortages.

4. Adulteration

The issue of shortages brings up the troubling issue of economically motivated adulteration. If an ingredient is pricey or in short supply, some suppliers will move to meet that demand with substitute materials. Or, in a scenario that is endemic rather than cyclical, suppliers will cut botanical supplies to meet buyers’ aggressive price points. So that’s the why. But who’s to blame?

Pontiakos has long been an advocate of the point of view that the buyer of the ingredient bears ultimate responsibility for what’s in the container. “Adulterated products are a function of the people who buy the ingredient, because they are demanding that suppliers meet impossible price points and looking the other way when they do,” he said.

Kolb agrees, citing the case of gingko supplies, which continues to be one of the most frequently economically adulterated ingredients. “The majority of the US market pricing has been set at an artificially low number for years, and really the only way one can get there is to spike the product to lower the cost,” he said.

What to do about adulteration

“The primary way to guard against adulteration is to put common sense over business sense. If a product seems too good to be true in terms of either claims or price, it’s not true,” said Steinford.

Doing a thorough inspection of the facilities where your raw materials come from is the ideal. For many companies, sourcing ingredients abroad may be beyond their reach, so it’s imperative to get a sense of the character of the people with whom you are dealing.

“The buyer is being incentivized on purchase price variance,” Pontiakos said. “These buyers need to get out in the field and go and visit these companies. If you go visit these suppliers and they are in a strip mall or in a 60,000-square-foot tilt-up with cardboard boxes around, that’s a problem.”

And as both a first and last line of defense, test, test, test. Industry sources say it is still common practice to rely heavily on certificates of analysis (CofA) to identify incoming materials. A CofA can constitute a useful starting point for identity testing, but it is no more than that.

GMP rules, reasonable measures to limit product liability, and ethical business practice all mean companies must verify their supply via testing. The GMP rules give flexibility on what tests to conduct, but are not flexible on whether you must test in first place. Test you must.

So, is the supply picture getting better, or worsening? Some in industry are hopeful that GMP requirements will raise the industry’s game across the board. But the problem is endemic. In a recent Herbalgram published by the American Botanical Association, author Stephen Foster traces the history of adulteration of medicinal herbs back to a report from a physician to Roman Emperor Marcus Aurelius. So it’s up to regulators and responsible players in industry to see that the industry steers this ship on a true course.

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