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The baby formula shortage: a lesson in supplier dependency
The baby formula shortage: a lesson in supplier dependency

When you depend too heavily on one supplier, your business could end up operating at their mercy.

Jodilee avatar
Written by Jodilee
Updated over 6 months ago

No one learns to ride a bike without a few fateful falls. Making mistakes is simply part of the learning process. You could probably teach yourself to ride a bike but it helps to have training wheels and a patient parent at your side.

Life is the same. We all make mistakes, learn and grow from them, but if we can learn from other people’s mistakes too, we may be able to avoid more than a few scraped knees. As Warren Buffet puts it, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”

In this series, we will investigate some real world examples of events or businesses that we can learn from to hopefully avoid those “falls” in our own business. The first in our series focuses on the current baby formula shortage in the United States.

U.S. baby formula shortages

I recently read about the terrible shortage of baby formula that the U.S. is experiencing at the moment. I can’t begin to imagine the impact this shortage is having on mothers, but it got me thinking, how did this happen?

It seems that COVID-related supply chain issues have now been compounded by the product recall and closure of a key supplier’s factory (approximately 25% of the nation’s baby formula). These two incidents have resulted in approximately 43% of baby formula being out of stock at retailers.

So, what can we learn from this?

This tragic event got me thinking about dependencies. The U.S. nation was dependent on one supplier for 25% of its formula and, when unforeseen events occurred, they were thrown into shortages.

This is not an isolated incident.

In South Africa, people are dependent on one power supplier, Eskom, for electricity and when they have shortages, the public have “load shedding”, scheduled power cuts.

Being dependent on a few customers or suppliers for products or sales is dangerous but unfortunately more common than we would like to think.

Supplier dependencies

Similarly to baby formula and electricity, when you depend too heavily on one supplier, your business could end up operating at their mercy, either when it comes to price hikes or to issues that affect them. These include:

  • Price increases: with just a few suppliers you lose a degree of your negotiating power and may end up with lower profitability as a result of having to absorb these price increases. You may also become less competitive if you have to pass these prices on to customers.

  • Supply shortages: if operational issues hit, (natural disasters, poor management, etc.) you could end up with supply shortages and unhappy customers who may move to competitors.

Customer dependencies

The same thing could happen with a dependency on customers:

  • Price pressure: they could pressure you to drop prices

  • Being tied to a sinking ship: if they fail and can no longer buy from you, you could lose a great deal of revenue as sales to them dry up.

So, what can you do?

1. Be Aware of Your Dependencies

The first step to solving and guarding against a problem is to acknowledge it. So, to make sure your business doesn’t end up in a similar situation you can use tools like Syft’s customers, suppliers and product views to understand and monitor your customers, suppliers and product dependencies.

I took some time to do this for my example entity on Syft and quickly realized that I had some problems:

Supplier Dependencies

More than 50% of my products are purchased from one supplier, Captain Hook. This means that I would be in big trouble if something were to happen to their operations due to supply shortages and I could end up with supply shortages and angry customers of my own.

Customer Dependencies

Customers are in a similarly precarious position with more than 50% of my sales being generated from one customer, Ariel. What happens if Ariel goes bankrupt, or finds a different cupcake supplier? What would I do then?

Product Dependency

Finally, I am far too dependent on one product, Ariel cupcakes (which make up more than 60% of my products sold) to generate sales. Bad publicity, product defects, etc. could lose my business 60% of its revenue overnight!

2. Monitor them constantly

Business changes constantly, so this is not a once-off exercise. Businesses should constantly monitor their dependencies. With Syft’s tools, you can check this monthly or even weekly or daily to get up-to-date, real-time data and quickly identify potential dependencies as they arise. With this information at your fingertips, you can act on these dependencies before it’s too late.


3. Take action to solve the problems

Now that we have a system to identify and monitor these dependencies, what can we do to solve them? This will depend on your business and industry but here are a few suggestions:

Suppliers

Customers

  • Implement initiatives to increase sales to other customers. You may want to consider what is working well with your main client and repeat with others.

  • Enter into longer term contracts and payment plans with your main customer to prevent them from moving to competitors.

Products

  • Implement initiatives to increase other product sales.

  • Identify key inputs for this product and secure diversified supply chains.

Keeping tabs on your dependencies

The current baby formula shortage in the U.S. critically highlights the danger of an over-dependence on a handful of suppliers and by extension, specific customers and products. Though I in no way wish to minimize the tragedy of this shortage, it does provide us with the opportunity to learn from the U.S.’s dependence on certain formula suppliers so that our businesses needn’t experience similar problems.

With the right tool to identify and monitor any dependencies, your business can act quickly to avoid and address these dependencies before you suffer the consequences.

About the author

Jodilee Manuel is a CA(SA) with a passion for accounting, education, and travel. She has several years experience in auditing and teaching and has recently joined Syft as Head of Education and Training where she hopes to empower users to get the most out of Syft and find ways to use it to add value and grow their business. In her free time she likes to explore the world and has, to date, visited 50 countries.

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