It is a sight we are all too familiar with, bare shelves with nothing but shelf tags telling you what was once there. But unlike the hand sanitizer and home workout equipment shortage of 2020, this time the empty shelves are indicative of a more serious supply chain issue: a baby formula shortage. Nationwide, 40% of baby formula SKUs are out of stock, with that number even higher in some cities. This shortage is up from a 10% stock out rate in 2021.
With parents and caregivers everywhere scrambling to find something as critical as their infant’s formula, many wonder how a shortage like this happens so quickly. Infant formula is a roughly $45 billion industry in the United States, and with three-quarters of infants being at least partially formula-fed, it is an important industry to many families. The formula industry in the U.S. relies heavily on only four manufacturers, with the top two manufacturers making up 83% of the market. In addition to limited domestic manufacturers, regulations make it difficult, if not impossible, to import baby formula (although this is something being challenged in the wake of the shortage).
What Triggered the Baby Formula Shortage?
The catalyst for the shortage happened earlier this year when four customer complaints and the deaths of two infants were traced back to a manufacturing plant belonging to the largest formula company. In February of this year, Abbott voluntarily recalled powder formulas, including Similac®, Alimentum®, and EleCare® manufactured in Sturgis, Michigan, due to contamination concerns. It’s important to note here that the subsequent investigation determined that there is no conclusive evidence to link the Abbott’s formulas to the infant illnesses.
Due to the Form FDA 483 issued in March 2022 (related to the FDA site inspection that started in January 2022) and the voluntary recall, the plant remains shutdown as of mid-May.
A Form 483 is issued at the conclusion of a FDA inspection when the investigator observes any objectionable condition that may be considered a violation of the FD&C (Food Drug and Cosmetic) Act.
In responding to this disruption, formula manufacturers and retailers can take a page from the lessons learned through other recent shortages. Businesses have used tactics such as using customer allocation processes, limiting purchase quantity to avoid stockpiling by a subset of retailers, and limiting variation to focus on key products. In the case of baby formula, this could mean considering approaches like focusing solely on the powder offerings over the pre-mixed variety.
Taking a Practical Approach
In responding to this crisis, it’s critical that businesses have business continuity plans and/or supply chain continuity plans to guide them through crisis situations. Let’s not forget the 2011 volcano eruption in Iceland, which threw our global transportation into a crisis; many companies dusted off the continuity plans too quickly and effectively maneuvered through the problem. Assessing supply chain vulnerabilities in calm times provides the playbook for timely and effective execution during times of crisis.
In the case of the Abbott voluntary recall, they have a plant in Ohio that also manufactures baby formula, as well as a manufacturing site in Ireland. Abbott is importing product from the FDA-approved Ireland site to improve the supply. How can these two sites be leveraged to reduce the supply interruption?
Their playbook may list current products and the sites that are approved as manufacturers and may also include steps to assess the path forward, including plant raw materials, capacity, and utilization.
The War Room
The focus becomes: what can the alternate plant(s) manufacture until the primary plant is operational again? In situations like this, a ‘war room’ is established with high-level functional heads assessing information and making decisions. What to make at the alternate plant(s) is one of the first decisions to be made. Data analytics are used to prioritize the sequence of products to be manufactured at the alternate plant(s). As a starting point, businesses can use the Pareto principle (or 80/20 rule) – 80% of the volume comes from 20% of the SKU to focus the discussion.
In a press release from Abbott, the company shared that production would restart with EleCare®, Alimentum®, and metabolic formulas first and then Similac® and other formulas.
Raw material availability and flawless execution to get as much product out into the field is the driving force. Are there raw materials at the alternate plant(s) that can be used to make the products that are now stocked out? If the answer is no, what materials can be transferred from the primary manufacturing site to the alternate(s)? How quickly can more raw materials be ordered and delivered? This is when having suppliers that are true partners is crucial – suppliers that understand the impact of a voluntary recall and the complexity of scaling production at an alternate site are critical success factors.
Based on the available raw materials, determine how much of each product in the top 20% products can be manufactured. Is there raw material inventory at the shuttered plant that can be moved to the alternate manufacturing site(s)? Sounds simple, but if the ERP system has not been set up to allow this, it’s another huddle to overcome. Again, the business contingency plan should have instructions on how to do this outside the system. Without a business contingency plan, subject matter experts are brought into the ‘war room’ to provide guidance on how to work around the new barrier to success – something that could take hours or days to resolve.
Establishing an Effective Communication Plan
Good news – there is a plan to address the interruption in supply – but that’s only the first step. Tension, anxiety, and all the other stress-related feelings are affecting most of the employees, not just those in the ‘war room’. A communication plan needs to be developed as well. In the absence of information, we make our own assumptions and decisions. The communication plan needs to include what information should be provided to the general rank and file, as well as timing. Typically, this is aligned and distributed in coordination with content on websites and/or public announcements from the company.
Relative to the business continuity plan, having an outline for the communication plan ensures internal communication is timely and clear. One of the first internal communications would be that a voluntary recall has been executed and that if employees are contacted by anyone (individuals, news sources, companies, customers …), they should tell the person to reach out to public relations and provide the phone number. Misinformation coming from within the company cannot be allowed.
Throughout the process to get product back into the field, the war room team has experienced a practice vs. procedure exercise. Many inefficiencies and barriers to success have been experienced and now need to be recorded and acted upon. After the crisis has passed, consider performing a review of the processes associated with the roadblock, inefficiencies, and complicated processes. With the execution of these processes fresh in your memory, standard ways of working can be updated ensuring the business even in good times operates more effectively and efficiently.
Latest News on the Baby Formula Shortage
Abbott has entered into a consent decree with the FDA related to the Sturgis plant. The consent decree is an agreement between the FDA and Abbott on the steps necessary to resume production and maintain the facility. Once the FDA confirms that the initial requirements for start-up have been met, Abbott could restart the site within two weeks. From the time Abbott restarts the site, it will take six to eight weeks before product is available on shelves.
In addressing disruptions of this scale, it’s critical that businesses leverage a partner with the breadth of experience across supply chain operations and manufacturing, quality management, and site remediation necessary to holistically to meet the inherent challenges. Our team of supply chain consultants bring not only breadth and depth in addressing these shortages – but industry-focused expertise and experience to enable solutions that reflect your unique industry nuances and challenges. Contact us today to learn how our consultants can help your business address disruptions like the baby formula shortage or whatever challenge your business may face.