Supply Chain Lessons Executives Learned from the Baby Formula Shortage

The baby formula shortage shows executives need to stop thinking of supply chain management as a cost center and start treating it like a profit-maker

Executive Summary

In this article, were going to shine a focused — and, we hope — clear spotlight on the role that dysfunction in the supply chain has played in helping to create and exacerbate the baby formula shortage. We’ll touch on three main themes:

Cause: First, we’ll summarize the supply chain problems that contributed to the baby formula shortage 

Pattern: Then we’ll show how the baby formula shortage is part of a pattern of chronic supply chain disruptions 

Persistence: Finally, we’ll explain the reasons why these types of disruptions keep happening

Before We Begin: Defining Our Terms
As we begin our exploration of this crisis, we thought it might be helpful to give a sense of the scope of our own use of the term “supply chain.” For our purposes, a supply chain is a connected set of organizations and individuals, working together to provision, receive, store, and move goods, for product manufacturing, and distribution. Importantly for this case, supply chain responsibility includes the people, technology, data, and processes required to assure the quality of the finished product, its continued availability, and regular, timely delivery.  

If that sounds like a lot — it is!  This is the ample field of possible action and error we’ll be delving into to discover why America has just passed through this crisis, and why we’re bound to see more of them. 

But most importantly, we’re going to suggest how treating supply chain management differently, as a profit driver rather than a cost-center, has the potential to change these problematic patterns for good.

How the US ran out of baby formula

Unless you’ve been on a digital leave of some kind, you certainly know that the baby formula shortage has been well reported. But you may still be wondering, exactly:

“WHY is there a baby formula shortage?”

Well, there’s certainly one aspect of this story with no shortages whatsoever — contributing factors: anti-competitive, monopolistic behaviors dating back to the 1990s; a slew of complicated regulations meant to ensure quality of these products; high tariffs, meant to protect domestic providers; and complications stemming from a well-intended WICs (Women, Infants, Children) program.  

Ripe as each of these avenues of exploration might be, we’re going to look at this story strictly through the lens of the supply chain. There’s a kind of unwritten code of commitment in the supply chain world, and we’re going to adhere to it. This code insists that ultimately, any shortage of goods can be best analyzed and remediated by addressing the proper functioning of the supply chain. 

So, with our supply chain hats firmly set, let’s begin by laying out the “facts on the ground” for this case:

  • In February, after four infants who had consumed baby formula from Abbott Laboratories became sick with bacterial infections, Abbott Nutrition voluntarily recalled its popular powdered formulas — then eventually shut down their plant in Sturgis, Michigan.
  • Baby formula is a highly consolidated market with only three major players: Reckitt / Mead Johnson (makers of Enfamil); Nestle/Gerber (Good Start); and Abbott Nutrition (Similac). Within this trio, Abbott controls almost 50% of the US market — so the closing of the Sturgis plant caused a major interruption — enough for some stores to run out of stock.
  • These stock shortages led to a run-on-the-bank effect, as concerned parents started to quickly buy up as much formula as they could. The end result has been a national shortage — bad enough that thousands of parents and babies dont have the formula they need. Some have had to improvise: adopting iffy online recipes for example, and stores that had any supplies were forced to ration out whatever formula they received. Ultimately, all providers among the big three: Gerber, Reckitt, and Abbott, were affected. 
  • Due to the fast-rising crisis, the Abbott plant’s testing for reopening was expedited, and it was given the green light to start manufacturing again. The US Government also invoked the Defense Production Act to give manufacturers first priority over needed supplies, and the FDA said it would relax regulations to allow for more imports into the US. 

Even with all these remediating steps taken, the course correction is still running behind: the infant formula shortage is expected to last at least several more weeks

A Layer Deeper: How The Supply Chain Failed

If we return to the broad definition for supply chain we offered in our introduction, and examine the genesis of this crisis, we begin to see how it was, in fact, supply chain problems that really triggered this breakdown. 

First, as revealed in a whistle blower report, there were rampant safety and cleanliness issues at the Abbott plant — chronic problems which ultimately led to recalls, and eventually…brought on the shutdown of an entire factory. In our view, the lack in oversight evidenced here, leading to serious manufacturing-environment problems, should be fully in the purview of supply chain leadership. 

However, sad to say, this kind of situation is not unusual. Truth be told, it’s the logical consequence of supply chain being treated strictly as a cost-center, and supply chain leaders being excluded from strategic, decision- and policy-making representation. When your only role in the company is cost cutting…things can spiral downward quickly.

 Another supply chain gap appears next (again, not surprisingly) — no backup plan. Neither Abbott nor the other big baby formula providers were able to ramp up production to offset the closure of the Strugis factory. Bear in mind, the initial recall happened in February — now at least three months ago. 

And today, even with the Abbott factory coming back on-line, the most optimistic estimates call for shortages to persist for weeks or months before inventory returns to pre-crisis levels.

A Brief, Recent History of Supply Chain Issues

The troubling (but fully earned) headlines about the baby formula shortage are just the latest in a series of problems resulting from chronic supply chain issues. It seems as if we’ve hit a moment of reckoning, where the classic top-down, cost-center-only model for supply chain simply won’t hold anymore. In our view, it’s high time for this recognition to break through.

Even before the pandemic put supply chain in crisis, disruptions were becoming more and more common. In 2019, the fallout from Brexit was beginning to snarl supply chains. In 2015, the Tianjin port explosion rocked maritime shipping coming out of China. In 2011, the Japanese tsunami hobbled Japanese suppliers for years. And all the way back in 2001, the dot-com bubble burst, leaving warehouses, trucks, and the goods in those warehouses stranded — abandoned by those bankrupted companies. Of course, these are just a handful of examples. 

Over the last 20+ years, we can identify at least 15 spikes in supplier delivery times that cause manufacturing output to be disrupted. These can be seen in the chart below:

These disruptions are often thought of as nuisances or inconveniences. And, theyre rationalized as transitory or par-for-the-course. The breath of these “interruptions” is impressive in itself. Since 2020, heres a sample of products that had experienced major disruption: garage doors; computer chips; lumber; toilet paper; bicycles; motorcycles; potatoes; cream cheese; gas; coins; champagne; chlorine; maple syrup; avocados; and resin.

Youll notice that these products span industries — and many of these shortages are still on-going. In our view, this breadth of issues is suggestive of an underlying issue with the way supply chains are managed. 

More Supply Chain Problems To Come?

As weve noted regarding baby formula, there are always mitigating circumstances that tempt us to move supply chain out of the glare of close analysis. Some of this too-quick dismissal is driven by the kinds of topics that earn clicks and views. No doubt, its a lot more intriguing for the average reader to encounter scandal: politicians, monopolies, lobbyists, and other bad actors, doing what bad actors do. On the other hand, bad supply chain practices, and the dysfunction that enables them to keep occurring, only attracts a limited audience. 

…Well, yes, now that we mention it: this is exactly the audience we’re hoping to reach in this article!

We want our supply chain-invested readership to know that we’re highly confident that these nuisances — and the fact that they keep happening — are largely due to structural problems within supply chain management. 

As we’ve already hinted, these problems start at the very top with most organizations, because this is where the tone is set for the way companies treat their supply chain functions. Companies who treat supply chain exclusively as cost-centers, rather than profit-makers, are bound to run into these kinds of crises, over and over again.

 Supply chain as a cost-center is based on the traditional view that supply chain management isn’t a viable path for increasing revenue. The thinking runs like this:Since you cant help us make more money, you better spend as little as possible.”  For supply chain, this “second class citizenry” almost invariably results in adverse behaviors with negative effects — like manufacturing facilities that require whistle-blower reports to gain much-needed attention. 

Typically in these “cost-only” contexts, supply chain reports up through the CFO, which dilutes their influence in major decisions, and keeps supply chain management perennially on the chopping block for budget cuts. Annual budget reductions reinforce an already strong habit for prioritizing short-term savings vs. long-term improvements, and under-investment (or no investment whatsoever) in innovation.

In these kinds of environments, the supply chain team also lacks the resources and incentives to reward creative thinking and recruit the best people. All they have left is their commitment and camaraderie — considerable as those positive factors can be, they’re often just not enough. 

The Road Ahead for Supply Chain

As the recent track record indicates, and as the baby formula shortage powerfully dramatizes: we’re at a point of crisis with supply chain. The good news?  This story has generated precisely the kind of attention and energy that can often lead to breakthroughs.  We believe that energy will be most effectively spent if we focus it on fixing chronic, systemic, and corporate cultural issues with supply chain. 

Our strong conviction: as long as supply chains are regarded only as cost centers, its not a question of “if” more problems will occur, but only a matter of when and where.  On the other hand, the breakthroughs possible with supply chain participating fully as a profit-driver are remarkable. Like so many things, you don’t hear about these successes as often — because good news seems to travel rather slowly these days. (Not enough clicks!)

But if you would like to learn more about the successes of companies who’ve made supply chain a profit-maker, we invite you to read The Most Important Lesson Every Executives Needs to Learn About Supply Chain Management.  

We’re confident you’ll find that it really is a winning formula.

David Blonski

David Blonski

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