Covid-19 Disrupting Supply Chains Short-Term, Could Spark Long-Term Procurement Shifts

Disruptions of natural product ingredient supplies linked to the coronavirus outbreak will extend at least until mid-year, becoming a “stress test” firms can use to evaluate supply systems, says Loren Israelsen, president of the United Natural Products Alliance.

Nutrients and ingredients typically in short supply already are unavailable, US manufacturers have started seeing shortages of other types of ingredients and it’s possible hat supplies of a “significant number” of materials will be at critical levels by the third week of April, Israelsen said during a 27 February webinar, “Coronavirus: How to Avoid Supply Chain Interruption.”

“Even if China is able to open factories and re-commence production, we run into the logistics problem of getting it from China to here. We don’t know how long that disruption could be,” said Israelsen. Shipping containers currently are stacked up on the US West Coast, waiting for ships to return them back to China, he noted.

UNPA CEO LOREN ISRAELSEN ON SUPPLIES FROM CHINA: WE DON’T KNOW HOW LONG THAT DISRUPTION COULD BE."

For at least a month, raw materials likely will be in critical supply and that estimate doesn't include hold-ups or other impediments resulting from concerns of the US Food and Drug Administration and Customs and Border Control regarding goods coming in and the potential for Covid-19 transmission, he said.

One factor weighing on when supplement ingredients are shipped again is the backlog of material in all industries that must be transported between the US and China using the same, limited number of ships and cargo. China’s domestic consumption will come first, followed by high-value cargo such as information technology and automobile materials, said Israelsen.

The natural products industry is unfortunately low in the queue and it is “particularly dependent” on China for ingredients, with 75% to 80% of US natural raw ingredients sourced there, he said.

Further, a “significant but unknown” percent of these ingredients, including amino acids, are sole-sourced – purchased only from one supplier in China, Israelsen said.

TraceGains Inc., a Westminster, CO, firm with a database on supplier compliance, quality management and new product development with customers sourcing 2,700 items from 1,300 supplier locations in China, also presented with UNPA and identified the top 25 food and nutrition items sourced from “high impact” zones in the country(see table).

Salt Lake City-based UNPA represents more than 100 companies in the natural product, dietary supplement and functional food space.

Covid-19 Could Change Procurement Systems

Israelsen noted that the Covid-19 outbreak also forcing companies to better understand their supply chain weaknesses and diversify their ingredient supplies. Covid-19 is a “stress test moment to evaluate resilience of past and present supply chains systems,” he said.

The virus may also usher in a new way in which US companies procure their ingredients.

On 11 March, the World Health Organization classified the Covid-19 outbreak, which has been reported in 114 countries, as a global pandemic. In the US on the same day, President Trump announced a 30-day ban on foreign visitors from most of Europe in an effort to curb the spread of the virus.

According to the Centers for Disease Control and Prevention, through 12 March the number of people in the US diagnosed with Covid-19 was 1,215, including 125 from "travel-related" causes, 102 from "close contact" and the remaining 988 undetermined. The CDC said 36 deaths have been linked the virus, which has been reported in 42 states and Washington, DC.

The centers also said that state and local public health departments testing and publicly reporting Covid-19 cases likely have the most-up-to-date data.

While the existing methods of finding materials involved global travel, building personal relations and networks and word-of-mouth intelligence, post-Covid-19 supply chain transactions could be through digital networks that connect buyers with suppliers and validate sources. Data collection and analysis and blockchain, a decentralized network of computers that shares a ledger of information stored in blocks accessible only participants connected to the network, also could become supply-chain components.

Israelsen said companies looking to switch their supplies from China to other sources must be careful to comply with Food Safety Modernization Act’s foreign supplier verification program requirements and to ensure that new partners are the original sources of ingredients and are not secretly sourcing sub-components from other entities.

Starting in May 2017, FSVP requirements have been imposed for importers of food to verify their foreign suppliers use processes that provide the same level of public health protection as relevant US controls and product safety regulations. (Also see "Foreign Supplier Verification Concerns Grow On Supplement Firms" - HBW Insight, 16 Sep, 2016.)

However, given the stigma of “Made in China” sourcing, even before the Covid-19 outbreak businesses in the country were making shipments to Cambodia, Vietnam, Myanmar and other Southeast Asia countries to mask the country of origin before the goods reach the US and other destination markets, Israelsen said.

“The factory that you think is producing your product, very often has a sub-contract with another factory, the ghost factory, and the product you receive comes from your contracted supplier but very often there are multiple other ghost factories they will trade with and it will be increasingly difficult to source supply,” he said.

TraceGains CEO Gary Nowacki agreed. “What we see continually is when there is supply chain disruption, it opens a vacuum for fraud,” he said.

Visibility into supply chains and diversified sourcing is more important than ever before as supply disruptions are impacting “not only small and medium sized companies that may have less clout in the marketplace it is impacting the largest CPG companies in the world,” Nowacki added.

The US and other governments are evaluating the sourcing relationships with China, especially for critical or sole-source supplies, Israelsen said.

The FDA has suspended most inspections of manufacturing facilities in foreign countries through April due to the outbreak. (Also see "Coronavirus Slams US Consumer Health Industry Event Schedules, FDA Meetings, Inspections" - HBW Insight, 10 Mar, 2020.)

In a letter to FDA on 9 March, House Energy and Commerce Committee members asked the agency for comprehensive assessment of the outbreak’s potential impact on US drug industry supply chains and on its impact on the agency’s inspections. Specifically, they want to know how many manufacturers, distributors and importers might be affected by supply chain issues and the agency’s ongoing plan to combat supply shortages.