W&M supply chain expert analyzes factors affecting baby formula shortage
As many parents all over the U.S. look high and low for baby formula for their infants, the causes and possible solutions to the shortage are being dissected.
Experts see it as connected to global supply chain issues that have manifested for years and been exacerbated by the pandemic, according to William & Mary Professor Ram Ganeshan.
Ganeshan is the D. Hillsdon Ryan Professor of Business at W&M’s Raymond A. Mason School of Business. He teaches courses on supply chain management and digital strategies.
Ganeshan’s research and consulting interests are in the areas of big data, supply chain management and logistics strategy. He has edited three books and has published more than 50 articles in academic and trade journals.
W&M News asked him to break down specifics of the baby formula shortage’s origins and complexity.
Is the production and distribution of baby formula different from other products?
We’ve all heard that it’s better to domestically produce so that you reduce the risk of being dependent on other countries. Interestingly enough, this is just the opposite. In some ways, it’s a little bit different from other products. And I’ll try to explain why that might be the case.
Baby formula is not a homogenous product. There are many stock-keeping units — different kinds of formulas suiting different kinds of nutritional needs that babies have. It’s regulated by the FDA, which means that they have some oversight on how these are made and how they are labeled.
Although European baby formula brands are nutritionally equivalent or sometimes better because they don’t use ingredients like corn syrup, it’s made it difficult for us to import from Europe simply because their labeling standards don’t meet our FDA standards. So there is a regulatory framework that stops us from importing baby formula or its ingredients from other countries.
What other factors play into this?
There are two other things that I think makes this product somewhat different from many others.
This is a very concentrated industry. There are a small number of companies that pretty much sell most of the baby formula. So if something happens to one of them, then there tends to be a problem because the supply just goes down.
The third way in which this product is somewhat different is that a significant portion of baby formula is made for the Women, Infants and Children program, which is a government program that provides subsidies to low-income families to buy baby formula. And about half the baby formula sold in the United States is sold through these programs. The government has contracted these companies for most of the baby formula production.
So the industry is concentrated. The manufacturers are limited. The federal government contracts about half of the production. And then there is a regulatory framework of us not being able to import from Europe.
How does this type of shortage start and escalate?
Even mid last-year, the out-of-stock percentage for baby formula was somewhere between 2 and 8%, But today the out of stock percentages have gone up to close to 40%.
So the question is how did we get from 2% to 40%? And the three reasons I gave about how this product is different contributes very significantly to that.
Earlier this year, Abbott Nutrition, maker of Similac and one of the largest producers of baby formula, did a voluntary recall and shut down their Michigan plant because they suspected bacterial contamination. This took out a huge portion of the supply from the market. And that is clearly one contributor to the shortage.
Because of how the industry is concentrated, there haven’t been other manufacturers to come and fill the gap. The inability for us to quickly import stock from Europe to fill that gap exacerbated the shortage.
What and how long might it take to improve the availability of baby formula, now that the government has invoked the Defense Production Act to speed production and expedited importing from overseas?
Yes, President (Joe) Biden invoked the Defense Production Act (DPA) Wednesday. The president is requiring suppliers to prioritize the needed resources to infant formula manufacturers before any other customer who may have ordered that good. This will help increase production and speed up supply chains.
President Biden has also started the “Operation Fly Formula” program that airlifts baby formula from Europe to the United States, bypassing the pandemic-related supply chain congestion. The FDA and the Abbott plant have reached an agreement to restart the plant in Michigan which is now ramping up the production of baby formula. Manufacturers are increasing efficiency in production by making standard sizes. This increases the capacity and the supply of baby formula.
Retailers are rationing baby formula. States are also working on WIC flexibility in an attempt to use vouchers for non-contracted brand infant-formula. This would not only make it easier for families who use the vouchers, but provide an incentive to non-contracted formula makers to increase production.
All these initiatives will alleviate the baby formula shortage. But getting back to normal may take several weeks. The long-term solution is to make the supply chain more resilient so it can quickly adapt to demand or supply shocks. That can be expensive.
