Challenges and Solutions: Managing a Clean Label Supply Chain

Cost-Implications-Will Lennon-2018-CLC

The cost of replacing various ingredients with clean label alternatives can pose challenges for product developers. Click on image to see a larger chart.

“As you have all probably come to realize by now, we are dealing with a clean label market that is still quite immature,” said Will Lennon, MBA, Chief Operating Officer, Imbibe, a beverage development company. “This means that pricing hasn’t yet equilibrated; information isn’t yet transparent; and raw material supply is still inconsistent.”

Lennon outlined some of the specific challenges confronting the clean label category in his presentation “Challenges and Solutions for Managing a Clean Label Supply Chain,” at the 2018 Clean Label Conference. On the ingredient side, for example, there is cost: clean label colors may cost five times more than the artificial colors they replace and require higher concentrations of use and shorten product shelflives. Clean label products may also require expensive packaging upgrades: A conventional cold-filled beverage, thanks to conventional preservatives, may now require hot-filling, along with much higher packaging material costs.

Lennon illustrated with a case study, “…a large consumer products company wanted us to develop a clean label powdered beverage. (Although the customer desired a freeze-dried berry powder, the cost was prohibitive.) So, we found a drum-dried berry powder, at half the cost, that we could blend with the freeze-dried powder to bring ingredient costs into line.” Product developers really need to press upon ingredient suppliers to provide acceptable clean label options. But, they should also establish a hierarchy of expectations. “Clean label can mean many things, and often, not all those needs can be met,” added Lennon. Does clean label mean minimally processed or preservative-free? Choices must be prioritized.

Clean label product development must also deal with capacity constraints. Normally, companies use contract manufacturers to launch new product lines to hedge their overhead risks. Today, limited capacity exists for clean label manufacturing and “large, billion-dollar companies are sequestering big parts of that capacity,” said Lennon. This results in larger up-front commitments for minimum-order production quantities and ingredient and packaging material inventories. “We also now demand that our suppliers stock three-to-four months of key-ingredient inventory, and many aren’t ready for this,” said Lennon. In some cases, key ingredients come in from overseas, further lengthening and complicating supply chains. Thus, both suppliers and manufacturers need to think about how much up-front risk they are willing to assume in case of product failure. And, warned Lennon, these supply chain challenges will only increase as large companies, such as Mondeléz, Weight Watchers, Kellogg’s and others enter the category.

An additional complication is that many new clean label ingredients originate from single suppliers and, overlooking the risks inherent to working with single-source suppliers (e.g., fires, bankruptcy), very little price competition or transparency exists when negotiating prices. Companies must thus make major commitments that can make or break their new product introductions, based on very little information.

Lennon cited the case of a single-source brown rice protein supplier that was building a plant in China due to be completed in four months’ time. Its ingredient may be key, but should the customer assume the risk of contracting with that supplier? “Reputational risk is another soft cost to consider and, often, you have little control over a suppliers’ ability to deliver crucial ingredients,” he added.

The only solution, in Lennon’s view, is to insist on complete transparency when discussing supply chain risks with both sup¬pliers and customers. Also, spend face time with each party to help avoid misunderstandings or mistranslations. “We had a Chinese supplier that claimed that their stevia leaf extract was organic, but upon discussion, it turned out that it was only the leaf that was organic, not the alcohol solvent used for extraction,” said Lennon.

Finally, there are the unforeseeable “hash-tag” costs imposed by fickle consumer trends and regulatory agencies (e.g., California Prop 65). These can place immediate reformulation demands on companies’ product development and procurement resources at a moment’s notice.

It is all heading in the right direction, affirmed Lennon. Clean label definitions continue to evolve, and supply will eventually catch up to demand, “but we are not there yet,” he added. In the meantime, get your operations team involved early in the product development process, and “be fully aware of and transparent about attendant risks,” advocated Lennon.

“Information on this page was derived from the 2018 Clean Label Conference Post-conference summary. See past and future Clean Label Conferences, which are annual events.

Posted on:August 6, 2018

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