For a time last year, Dunkin’ customers across the country were sliding clear plastic straws into their cold beverages. Most probably didn’t notice the typical orange and purple stripes were missing. Others, no doubt, chalked it up to something else that had changed during the pandemic. Indeed, straws are just one piece of a complicated puzzle for the National DCP (NDCP), Dunkin’s procurement and distribution cooperative, which like logistics organizations the world over has been dealing with unprecedented circumstances for the past two years. The fact that Dunkin’ shops never ran out of straws – or cups, or coffee – is a testament to the NDCP’s expertise. Dunkin’ is certainly not alone facing ongoing supply chain disruptions and higher prices for raw materials. As the business publication Supply Chain Dive reported last month, “Shortages, labor constraints, limited storage space and soaring delivery rates are all expected to continue and create headwinds for shippers this year at a time when demand still remains high.”
Liz Longstreet, NDCP’s executive vice president of Strategic Sourcing, admits, “Supply chain challenges are as bad as they have ever been [and] I don’t see us getting out of it in 2022.” But she is also quick to point out that “Some of our issues are unrelated to COVID-19 and the resulting supply chain challenges.” What she and others in the sourcing and logistics field have witnessed over the last two years represents a master class on supply and demand disruptions—brought on by several factors and exacerbated by a global crisis unlike anything in generations. Bloomberg Businessweek described the situation this way, “The world’s food supply chains are being tested by logistics and shipping chaos at a time when global demand is on the rise [and] cyberattacks are adding to the uncertainty.”
Signs of trouble
“We started seeing [evidence of a crisis] in Q4 2019 with Asia shutting down. It spread to Europe and we said, ‘We have to start planning because we would be next,’” recalls Scott Carter, NCDP’s chief executive. “For the first time, I was telling our leadership team to stop buying goods from our suppliers,” Carter says, adding the NDCP typically stocks inventory for 10 days or less on its top items. “We knew we would run out and store sales would dry up,” although that concern didn’t last very long.
“Our downturn was short-lived compared to other industries,” says Longstreet. “Business came back quickly and we had to shift to making sure we had enough inventory in 2020.” She describes the situation as a “full about-face from March to May.”
As franchisees know, when customers returned to Dunkin’, it was for to-go items. That created different troubles, Carter says. “Industry-wide our supply base was challenged with incredible demand from all sectors and that put pressure on supply, which put pressure on pricing.” The result was inflation at the franchise level.
Take cup carriers for instance. With customers packing drive-thrus for a family Dunkin’ run, cup carriers were in high demand. As Longstreet explains, “The cost increases for cup carriers were partially driven by higher costs of raw materials and ocean freight, but also due to the need to source from multiple vendors due to increased demand and limited capacity.”
In 2019, franchisees paid $16.44 per case of cup carriers. In 2020, the cost jumped to $17.14. The cost in 2021 was $20.02. “This is the only time I’ve experienced these types of inflationary pressures in my 32-year career,” says Carter.
In the procurement and logistics business, the words “lead time” can take on different meaning, depending at what stage they occur along the supply chain. With its mission to provide the lowest cost, highest value product to meet Dunkin’s specifications, NDCP routinely sources certain raw materials – and most notably, coffee – on a long lead time. So, when Brazil experienced its worst cold snap in three decades in 2021, Dunkin’ franchisees were insulated from dynamic fluctuations in the price of Arabica beans. “We went long on coffee in 2020 and that insulated the system against these significant increases for two years,” says Longstreet.
“We go long when it’s appropriate to provide price stability,” Carter adds. But stability can’t last forever in a world riddled with weather extremes and business disruptions. NDCP expects franchisees will feel the impact of higher coffee prices next year. Carter is also quick to point out that the situation in Brazil has nothing to do with the supply chain, per se. Like the straw situation late last year, products along the continuum from procurement to distribution face myriad potential problems. There were significant capacity constraints on resin-based products because a massive ice storm in Texas in 2021 knocked petroleum processing plants that make resin offline. Carter and his team are now facing an all-time high in wheat prices as a result of the Russia-Ukraine conflict; Russia is one of the world’s leading exporters of wheat.
“We continue working with the brand to source ingredients to make sure they meet quality parameters with no impact to finished product,” says Longstreet.
Yet, she and Carter agree the biggest single greatest issue impacting supply, demand and pricing isn’t geo-politics, weather or the virus; it is labor.
The driving force
“Labor is the driving force behind the need to increase menu prices. It drives a larger share than food cost does,” says Carter, who points out that labor concerns extend far beyond the Dunkin’ business. Take the paper milling company, for example. After a cyberattack put a major paper supplier offline in 2021, demand for their products was already at record peaks. But finding employees to work once the mill was fully operational again proved to be a challenge that perpetuated the difficulty of meeting new levels of demand.
“With [labor] constraints, it’s hard to catch up,” Carter says.
Longstreet adds it is now more difficult to overcome setbacks related to severe weather or cyberattacks. “There is so little wiggle room now because of labor, it’s harder to recover from any challenge.”
At the NDCP, there is also a shortage of truck drivers to deliver products to franchisees. Turnover in the ranks and competition for drivers prompted NDCP to increases wages outside its normal budget cycle for the first time “to support retention in driver workforce,” says Carter. “We are competing for truck driver talent. Amazon hires 40,000 people in a year and raises wages and puts pressure on competitors around them.”
And the challenge is expected to grow, based on industry outlook data from the American Trucking Association (ATA), which found after falling 6.8% in 2020, freight volumes surged 7.4% in 2021, “And we will see continued growth in freight demand across all modes for the foreseeable future,” ATA wrote.
More of the same?
Facing wage inflation from an unprecedented labor shortage, plus shortages of materials from virus-fueled changes in consumer demand patterns, Carter recognizes the challenge ahead for NDCP and Dunkin’ franchisees. “It’s going to take time. We have to communicate accurately and forecast accurately so stores can plan accordingly in months ahead. Working together, we can support their profitable operations at the store level.”
Adding to the current situation is Dunkin’s continued expansion. While new store openings are not expected to reach the high-water mark of 400-500 per year, as we saw in the mid-2010s, Dunkin’ is still on track to open 200+ new locations each year, which Carter calls “steady growth we can support.”
What about the new hiccups along the way? Experts believe disruptions will become more ordinary, which will test everything NDCP and others have learned during past two years. A recent McKinsey Global Institute report predicted that most companies could expect major supply chain disruptions every 3.7 years.