CO2 shortage shines a light on unseen supply chain essentials

03 July 2018

An unprecedented shortage of carbon dioxide has already put bakers on the backfoot and threatens to see British beer taps run dry.

This is a bad state of affairs at the best of times, but in a World Cup year when the UK is basking in a tropical heatwave, it is only a whisper away from being a national emergency.

Market-wide issue

Carbon dioxide is an unseen, but essential commodity in the food and agriculture supply chain and the shortage is affecting companies across the market.

Slaughterhouses uses carbon dioxide to stun pigs and chickens. Packagers use the gas to increase the shelf life of products, including salads, fresh meat and poultry, while it gives fizzy drinks such as beer and larger their sparkle.

Carbon dioxide might be invisible to the end consumer, but without it, many food and drinks companies simply cannot operate.

Last week, Warburton’s, the UK’s largest producer of crumpets, announced it had stopped production at two of its four plants, because of the shortage.

The British Beer and Pub Association said brewers were ‘working their socks off’ to keep the taps flowing, while a number of abattoirs have ceased operating. Should the shortage continue, the effect will be felt by consumers throughout the UK.

Out of gas

So, what’s causing the shortage and how can companies protect themselves from similar events in the future?

Carbon dioxide is a by-product from ammonia production in the fertiliser industry. In the summer months when farmers are harvesting rather than planting, the demand for fertiliser reduces. As a result, producers slow down their operations and use this time of the year to carry out maintenance work.

Unusually, these scaled-back schedules have all overlapped and at the time of writing only two of the five plants that supply carbon dioxide to the UK market were operating.

The upshot is that food and drinks companies are scrambling to eek out their carbon dioxide supplies and get their hands on whatever stocks are available.

Supply chain mapping – forewarned is forearmed

The challenge for companies is to identify these sorts of issues early and to quickly enact contingency plans. The difficulty comes in getting the data that provides executive boards with the foresight to ensure their production lines can continue as normal.

The only way to shine a light on potential pinch points is to carry out in-depth supply chain mapping. What commodities are used in the supply chain? Where do they come from? What could affect their timely delivery? How many alternative suppliers are there?

Completing a granular analysis of your supply chain, will enable you to see where problems might arise and to hatch plans that can be enacted if they do.

It will not stop the problem happening, but it will give you a head-start in recognising logjams as they develop and provide the insight required to outmanoeuvre competitors as the situation develops.

Instead of simply responding to events, you will be able to proactively manage the problem to generate better commercial outcomes for both you and your customers.

Insurance options

Business interruption insurance can provide a financial safety net in such situations, but most policies will only respond to losses that result from physical damage. Non-damage extensions are available, but insurers are not keen to provide them on an all-risk basis and policies quickly become prohibitively expensive.

However, where companies can name their key suppliers and quantify their reliance on them, it becomes easier and more affordable to secure non-damage business interruption cover.

Indeed, by completing this level of supply chain mapping, companies can use the business intelligence they gather to create effective contingency plans and, in many cases, the confidence needed to retain the risk on their own balance sheet.

We are currently working with a partner to offer granular supply chain mapping analysis to clients. The research will identify weak links in a supply chain, enabling companies to draw up effective contingency plans.

It will also generate the level of information required by underwriters to offer tailored non-damage business interruption policies if companies decide they want to transfer the risk to the insurance market.

Whether the carbon dioxide shortage sees crumpets taken off the menu and lager in the UK’s pubs go flat, remains to be seen. But what is for certain, is that without an understanding of where supply chains can falter and a warning system to highlight when they are beginning to go wrong, companies will struggle to maintain production when the next unexpected issue arises.

For further information please contact Simon Lusher, Head of JLT's Food and Agri Practice on +44 (0)20 7459 5550 or email simon_lusher@jltgroup.com.

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