02/3/10

What Garlic Bubble in China tell us about Supply Chain Risk?

They seem to be totally two unrelated incidences.  First, there was a very interesting news story on Dec 5th, 2009 at NPR, What The ‘Garlic Bubble’ Means For China’s Economy. The news discussed a very interesting scenario of “garlic bubble” when “garlic prices in one Chinese province have shot up as much as 40 times the going rate”. China is the biggest producer of garlic so this bubble definitely shakes the food industry.  There were three reasons which caused the bubble:

  1. Due to the collapse of the global economy, there is less demand for garlic, so garlic farmers in China produced 50% less garlic.
  2. Due to the wide spread concern of swine flu, Chinese started to buy loads of garlic to keep them from getting sick.
  3. The Chinese government stimulus plan pumped its banks full of money and made lending very easy.

Therefore, limited supply ran into unforeseen high demand. “Smart” people saw this as a great opportunity thus “the garlic frenzy was turning into some kind of gold rush”. Many people borrowed easy money from banks, and started stocking tons of garlic in the warehouse and waiting for garlic prices to rise. The bubble hence created. Government stimulus plan caused an unintended result. I haven’t read follow-up story how this garlic bubble broke in the end.  I can only imagine how a purchasing agent from food industry jumped out of his/her office chair seeing the garlic price increased dramatically in short time. It’s also funny to think that every restaurant or food company has to reduce the portion of garlic ingredient and probably pray for the “garlic bubble” to burst.

Another story made me think about the impact of “uncertainty” to supply chain and related supply chain risk management. I was discussing supply chain in the horticulture industry with an industry expert. I was told that the demand for next year is almost out of question to forecast and that whole supply chain seasonality almost doesn’t exist. The big box retailers, such as Wal-Mart and Home Depot, keep pushing out their order forecast to growers since they couldn’t decide what to buy for next year from their weak 2009 point of sales (POS) data. This uncertainty put growers at a huge risk as they face the challenge of missing growing season. If I were a grower, I might be forced to hold up my purchasing decision to the very last minute, facing the risks of higher purchasing costs for rush orders or even not able to obtain the materials I need. If I went ahead to make my own “speculated” forecast, I would face an even bigger risk of ordering the wrong products and put the business in total loss.

In the blog of Supply Chain Risk Literature: a complete review, Jan Husdal summarized the typology of supply chain risks. Among them, “uncertainty” is the biggest cause of all risks. Every company is fully exposed to today’s global economy, consequently it’s even more difficult to predict or forecast with high level of “certainty”. Unfortunately, I don’t have a good solution to avoid such risks brought by “uncertainty”. All I can suggest is to realize those risks associated with supply chain, and increase communication with all trade partners. Communicate! Communicate! Communicate! Only doing so will break the organizational silo, minimize the exposure to supply chain risks, enable organizations to act quickly to unexpected incidences, and hence minimize the financial loss caused by supply chain uncertainty.

So, what can a garlic buyer in the food industry do to minimize the loss from this garlic bubble? Fly to China and buy a warehouse of garlic immediately! No, I’m kidding, although it can be one possible option.  First thing the buyer needs to do is to prevent the situation of out of garlic. Not only he/she need constantly communicate with the suppliers about pricing fluctuation, inform factories or restaurant to check current on hand and incoming inventory for allocation, but also need start searching for other supply sources. They might not able to get a lower price in short term, but, hey, our consumers can still have garlic in our tasty food, perhaps several cents more expensive than they used to be, but we don’t feel it.