WVU Professor Discusses Baby Formula Shortage, Supply Chain Issues

Effects from COVID-19 and a recall from one of the nation’s largest baby formula manufacturers have caused a nationwide shortage.

Shepherd Snyder spoke with John Saldanha, WVU professor and Sears chair in global supply chain management, about the factors that contributed to the shortage, how it could have been prevented, and how it affects West Virginians.

The transcript below has been lightly edited for clarity. 

Snyder: Starting off, I was wondering if you could give some background on why we’re in the middle of a baby formula shortage. How did this happen? When did this start?

Saldanha:  So there’s something called stockouts, which is a measure of how many times a retailer places an order with a distributor or a manufacturer, and does not get that order filled. The retailers usually expect between five to seven percent stockout, pre-pandemic. Once the pandemic hit, and you started seeing transportation slowdowns, labor shortages, because of lockdowns, and because of sicknesses, and cutting manufacturing, you started seeing that figure climb up to about just around 10 percent, which is usually a red flag for baby formula, because it’s so specialized. Starting in January, there was a climb beyond 10 percent. And by February, March, it was already 20 percent. And late April, May, it was close to 40 percent. Tracing back the events that led to this was the voluntary recall of the Similac formula that is produced by Abbott in Sturgis, Michigan. So that plant alone accounts for a fifth of the total baby formula that is distributed in the United States. So that’s a big chunk of what is produced for the entire U.S. market.

Snyder: I was wondering if you’d go a little bit into how the outbreak of COVID-19 worsened the shortage.

Saldanha: So the lockdowns essentially meant that everybody just stayed at home. And of course, if there was any suspicion that anybody in a facility was sick – you saw the lock downs, even in fact, the meat supply chains, there were meat shortages. Going down the list of commodities and products that you saw in the grocery store, on the demand side, you also have hoarding, and you have pantry loading, so people feared that we were going to lose supplies, and then you go out and you buy as much of that product that you can.

Retailers, before they realize that they start stocking out, they start seeing that they cannot order enough because production has a capacity that is usually efficiently optimized to make sure that, especially for commodity-type products, your everyday staples, they usually have pretty steady demand throughout. You’re not going to see health, beauty care (products) like deodorants, soaps, toilet paper, spike at any time of year unless there’s a manufactured promotion. So when you have this sudden shock to the system on the demand side, there’s something called a bullwhip effect that affects the signal that gets sent up the supply chain to the manufacturer and into suppliers, that affects the availability of product and the availability of raw materials. So you had this crunch on both sides that affected supply chains into the pandemic.

Snyder: Are there any other supply chain issues that we’re seeing that are affecting this baby formula shortage currently?

Saldanha: If you think about the market as a whole, it resembles an oligopoly. You have Reckitt Benckiser and you have Abbott, which control close to 80 percent of the market share. Baby formula is treated like medicine, and it is one the FDA has regulated significantly. On the supply side, you have this very, very regulated, protected market where you have a few large players. And the biggest purchaser of baby formula is the Women, Infants and Children (WIC) Program, which is administered by the federal government. So the states provide a retailer. So if anybody goes into a store and buys WIC, then the state will reimburse them with those federal dollars that they’re given. Now, it is actually beneficial for states – and hospital systems also do this – where they can contract with one manufacturer, because now they can leverage those quantity discounts. And they can get the formula at a much lower price. So around the United States, you can actually see each state is actually divided and has a sole source of one manufacturer. So some states are more affected because they are directly contracted with Abbott. And as a result of that you have this large, protected, government-funded industry. And of course, because of the significant barriers to entry, you don’t have many more producers entering the market and adding more competition.

Snyder: I was also wondering how some of these supply chain issues can be – at least in your eyes – fixed, or even prevented.

Saldanha: First and foremost, as a private company, I would say leaders of these companies will look at their market, look at their customers and say, where can our customers suffer the most because of a lack of our product? Then going back and mapping the supply chain and seeing where are the vulnerabilities in their supply chain, or seeing where we have the sole source contract with this supplier in this region of the world, and these are the political effects, the geographical effects, the climate and economic effects that can affect them and affect the supply of that critical component or raw material. And we have to be able to do something about this. Now, if it’s critical enough, like baby formula, or pharmaceuticals, or some other shortage, that it’s going to affect the population at large, then we need to go in and talk to whoever the government regulators are or have a discussion with our representatives in Congress to be able to say this is something important and put it on the radar or public policy realm.

Snyder: Are there any unique issues West Virginians might face with regards to this baby formula shortage? 

Saldanha: We have the same problem that everybody else has, and that is, who is our primary supplier? Is it Similac or is it Enfamil? And in the short term, we are obviously going to see a greater impact in West Virginia, and that’s something that everybody else is facing.