How the baby formula industry failed to protect its Achilles’ heel

Four companies account for about 90% of the entire market
baby formula
Photo credit Getty Images

PHILADELPHIA (KYW Newsradio) — The baby formula shortage in the U.S. has left parents of young children scrambling. By this point into the pandemic, we’re used to supply chain issues, but there’s more to this shortage than just production.

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The issue started with a formula recall that shut down Abbott, a major U.S. production plant based in Michigan. As the shortage has worsened, it has become evident that the concentration of power in the baby formula industry is uniquely and critically susceptible to supply chain disorder.

That is the deeper problem, according to Dr. Nilofar Varzgani, assistant professor of business systems and analytics at La Salle University.

Only four companies account for about 90% of the entire formula market, which is making the supply chain extremely vulnerable, she explained. Abbott alone holds about 40% of the market share, and since its factory shut down in February, there’s been a huge disruption.

Abbott officials said production could start up again within two weeks, but it could take six to eight weeks from that point for products to hit the shelves again.

“In addition to this existing issue of the industry dynamic, plus the shortage with the factory, we also don’t import a lot of baby formula,” Varzgani said. “The baby formula that is imported faces excessive tariffs, because of which the imported stuff is overpriced and it’s not sold at competitive prices for the consumer.”

The recall happened in February — so why didn’t we see this coming? Today’s supply chains are built for efficiency, not resiliency, she said.

“We’ve managed to make it extremely efficient in terms of on-demand deliveries,” she said. “But the supply chains [themselves] are in extremely vulnerable positions because we are trying to build so much on the efficiency factor that we are ignoring the resiliency factor. And instead of having diversified suppliers, where different raw materials go into our product, we’re relying on the single supplier, which is not necessarily the smartest thing to do, because it’s going to have trickle-down effects across multiple industries.”

This shortage affects a specific slice of people — parents with infants, primarily — unlike the toilet paper shortage at the beginning of the pandemic that affected everyone. However, the fallout from the formula shortage could expand to a much wider section of Americans.

“One industry shortage is not necessarily contained within that industry,” Varzgani said. “Many of these raw materials are connected across industries.”

After COVID-19 hit, people changed their buying behavior — instead of going out to eat, people cooked at home. That forced suppliers to cater to individual households rather than the bulk market of restaurants.

Among other supply-chain hiccups is the availability of glass and aluminum. With those in high demand, that could lead to a shortage of canned foods or drinks. The formula shortage could have a similar impact.

For more, listen to the full interview with Dr. Nilofar Varzgani on KYW Newsradio In Depth in the player below:

Podcast Episode
KYW Newsradio In Depth
'Four companies control 90%' How the baby formula industry failed to protect its Achilles' heel
Listen Now
Now Playing
Now Playing

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