October 2021 Working paper Value Chain Resilience during the COVID-19 Pandemic: Lessons Learned in the Food and Natural Cosmetics Sectors Table of Contents 01 02 03 Introduction Key findings Covid-19 Impact Mitigation Strategies 3.1 3.2 3.3 Market-related Mitigation of supply Mitigation Through Value Chain Resilience during the COVID-19 Pandemic: challenges mitigation and logistics-related Improved Digitalization Lessons Learned in the Food and Natural Cosmetics Sectors applied by the firms challenges Stimuli for digitalization Authors: Meta Arh, Michael McManus, Dr. Gerd Meier Barriers for digitalization zu Köcker, Mateja Dermastia, Mateja Novak Series: Value Chains’ Transparency and Sustainability Series Editor: Dr. Maja Berden Zrimec Design: DBP Brand Design Studio Electronic edition, English language Published in 2021 by Anteja ECG, Ljubljana, Slovenia and VDI/VDE Innovation + Technik GmbH, Stuttgart, Germany. Kataložni zapis o publikaciji (CIP) pripravili v Narodni in univerzitetni knjižnici v Ljubljani 04 05 COBISS.SI-ID 85210115 Conclusion and Literature ISBN 978-961-07-0863-6 (Anteja ECG, PDF) Future Challenges and sources 02 01 Introduction With the rise of the Delta variant of on external production and, where they Covid-19 at the beginning of 2021, are dependent on external producers, a study was conducted on value ensures that such dependence is chain resilience. The value chains in spread amongst more trading partners.2 question were food, natural cosmetics and natural pharmaceuticals with the The objective of the current study was focus on companies from regions being to gain insights and lessons learned Baden-Württemberg and Slovenia. on measures and strategies that firms The Covid-19 pandemic has exposed from the food, natural cosmetics and vulnerabilities in production and supply natural pharmaceuticals industries chains throughout the EU and wider apply to mitigate the adverse impacts world. Various studies imply that re- of the Covid-19 pandemic and ensure organizing value chains is imperative to their value chains’ resilience in times making them more resilient. However, of crises and high uncertainty. While the level of exposure to pandemics there are several theoretical concepts differed among industries. Companies on value chain resilience, this study had multiple options for building provides empirical examples of twenty resilience, and the major resilience companies from Baden-Württemberg strategies vary by industry. For some, it and Slovenia, who shared their latest is essential to increase the inventory of experiences with the effects of Covid-19 critical products1 . For others, diversifying in the interviews. value chains ensures less dependency 1McKinsey Institute: Risk, resilience, and rebalancing in global value chains https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains, August 2020 2https://www.institutmontaigne.org/en/blog/imperative-diversify-value-chains-post-covid-19 03 How firms consider the impact on Covid-19 on their business development (March 2021) 02 43% Negative impact Key Findings 35% Around 25 firms participated in the Companies from the pharmaceuticals survey through individual expert industry estimated the effects of the interviews during the period of Covid-19 on their companies and the February and March 2021. 43 percent industry to be similar. Micro-companies No impact of companies estimated that Covid-19 from the food and cosmetic sector, on harmed their business. An additional 17 the contrary, believed their companies percent also claimed that this impact were more negatively impacted than was very negative. Especially natural other companies from the industry. cosmetic firms saw an increased Smaller and micro companies tended demand for their services because to experience more negative impacts of the widespread use of aggressive from Covid-19 than medium and large 17% disinfectants, which had detrimental companies, especially from Baden- effects on human skin. On the contrary, Württemberg. companies operating in the cosmetics and food sectors experienced more Participating companies from Baden- harmful effects because their products Very negative impact Württemberg estimated that their can have a very limited shelf life. business experienced a neutral Covid-19 significantly impacted specific to negative impact. In contrast, sales channels of the companies. participating Slovenian companies 60 percent of these firms estimated seemed to be more pessimistic and that Covid-19 had a neutral impact estimated that the overall effect was 5% on the industry. A third of companies negative to very negative. The current estimated this impact to be negative. study found seven major findings, which are summarized below. Positive impact 04 Finding 1: Covid-19 negatively impacted approximately 60 percent of the participating companies The majority of the firms that those from Baden-Württemberg. participated in the survey reported Observations from the industry being negatively impacted by the perspective showed that participating Covid-19 pandemic. However, the companies from the cosmetic and food kind and extent of the impact varied industries were more seriously affected significantly. Larger companies have than the ones from the pharma faced less harmful effects than the industry. The latter estimated the effects smaller ones. In particular, micro of the Covid-19 on their companies companies from Slovenia reported and the industry to be similar. On the experiencing the most severely adverse contrary, micro-companies from the effects of the pandemic. As they food and cosmetic sector believed that represented most of the Slovenian their companies were more negatively sample, companies from Slovenia impacted than other companies from reported more negative effects than the industry. 05 The main challenges and SUPPLY AND LOGISTICS PRODUCTION MARKET solutions for VCs resilience Broken supply chains Lack of qualified and certified Breakdown of traditional laborers sales channels suppliers scattered worldwide - very expensive and fragile Perishable inventory Shrinking market - challenges ensuring supply - difficult to find alternative suppliers CHALLENGES Transport disruptions Strengthening VCs Governmental compensation policies e-sales channels (for B2C) - Strengthening relationships with supplies - Multi-sourcing - Reshoring clolser to home Implementation of new New (B2B) market segments - Sourcing from more reliable (less JIT) technologies - Shortening VCs - Supply chain mapping & stress testing - Digital solutions for better transparency and Change of portfolio SOLUTIONS tracebility Higher stock levels New innovative products Moving operations in-house Marketing innovations Finding 2: Covid-19 impacted both ends of the value chains – demand and supply Participating companies have faced On the demand side, the key issue Other firms established e-sales channels different problems in various parts of was that due to tough lock-down in order to better reach out to their their value chains, and we observed regulations, traditional sales channels customers. Some adopted measures different mitigation strategies did not work anymore. have already brought positive results after depending on the countries, industries, a short period. However, there is still a and companies’ sizes. Most issues on However, many firms are able to significant number of companies that are the supply were broken supply chains. respond in a proper way, by multi- still looking for solutions to issues caused Especially in cases when raw material sourcing approaches or higher stock or accelerated by the pandemic. was sourced from outside Europe. levels to assure sustainable the supply. 06 Finding 3: Companies faced two major market-related problems – lower demand and breakdown of traditional sales channels Most participating companies were depended on advice (i.e., cosmetic not prepared, especially those that rely sector), doctors’ recommendations, or almost exclusively on traditional sales other face-to-face situations. For some, channels, such as pharmaceutical reducing the product portfolio and companies. The companies that focusing on the best-selling products primarily sell to the HoReCa sector3 helped cut the costs, retain key tried to find new market segments but personnel, and was a successful short- were only partially successful since term measure. Companies reported finding new B2B customers requires that direct sales to consumers online time. Companies that sell directly to the also required intensified communication end consumers (B2C) went online or with them and continuous marketing strengthened their online channels in and product innovation to attract their both countries, regardless of their size attention. For example, a Slovenian or industry. For the majority, the strategy micro company launched a new, proved successful but could not fully highly customizable product suitable compensate for all the lost offline for selling online. They introduced 3D sales. The study observed that some printing technology and offered a cosmetic and pharma companies from personalized gingerbread product for Baden-Württemberg still needed to special occasions (i.e., Valentine’s Day, fine-tune their strategies to mitigate the Mother’s Day, etc.) that has already market-related challenges. They faced become a sales hit. additional problems where their sales 3hotel, restaurant and catering sector 07 Finding 4: The majority of companies in the study did not face significant production Covid-19 related challenges Production difficulties were mainly in Slovenia. Participating companies temporary and related to lockdown from Slovenia revealed that they did measures that created specific not expect governmental help or were resource bottlenecks, primarily due to not eligible for receiving governmental the lack of qualified workers because support. This could explain why some of lockdown measures or sick leave Slovenian companies also expressed absences. Individual companies overall dissatisfaction with poor policies faced issues with perishable inventory. that could be vulnerable to abuse. Therefore, the main lessons learned It can be observed that for German were to consider implementing companies, mainly those active in the new technologies to compensate phytopharmaceutical sector, bottom- for the absence of a workforce and up approaches such as exchanging that they needed to strengthen ideas and networking with other their supply chains. Governmental companies were a common solution. support significantly varied between This helped to learn how to best deal Baden-Württemberg and Slovenia. with Covid-19 related challenges. The Whereas many companies in well matured network and cluster Baden-Württemberg used different landscape in Baden-Württemberg governmental aid packages (on the helped these companies to connect regional and national level) for retaining and to respond to the Covid-19 their employees, this was rarely the case challenge. 08 Finding 5: The majority of companies have combined and implemented multiple strategies to increase their resilience and stability Some participating companies faced Implemented mitigation strategies mentioned multi-sourcing more problems related to broken supply differed to some extent among regions often, while companies from Baden- chains and transport disruptions during and industries. Companies from Baden- Württemberg, primarily relying on the pandemic and needed to find short- Württemberg even strengthened the imports from outside the EU, have been term solutions. For others, Covid-19 relationships with suppliers in already trying to reshore closer to home. As it is raised the importance of working on short supply chains. In some cases, difficult to find reliable suppliers in the preventive measures to strengthen their they also provided financial support short run, this strategy is ongoing. More supply chains and make them more (e.g., extended contracts with farmers often, companies in Slovenia mentioned resilient and efficient. Though planned to give them access to funds) to ensure that they would like to shorten their for some time, they had not been fully suppliers could deliver, even under value chains further, mainly if they use implemented due to a lack of resources. Covid-19 restrictions as they had no intermediaries. Despite general trends in The majority of participating companies alternative sourcing options. Good the manufacturing industry, only three in both countries already had short relationships also proved to be fruitful participating companies considered value chains. Nevertheless suppliers in cases where a traditional supplier stress testing their supply chains, scattered worldwide proved to be very of one ingredient supplied the food and only two of them had actually fragile during the pandemic due to company with a missing ingredient implemented this measure. Both transport and logistics problems. This usually provided by other suppliers. companies were large and from the issue represented the biggest problems food sector. Smaller companies lack the for companies sourcing from non-EU We observed this strategy combined resources to implement such solutions. sources (e.g., Asia and Africa). This was with sourcing from more reliable more commonly reported in Baden- suppliers rather than the cheapest Württemberg. The Slovenian micro- suppliers in the food sector. A German companies faced fewer problems as company activated their excess they either sourced locally or from the warehouse capacity to stock up for the EU or worked with a few reliable (big) unpredictable future, proving that a distributors from the EU. The latter took trend toward holding more inventory is responsibility for sourcing ingredients already underway. Some companies from across the world. The most considered moving some of their commonly mentioned strategies were: operations in-house or offering only strengthening the relationships with products with substantial resources suppliers, multi-sourcing, sourcing from at their location, making them less more reliable suppliers, reshoring closer dependent on external supply. to home, and shortening value chains. Participating companies from Slovenia 09 STIMULI AREAS CHALLENGES Areas where Digitalization impacted and related key Sales trough challenges e-commerce High costs new channels Communication with Improved communication Lack of digital skills, problem clients / customers / suppliers attracting skilled employees MARKET Better transparency Company not ready and traceability Optimization and Production and internal Lack of digital efficiency processes infrastructure Ensuring smooth Testing and quality Lack of digital solutions operations assurance on the market COMPANY Improved communication Big data (for R&D) Incompatibility issues Finding 6: Digitalization is perceived as very important for business in general and not only for solving Covid-19 related problems Especially micro-companies from the In general, participating German experienced more challenges brought Companies found it hard to adopt food and the cosmetic sector, both companies paid more attention to by digitalization, mainly high costs ready-made digital solutions for some from Slovenia and Baden-Württemberg, digitalization than Slovenian companies. (and long return on investment), of their business processes, such as stressed that digitalization has been Early adopters could be found among lack of digital skills, and difficulty R&D and clinical studies and quality essential during the pandemic. This large German companies that usually attracting skilled employees. Often the assurance systems. Smaller companies was primarily for reaching their end- develop their own digital solutions. companies were not fully ready and found it challenging to find digitalization consumers through e-commerce and Slovenian companies mainly classify faced incompatibility problems (e.g., experts. digital channels. Simultaneously, it can themselves as followers and use digital with different internal departments be observed that Covid-19 accelerated solutions provided by third parties. of suppliers, and some from less Digitalization is essential in general, ongoing digitalization activities in Almost all respondents from Baden- developed countries are not digitalized and Covid-19 only accelerated it. participating companies from Baden- Württemberg said that digitalization at all). The lack of appropriate digital However, for the majority of firms it was Württemberg operating in the cosmetic has been essential for their businesses tools on the market seems to be a not crucial for addressing pandemic- and phytopharmaceuticals sectors. in general. Consequently, they also problem in the pharmaceutical sector. related challenges. 10 Finding 7: Digitalization is vital for market-related uses as well as for improving internal processes and operations On the market side, strengthening Participating companies from e-commerce with end-consumers Baden-Württemberg experienced prevails in both countries as it added optimization of production and complementary sales channels to internal processes. This could be traditional ones. Additional primary mainly observed with medium and stimuli for implementing digital large companies operating within the tools are improved marketing phythopharmaceuticals and cosmetics communications and transparency, sectors. Digitalization in this area has which the consumers requested. The already brought some positive effects. micro food and cosmetics companies For example, digital tools improved from Slovenia mentioned better and stabilized production and testing company and product visibility, brand processes and they also improved awareness building, and improved the efficiency of quality assurance competitive position on the market. systems. They provided big data for The introduction of digital tools also R&D. They could also see positive helped their business operations to be effects of digitalized communication smoother. However, their processes and and documentation with suppliers, organization are less complex, so simple which improved traceability and solutions such as Excel can often be transparency. Additionally, companies sufficient. from Baden-Württemberg emphasized easier and more efficient internal communication as an essential stimulus for increased digitalization. Slovenian companies mentioned time and financial savings by lowering travel costs. 11 03 Covid-19 Impact Mitigation Strategies Companies used different mitigation strategies to cope Companies have adapted differently sector in particular. Most of the to the challenges caused by participating companies did not with each of the value chains’ Covid-19. The majority of companies request/need additional governmental have combined and implemented help. Only a handful of companies problems and ensure better multiple strategies to increase their used governmental support for their value chains’ resilience. resilience and stability. While some employees (paid sick leave or aid to have tackled these challenges with retain the employees). successful strategic adjustments, like introducing new products or Companies used different mitigation innovative risk management inside strategies to cope with each of the their value chains, some have not value chains’ problems and ensure had adequate financial resources or better value chains’ resilience. Some time to mitigate all the challenges. of these were already present before In addition to individual companies’ Covid-19, and the pandemic only mitigation strategies, networking accelerated them. For some challenges, and learning from other companies mitigation strategies still need to be how best to deal with the impact of developed. The Covid-19 problems that Covid-19 has been very important. required mitigation challenges were It was mostly seen as a popular market, production or sourcing and approach in Baden-Württemberg logistics-related. and in the phythopharmaceuticals 12 Temporary change of product portfolio. 3.1 To cut costs, some of the participating companies made temporary changes in their product portfolios. They mainly reduced their product portfolio, focusing on products for which they produced resources at their location. This made them less dependent on external supplies or the best-selling products only. A company that focused on its best-selling products only considered this Market-related challenges mitigation measure successful since it reduced the costs, and the firm could retain its key personnel. mitigation applied by the firms Launching new products. A smaller company in the food sector used Covid-19 as an opportunity to launch a new product that is highly customizable and suitable for online sales and is already a great success with record sales. They introduced 3D printing technology and offered a personalized gingerbread product for special Increasing sales through e-sales channels. occasions (e.g., Valentine’s Day, Mothers’ Day, etc.). This strategy was mainly used by companies selling directly to end-consumers (B2C), principally in the food and cosmetics sector. Some firms increased their Marketing innovations. activities in this area, and some started with online sales to overcome the problem of unreachable traditional sales channels. For the majority, this strategy Some companies are aware of the importance of e-commerce. However, proved successful. However, for many participating companies, e-commerce they have not yet used any solutions in this area, partly due to specific policy sales could not fully compensate for the overall sales loss. This was especially barriers (e.g., mandatory prescriptions for some products within pharmaceutical notable in the pharmaceuticals sector and, to a limited extent, in the cosmetics markets). The company admitted they did not pay enough attention to this industry. They considered e-sales channels to be inferior because they failed issue before Covid-19 because they relied on their traditional sales channels to provide their customers advice on the best product due to the break down i.e., functioning healthcare systems. In general, the participating companies of traditional sales channels. They are still exploring the most appropriate also reported that direct sales to consumers online also require intensified mitigation strategies. communication with them and continuous marketing and product innovation to attract their attention. Increased sales to other market segments. Implementation of new technologies. Covid-19 severely negatively impacted one company from Slovenia that managed to enter new B2B segments to compensate for their lost revenue. Due One of the main lessons learned was considering implementing new to lower demand in their traditional HoReCa segments, they partnered with the technologies to compensate for the workforce’s absence. For example, a cruise sector to mitigate Covid-19 impacts. Some firms that faced lower demand smaller company in the cosmetic sector claimed that they implemented new made a shift from B2C to B2B customers, utilizing their excess warehouse technology in their internal processes to help cope with Covid-19 related issues. capacities to stock up and successfully fulfill the shifting market demand. 13 Moving operations in-house. 3.2 Some companies implemented in-house operations and found this strategy to be successful in addressing Covid-19 related challenges. Some companies are still considering this mitigation strategy but couldn’t implement it yet, as they lack resources (financial and labor). They also mentioned lack of time as being one of the contributing issues. Mitigation of supply and logistics-related challenges Shortening supply chains. In general, the majority of participating companies already described their value chains as short. Participating companies from Slovenia mentioned Strengthening relationships with existing supplies. that they would like to shorten their value chains further, especially if they use intermediaries. Some companies from Baden-Württemberg intensified well-established relationships and provided financial support to ensure suppliers could deliver Strategic supply management. even under Covid-19 restrictions (e.g., extended contracts with farmers to provide them with access to funds). Suppliers of some products helped companies to find the missing ingredients from other suppliers. One large company had a separate division that could react promptly in the event of supply chain issues. This became an asset during Covid-19 since the team were able to shift raw material supply from one region to another. Diversifying supply chain targets multi sourcing, reshoring closer to home and higher stock levels. Using digital solutions. Multi-sourcing is difficult since it is hard to find reliable suppliers, particularly A larger company used digital solutions to organize air cargo supply to solve in the short run. Such changes are also challenging for some niche ingredients. shifting supply sources. There are a limited number of suitable suppliers, and sometimes they also lack negotiation power because they do not need large amounts of supplies. Participating companies from Slovenia were more likely to mention multi-sourcing. Reshoring closer to home addresses the same problem as it is difficult to find reliable suppliers in the short run. Some companies expressed that this mitigation strategy worked well for the challenges related to Covid-19. For example, one company faced an issue with missing ingredients but, they found a substitute supplier within the EU with their laboratory’s help. Some micro companies were successful in doing this as they only need a limited quantity of raw materials. Participating companies from Baden-Württemberg, primarily relying on imports from outside the EU, were more likely to mention reshoring closer to home. Higher stock level seems appealing but only one company from Baden-Württemberg used its excess warehouse capacity to stock up for the unpredictable future. They claimed this strategy saved the company’s business during Covid-19 related uncertainty. 14 3.3 Mitigation Through Improved In terms of the adoption of digitalization, some differences can be noticed regarding the size of the companies as well as their country of origin. of Digitalization Digitalization has been of the utmost for reaching their end-consumers The majority of participating importance for business operations through e-commerce and digital before and during the Covid-19 channels. bio-based companies in both pandemic. With digitalization and countries are followers in the digital solutions, companies have In general, there is a different approach tackled many challenges that emerged to digitalization depending on company area of digitalization. due to the pandemic. Simultaneously, size. Larger companies from Baden- the increased digitalization level Württemberg are much more likely to means more traps and unprecedented have their digital solutions developed barriers, especially when implementing in-house. Smaller Slovenian companies and financing digital solutions. In this predominantly used solutions offered All of the companies that said section of the study, we examined the by external providers. Companies with they were early adopters latest trends in digitalization among the developed digital solutions were more participating companies. We outlined likely to claim that Covid-19 accelerated of digital tools were large challenges that expanding business their digitalization. Companies in companies based in Baden- digitalization poses to the participating Baden-Württemberg also considered companies in the bio-based industry. digitalization to be more important than Württemberg and Switzerland. companies in Slovenia. The vast majority of the participating companies believed that digitalization Around one-fifth of the participating was very important for them, companies estimated that Covid-19 particularly for companies from All of the fast followers are accelerated their digitalization. In Baden-Württemberg. However, the participating companies from both micro-companies from majority of companies estimated that the cosmetics and pharmaceuticals digitalization was not an essential Slovenia. They were present in sectors in Baden-Württemberg, there factor in addressing Covid-19 is a noticeable trend that Covid-19 the cosmetics and food sectors. related challenges. Micro-companies accelerated digitalization. However from study focus regions claimed Covid-19 played only a minor role in digitalization helped them cope with accelerating digitalization in the bio- challenges posed by Covid-19, primarily based food sector. 15 Stimuli for digitalization In general, participating companies Increased digitalization has already from Baden-Württemberg paid more brought some positive effects to the attention to digitalization than the participating companies. The most Slovenian companies. Participating important effects for the majority are companies stated different stimuli for improved internal processes and their digitalization. increased sales through e-commerce. Other positive effects also included New online sales channels – vital stability of production processes, and for all companies selling to the end higher efficiency of quality assurance consumers (B2C), prevalent in food systems, improved communication and cosmetics sectors in both regions. throughout the value chain, Related to the optimization of internal transparency and traceability. processes, it was mainly mentioned by participating companies from Baden- Despite these positive effects, Württemberg. It was very important for digitalization has also brought ensuring smooth business operations, many challenges. Most participating digitalization for more efficiency companies in Baden-Württemberg on all levels, digitalization for better tended to experience issues with the communication and transparency high costs of digitalization. Two-thirds of within the company. Related to this all interviewed companies from Baden- was better market communication and Württemberg complained that high position which was mainly mentioned costs were a significant issue impacting by the micro food and cosmetic companies across sectors, regardless companies from Slovenia. This ensured of their size. Some companies also digitalization for data collection for internal processes and production they could meet the demand for more expressed concerns about problematic improvements in R&D and digitalized process, followed by digitalization of transparency, general awareness in the return on investment, indicating processes helped with quality testing processes, use of big data and company, better competitive position that the costs are recuperated too assurance better communication with clients and keep up with trends (especially for slowly. The majority of participating and customers. Digitalization of micro-companies) companies in Slovenia did not mention The participating companies increased communication and documentation issues regarding costs of digitalization. their digitalization in internal processes with suppliers emerged as a growing However, individual companies Better supply chain management is and marketing and sales operations. demand, especially by larger companies complained that they had difficulties more important for larger companies. Particular areas with increased from Baden-Württemberg. The fully finding suitable financing options for R&D and quality assurance was mainly digitalization are e-commerce in digitalized quality assurance process digitalization and were disappointed mentioned by participating companies companies selling directly to the became a viable option for larger that there was a lack of governmental from Baden-Württemberg who said end consumers and digitalization of companies from Baden-Württemberg support. 16 Barriers for digitalization Lack of digital skills The company was not ready for digitalization Two-thirds of firms in Baden-Württemberg expressed Some of the respondents mentioned that digitalization concerns over a lack of digital skills of their employees. was challenging to achieve in such a relatively short period It is an issue that is present in every sector. Some due to the complexity of their operations. This caught the companies from Baden-Württemberg complained that company by surprise. Some companies said they were not their employees did not have sufficient digital skills and yet ready for complete digitalization because they had a that it is challenging to find skilled workers on the market. highly specialized production process. Micro firms say that Some companies, especially in the pharmaceutical they do not need fully digitalized business and therefore sector, complained that IT personnel’s motivation is an use ad-hoc digital solutions such as in-house developed issue. It is also challenging to attract workers with relevant Excel spreadsheets for tracking inventory, orders, invoicing, competencies and this makes digitalization processes etc. more difficult. Some smaller companies expressed concerns that their staff needed additional training and Larger firms that used digitalization for multiple purposes that it is difficult to find appropriate digitalization experts. (R&D, production, etc.) faced some difficulties in Small and micro firms expressed limited resources due incompatibilities that emerge from using different software to their size. Consequently, they have limited abilities to within various firm departments. Many suppliers cannot provide the necessary in-house IT support. However, not a adapt their systems to the firm’s digital approach. Firms single company experienced issues with an external lack found it hard to adopt ready-made digital solutions for of digital skills (i.e., external providers unable to fulfill their business processes, such as R&D and clinical studies, and needs). quality assurance systems. It seems to particularly true in the pharmaceuticals sector. 17 04 Conclusion and MARKET Future Challenges The deep dive into the resilience of they produce in higher-cost home value chains during the pandemic markets. In addition, the pressure to revealed that firms active in food, operate efficiently and use capital and natural cosmetics, and natural manufacturing capacity frugally will be pharmaceuticals sectors found new unrelenting. Increased digitalization and business models and approaches. automation might be one of several PRODUCTION ways to help firms mitigate these Manufacturers worldwide are going challenges. The challenging tasks of the to be under greater political and post-pandemic period are those which competitive pressures to increase their might seems less important during domestic production, grow employment a crisis but are critical for resilience in their home countries, reduce or in the long run. That is, prioritizing even eliminate their dependence sustainability, digitalization, and talents. on sources that are perceived as risky, and rethink their use of lean Covid-19 influenced both ends of the manufacturing strategies that involve value chain, demand and supply, as minimizing the amount of inventory well as production. The three main held in their global supply chains. categories were market, production and SUPPLY Consumers will continue to demand supply and logistics-related challenges low prices and manufacturers will not which are presented here. be able to charge more just because 18 Market Market-related challenges included an unexpected drop in demand for a shrinking market. Lower demand prescription drugs. Due to regulatory and shrinking a market were mainly limitations, it was difficult for them related to the breakdown of traditional to switch to online channels. In the sales channels. This issue was cosmetics sector, participating especially notable for companies companies from Baden-Württemberg operating in close cooperation with did manage to shift their sales to hotels, restaurants catering, etc. (the e-channels. However, they could not HoReCa sector), which had to limit or compensate for the overall sales losses. even halt their business operations Some companies in this sector also entirely. Breakdown of traditional complained that their customers could sales channels significantly impacted not receive consultant advice on the participating companies operating in best product for their issues because market sectors heavily dependent on their traditional offline sales channels specific sales channels to reach their broke down. All participating Slovenian customers. In Baden-Württemberg, companies that experienced very issues emerged in the pharmaceutical negative impacts of Covid-19 operated and cosmetics sectors because in the food industry. The companies companies lost their traditional primarily reliant on the HoReCa market sales channels. Many patients lost segment reported lockdown measures their doctors’ access (especially and uncertainty in the tourist industry notable during the long second severely impacted their business. wave). Consequently, participating They are still searching for long-term pharmaceutical companies had solutions. 19 Production The majority of participating companies Firms in the food sector faced a unique did not experience significant problems challenge of perishable inventory due with production. Those who faced to lower demand. A company that them had issues with a lack of qualified mentioned this issue could not yet find and certified laborers because of a solution, as its customers mainly lockdown restrictions or absences due came from the HoReCa sector, and it is to sick leave. This caused them some complicated to substitute them in the bottlenecks but fortunately did not short run. significantly impact their operations. 20 Supply timeframe, and therefore they have not yet resolved the issue of broken supply chains. One micro company even had to cease their operations for extended Supply and logistics-related challenges periods (2 months) because they could mainly related to broken supply chains. not obtain raw materials from their Several issues existed even before suppliers in Germany, who in turn faced Covid-19 and escalated during the difficulties obtaining raw materials from pandemic. Larger firms have many Africa. suppliers scattered worldwide, which proved to be very expensive and fragile. Several large and small companies Firms from Baden-Württemberg were stated that they faced logistical more likely to experience difficulties with issues with overseas supplies (e.g., broken supply chains than Slovenian with Africa /Asia as main sourcing firms. The main reason was that markets). In some cases, suppliers’ they were more likely to be sourced prior warnings about potential logistic from outside the EU (e.g. Asia, Africa). difficulties enabled a company to react Most affected companies could find appropriately and avoid unnecessary a positive solution for their broken issues. One larger company faced a supply chains by combining different significant challenge with its logistics. mitigation strategies. The Slovenian In one case, the company said that it micro-companies faced fewer had experienced issues with outbound problems as they either sourced locally logistics due to significantly lower or from the few reliable (big) distributors market demand. They handle fruit and from the EU. 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Disclaimer Neither the Anteja ECG nor VDI/VDE Innovation + Technik GmbH may be held responsible for any use that may be made of the information contained herein. Unless stated otherwise, reproduction is authorized, provided the source is acknowledged. For the use/reproduction of third-party material specified as such, written permission must be obtained from the authors. The information in this report is provided without assuming any legal responsibility for its correctness or completeness. The data presented is based on the information gathered from personal interviews and other relevant sources. Published October 2021 by Anteja ECG and VDI/VDE Innovation + Technik GmbH © 2021, Anteja ECG and VDI/VDE Innovation + Technik GmbH DOI: 10.13140/RG.2.2.27618.45760