February 12, 2024 How to Avoid Disruptions Like Spiking Cocoa Prices

Spiking cocoa prices signal wider supply chain volatility, which better forecasting, visibility, and production upgrades can solve.

By Matt Spooner, Industry Thought Leader at Kinaxis

Valentine’s Day sweets will have consumers feeling a bit sour this year. After three years of rising costs, Cocoa prices recently hit a 46-year high, making chocolate hearts twice as expensive than they were just a couple of years ago. According to the National Confectioners Association, 92% of Americans plan to share chocolate and candy on Valentine’s Day this year, so a considerable consumer effect is at play. But the root of cocoa’s soaring costs lies far from store shelves.

In top cocoa-producing nations of West Africa, a triple whammy of El-Nino weather, disease and lack of fertilizers caused by the war in Ukraine are drastically reducing yields. At the same time, global demand continues to advance steadily. This supply-demand mismatch has sent commodity markets reeling. And the farm-level impacts now threaten to cascade worldwide.

Spiking cocoa prices offer the latest example of significant supply chain disruptions jeopardizing companies’ production and razor-thin profit margins. Extreme weather events, shifting consumer preferences, and global uncertainties increasingly ripple across worldwide supply networks with volatility being the new norm for any goods relying on imported components, materials, or labor.

Proactively navigating these disruptions is a pressing need for manufacturers and retailers alike. Building supply chain resilience before shortages hit requires technology innovations and cross-industry collaboration. Shared data and best practice platforms also allow organizations to learn from each other.

With preparation, companies can turn supply chain uncertainty into a competitive advantage. As the cocoa case illustrates, global pressures are only going to intensify. Let’s look deeper at some best practices that can keep supply chains afloat even amid disruptions.

Understanding and managing the markets

Market uncertainties quickly cascade into downstream supply disruptions with a complex commodity like cocoa. But, companies must first understand them before responding effectively to changing market conditions. That’s why advanced demand forecasting has emerged as a critical capability.

Delays are the enemy of supply chains; data latency is an often ignored but a significant form of delay. The delay between a product being bought by an end customer and the demand signal being visible at the confectionery manufacturer is often in excess of six weeks, while the delay getting that information to the cocoa farmer is often in excess of six months. By challenging the traditional cascaded approach to demand management, companies can enhance agility at the same time as improving forecast accuracy.

Manufacturers can develop high-resolution projections of likely demand trends by incorporating more datasets — from internal sales histories to consumer sentiment tracking to market futures data. AI integrations and other emerging technologies also help process more demand drivers for enhanced forecast accuracy.

With greater insight into potential fluctuations, companies can also simulate different ‘what if’ scenarios to stress test their supply chains. If threats like commodity price spikes or consumer demand drops emerge, scenario planning ensures contingency plans are put in place before the impact is felt and shortages develop. It also facilitates collaboration with suppliers to shape risk mitigation and sourcing strategies.

Difficult decisions are sometimes unavoidable; if there is not enough cocoa to service all markets, trade offs need to be made: market and product segmentation strategies put in place so that the most important markets or most profitable products are prioritized, new products or formulations with lower cocoa content developed and demand shaping strategies deployed to promote non-cocoa alternatives. All of these trade offs need to be supported by scenario planning and advanced analytics to model the impacts.

Market visibility and risk simulation offer essential hedges against uncertainty for commodity-dependent sectors. Resilience benefits extend broadly for globalized supply chains of all types navigating today’s turbulent markets.

End-to-end planning

Historically supply chains operated under the illusion that so long as we could forecast demand, supply would be essentially unconstrained. The current situation with cocoa is yet another reminder that this is a fallacy, there is simply not enough cocoa to serve the world’s insatiable and growing demand for chocolate.

While demand sensing and risk modeling provide crucial foundations, fully realizing resilience requires coordinating across the entire supply chain. Too often, delayed signals and fragmented planning create avoidable volatility.

End-to-end planning breaks down those siloes through enhanced connectivity and collaboration. Manufacturers gain real-time visibility into inventory levels, production capacity, and shipment locations for both internal facilities and external suppliers. Sophisticated control towers integrate related data into a dynamic digital thread.

Supply chain managers can calibrate and optimize activities across functions and partners with a unified operational picture. If the cocoa harvest is unexpectedly delayed or short, production schedules automatically adjust without manual workarounds. Stress testing through scenario simulation also allows contingency strategies to engage the minute upstream disturbances register downstream.

New regulations in California, Canada, and the European Union are making a huge impact on the welfare of people who work on cocoa farms and reducing CO² emissions. However, additional compliance considerations are adding complexity; end-to-end planning ensures sustainability initiatives like ethical sourcing or carbon reporting integrate smoothly across businesses. Supply networks grow more agile and adaptive in the process. The result is a cushioning against the next market disruption.

Streamlining production

While supply chain coordination equips companies to respond to market volatility, bolstering production capacity also provides critical stability. For cocoa cultivation, dated farming techniques and equipment constraints challenge yields in many developing regions. Simple upgrades like irrigation access and crop protection can drive step-change improvements. This is especially important as cutting down forests to extend cocoa plantations is no longer a viable alternative.

Further downstream, processing and manufacturing processes also require upgrades to match market dynamics. Introducing Internet of Things (IoT) sensors across production assets gives operators and managers more visibility into real-time performance. With connected equipment and automated data feeds, issues can be identified and resolved quickly while minimizing disruptions.

With a scarce resource like cocoa, it is especially important to minimize waste. Efficient farming, efficient manufacturing, and efficient supply chains all contribute to ensuring that yields are maximized and losses are minimized.

If cocoa stocks grow scarcer still, coordinating alternate recipes and batch requirements well in advance is crucial. Healthy dialogue eases such transparent coordination across partners. With market uncertainty the norm, building flexibility across cultivation, processing, and production is imperative. Streamlining operations unlock new stability when the next supply shock emerges.

Today’s interconnected, climate-impacted economy demands companies prioritize supply chain resilience. Market instability is here to stay for Valentine’s Day chocolate and countless other commodities, but lessons from cocoa’s recent volatility offer a guide.

Manufacturers can take steps to increase resilience and enhance production before the next disruption emerges so they can maintain operations through uncertainties that leave less agile competitors stranded.

Matthew is an Industry Thought Leader at Kinaxis. Before joining Kinaxis, Matthew worked in Finance, managing corporate restructuring at ABB. Prior to this, he was VP of Planning and Fulfillment responsible for the global supply chain planning processes. Matthew was an analyst with research firm Gartner, where he was responsible for supply chain planning research. For many years, he worked for telecomms company Ericsson, where he held leadership roles in planning, logistics and IT deployments. Matthew is recognized as a supply chain visionary with deep industry expertise. In his spare time, he is one of Europe’s top age group Ironman triathletes. Matthew has a BSC in computer science from the University of York, he holds APICS CSCP certification.

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