What are the top three opportunities and challenges faced by the raw material industry over the next 12 months?

From the many challenges faced by the natural raw material industry, I can see the following three being the most important to the supplying industry of the perfumes and flavors industries and their customers, the fast moving consumer goods and food industries: 

  1. Supply availability
  2. Mounting regulatory pressure and certification needs
  3. Local versus global

Those three are not particularly new but these themes have been increasing in importance over the past 10 years and they repeatedly come to the front of the minds of sourcing professionals in our industry.

Let’s look at them in more detail:

1.       Supply availability

More than ever, our industry is governed by low inventories due to cash flow and financial short-term results, coupled with uncertainty of demands, due to the ever increasing overabundance of choices faced by the consumers and often uncertain economic times. It does not allow for predictability, forecast and long-term commitments, as used to be the case in the early 2000s. Unfortunately, when one talks about natural raw materials, one needs to plan ahead, commit to volume, price and guarantee working farmers a steady income. There is less and less commitment in the industry, coupled with two additional factors that are of increasing importance year-on-year: on the one side we have an internal competition for the skilled farmers and their lands, attracted by other jobs or other crops (e.g. palm oil), and on the other we seem to see an increase in natural disasters badly affecting some harvests every year (e.g. citrus this year).

My advice: fight your inventory pressure and go back to partnership, long-term partnership and contract with your natural suppliers.

2.       Mounting regulatory pressure and certification needs

The mounting regulatory new rules and regulations is in itself a positive factor as it aims at ensuring a better quality of products and allowing the consumers to know that the products are safe and do respect national rules and regulations. In addition, it somehow also rewards those in our industry who comply with those rules by forcing the players who are not 100% compliant out of the market. However this means that, for a while, less supply (even if it was of bad or adulterated qualities) is available and all demands concentrate on less supply. In the long-term the supply-demand balance will be re-established but in the short-term it means there might be less material available to all and almost always more expensive.

My advice:  be close and fair with your supplier, ensure that you treat them well and commit when needed on an annual contract covering at least 2/3 of your annual forecast needs.

3.       Local versus global

There is a clear trend in the market for natural, close-to-home, organic, etc… coupled to push for many of us to reduce our carbon footprint and come back to a more “natural” way of life. It indeed increases the pressure to source more raw materials locally and/or at least closer to the consumer.  In the fragrance and flavor industry, and I am sure for many of its clients too, this is rather difficult to manage. Today, factories are often sized for regional productions and deliveries taking sourcing and supply to the scale of a country or even a continent – they would have to be down-scaled and the whole manufacturing footprint would be redefined over time. On the raw materials side, we are facing a very difficult, if not impossible challenge, as many natural raw materials do not grow in every country of the world but only in a few particular ones.

My advice: Don’t try to grow plants anywhere to extract an essential oil locally, but look closely at bio-technology and the possibilities it offers.

Opportunities for the fragrance and flavor industry

As always, the market is looking for innovative new products and ideas. Therefore the industry should:

  1. Try developing fragrances with added functions, like active ingredients, where the perfume is not only perfuming but also adding a benefit to the final product. The same goes for flavors.
  2. Sustainable, fair and natural are all attributes which strongly resonate with consumers today and the industry should offer more choices to clients and consumers. The challenge lies with the price that consumers are ready to pay for those products.
  3. Closer contact with customers has always been a key successful factor but today it is even more important than before, as clients need flexibility and speed. Global organizations should decentralize and localize as much of the customers interface as possible, without losing the benefit of global processes and systems.

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Richard Illi

About Richard Illi

Richard Illi is a senior executive with more than 20 years’ experience in the Fragrance & Flavor industry. He held many positions from Sales to Supply chain and general management at local, regional and global level with one of the leading players of the industry. He is currently CEO of a niche perfume and essential oil company in Switzerland. Richard has a Master of chemical engineering from the Swiss Federal Institute of Technology (EPFL) and a MBA from IMD, Lausanne, Switzerland.