Solving For Sriracha: A Case Study in Effective Solutioning

[00:00:05.120] Hi, everyone, and welcome to another episode of it’s the end of the week. I’m here today with Emilio Colangelo and we’ll be talking about the Sriracha shortage. So quickly I want to introduce why we’re going to be talking about the Sriracha shortage. A few weeks ago, Emilio came in my office and he had this pretty sizable problem to think through. And then we started kind of bouncing ideas off of each other. And we realized that when you have this very, very large challenge or situation that you need to deal with, the only way of being able to move forward and make progress into solving it is to break it down into smaller pieces and try to understand well, who are the right actors we need to bring in and how we’re actually able to solve this. And then when we ran into this article of the Sriracha shortage, we figured, hey, let’s just talk about it. Let’s take a stab at trying to solve it. And here we are today. So I hope everyone enjoys this episode.

[00:01:04.660] Like we were just saying as well, we are not, we don’t know a ton about Huy Fong foods and about Sriracha. Well, generally we are supply chain experts and so we’re gonna use that knowledge to try to help solve this. But we. We know as much as you all about this business and the shortage bar, a little bit of research, but we’ll show kind of our method of thinking through it and try to break it down and at least give us some way to make some progress on improving this situation.

[00:01:38.280] Yeah, and so the challenge with the Sriracha shortage ultimately, is that they have a lack of hot peppers. Right. So that is the challenge that they’re dealing with. And what that’s, that means is that they’re going to have to short a bunch of customers. Stop production. Short a bunch of customers.

[00:01:54.860] So we know, in fact, they’re saying, what is it? It’s stopping production from. Whenever this article came out, I think this was a couple weeks ago, maybe a couple weeks ago, June 3, this came out and they’re stopping production, I believe, until September.

[00:02:10.000] And this is actually, I believe the third time in the last five or six years that they’ve been in this situation. I mean, since they’ve changed vendor ultimately, which we’re gonna get to, but, you know, this is kind of happening over and over again. And now they’re, they’re in a position where they’re not even looking at how to efficiently produce the Sriracha, which is what we typically think about, but just how to produce it and how to be able, how do we even source it?

[00:02:35.180] How ingredients to make it.

[00:02:36.950] Yeah. So if we think through this and we say, all right, so right now they’re not able to source the ingredients, what is one of the main reasons, or what do you think about when you’re thinking of planning and you’re thinking of sourcing? That comes top of mind.

[00:02:52.160] Yeah, well, and I think knowing the context of this one specifically is they’ve been in kind of lawsuits with one of their main, who was their main supplier since the beginning of this Sriracha sauce in the, I think it was in the seventies. Yeah.

[00:03:10.690] When they started, since the beginning.

[00:03:12.660] And they had, so they were sole source. They had the one supplier which that in and of itself introduces quite a, quite a bit of risk, but then also the relationship that they developed with that supplier, and I don’t know the absolute ins and the outs of it, but I know that it ended up in essentially them suing each other. And so there’s a falling out between your supplier and your only supplier. And so kind of, I’d say even.

[00:03:40.900] More to that, though. So their problems didn’t start because they only had one supplier. Their problems started because the falling with that supplier. But that supplier was also had, I believe, a stake or like, had a very special, intimate relationship with Sriracha. So I believe, like, if you’re vertically integrated to a certain extent, you could afford to have only one kind of supplier. But once you actually go in a market, how does that translate?

[00:04:06.520] Yeah, and so I know in their case, one thing I would want to harp on as well, and not harp on, but rather bring up is if you, especially when you have one single supplier, but generally with all your suppliers, your suppliers are almost as important as your customers. And having, maintaining that good relationship with them is something that’s you, that’s critical. I think there’s actually, now that I’m saying it out loud, I’m thinking back to, I think, a podcast that Charles was on, a podcast Charles was mentioning, saying they’re your business partners. And so we’ve all had, I think, difficult clients or customers. Well, you don’t want to be the difficult client or customer to your own supplier. You want to be easy to work with both up and kind of downstream.

[00:04:59.350] Of course, because as you’re thinking of the shortage, what’s going to happen is that the vendors that have the good relationships are going to prioritize their favorite customers, and ultimately the end impact is going to be on Sriracha’s customers. And being able to not short them. So it’s a really important thing to think that your vendors are the first leg in this whole supply chain journey, and that if you don’t treat them properly or if you don’t have clear, a clear understanding with them what that business relationship is, you’re going to be in that kind of situation. And just thinking through that, what are the ways that people typically mitigate that risk or just not have that sole supplier? What does that mean?

[00:05:43.490] Yeah, well, so it’s having multiple suppliers and you might have your not might, you will have likely a preferred kind of supplier, maybe quicker service that they can provide to you at lower cost, but you don’t want to necessarily give them 100% of your volume. You don’t want to put your suppliers, competitors out of business. So you don’t want to give 100% of the volume to one. You want to make sure that you’re spreading that around a little bit, accepting that maybe the cost is gonna be a little bit, a little bit higher overall, you’re gonna reduce your margins a little bit. But what you’re paying for essentially is reducing the risk and to hopefully avoid being in the situation like Huy Fong Foods is in.

[00:06:31.220] Yeah, I think that’s a very interesting point they brought up to say, you don’t wanna put your suppliers, competitors out of business. Right? Like, healthy competition is important for your suppliers and between them. So you keep getting the best service. But even to say, hey, you’re going to get 60, 70% of my business, but being very transparent that you’re not getting all my business and you’re not getting all my business, because I want to make sure that I’m not in a situation where there’s shortage. But I also want to keep this healthy relationship, or healthy competitive relationship of a supplier buyer relationship. So, yeah, so the shortage, one of the big reasons for a shortage, or we believe one of the big reasons anyways, for shortage, or how we would look at it, is looking at the vendor relationships in the supply chain and being able to adequately manage that and mitigate the risk by having multiple vendors. Anything else that you’re thinking in mind when you’re thinking of supply chain?

[00:07:24.930] Well, so I would shift another one that if you look at this whole problem as well, one thing that they’re citing is to why are they even in this position of shortage? There’s another factor is the environmental. So stating the, the climate change being one of them, and that the certain droughts have led to lower yield as well. And so there’s inconsistency in how much yield, and it’s slightly unpredictable. In fact, in Huy Fong’s example, they’ve, instead of sourcing from their primary supplier, which I think was in California, they’ve now moved to some suppliers in Mexico, which is slightly different kind of climate there, and expectation. And so I think that’s another thing we’re looking at, is there’s some environmental considerations that are, I wouldn’t say considerations, but root causes that are contributing to this shortage. And so I think you were bringing up some good points on how could we, how do you mitigate that risk of just the environment? Right. Climate change is something that, yes, that we can all do our kind of our part to help enable, to a.

[00:08:37.620] Certain extent, we have some control over it, but very limited versus.

[00:08:41.560] But as one individual company, you’re not gonna solve climate change alone. And so you have to work with that. And so, yeah, that’s where you’re bringing up some points, like speak to them.

[00:08:53.050] Yeah. I think to your point, it’s very difficult sometimes to understand if there’s gonna be drought, there’s gonna be heavy rainfall, like kind of how the weather is going to affect the yield of the crops and to mitigate that risk. One thing that we could eventually investigate is to understand, well, could we have finished goods? So products that we’re selling to customers that use ingredients that are complementary to themselves. So, for example, if there’s a drought, are there certain ingredients that thrive in that drought versus if there’s heavy rain, are there some ingredients that would thrive in that heavy rain? So if you have finished goods that consume these different types of ingredients, what you could do is you could just shift your production instead of halting your production. So, for example, we take sriracha. If they had a certain sauce or a certain complementary skew that they would sell that well, they know that in a period of drought, they could source from another vendor a lot more of those components, and the production line could actually take or create that fixed finish. Good, then they could mitigate that risk. It doesn’t mean that it’ll be able to yield as good profits because might not be as profitable of an item, or there might still be some impact to customer satisfaction, but that way, at least you’re not, you’re not completely halting your production and you’re not letting your production lines kind of stand still and just look at production be down for.

[00:10:16.700] Like, for several months.

[00:10:17.840] Yeah, exactly, for several months. So, like, at this point, it’s really more medium to long term planning. But it would be an interesting to look at is how do you find ingredients that typically complement themselves in environmental changes? So, yeah, and I guess the last point that we quickly discussed that I thought was interesting as well, especially when it comes to agriculture, which has the first law level of impact, I guess, on the harvesting even before, if you’re able to get it or not, is that labor shortage? So you said right now they used to source from California initially. Now they went to source Mexico. So they’re sourcing from more places. But it’s still, the peppers themselves are very labor intensive to be able to.

[00:11:08.720] And what I think they were saying in this article as well is, well, and this is, again, take it with a grain of salt, but it’s Huy Fong’s competitor that is saying, yeah, the reason that they’re in this shortage is likely because they picked the peppers a little, little bit too late. And so they have a different profile. And so they wouldn’t be, essentially.

[00:11:29.470] You.

[00:11:29.780] Wouldn’t be producing the finished good that people are used to. And so if you look at what is one of the reasons that they picked him too late, they’re citing as well that it’s labor shortages. And so when it was that right time to actually go and pick them, they didn’t have the, the labor to actually go ahead and pick them all at the right time in the right window. So not pretending to be, to know too much about agriculture, but again, citing the article there. And so I think what you were saying, things that you can look at, well, okay, so if labor is a constraint, you could either, well, try to improve or increase the amount of labor. Yes.

[00:12:11.090] Or increase efficiency or these are kind of things always come up. But the two points that we brought up that I think are worth exploring is, well, are there any new techniques of growing and harvesting some of these foods? But I think even more importantly, what is the loss that happens throughout the supply chain? So we work with a lot of different food banks and different organizations that look at loss in the supply chain and try to reduce it. And it would be interesting to know. And once again, we’re no expert in agriculture, so I don’t want to improvise myself as being one, but understanding, are we able to keep the same kind of labor, keep the same kind of efficiency, but just have much more ingredients to consume by reducing loss throughout.

[00:12:56.960] Just the food waste, you’re saying within.

[00:12:58.810] Exactly. Just the food waste in the supply chain. Sometimes we’re always trying to increase efficiency in a siloed fashion. So how do we do it for agriculture? How do we do it in terms of environmental elements? How do we do it from vendors? But if you think about there’s, I don’t know, 510 percent loss every step of the way and you’re able to reduce that significantly or even just reduce it by a few percent along the way. It accumulates up and then you have much more volume or you have a lot more ingredients to consume down the line. So I don’t know what your thoughts on that are. I know we were a bit mitigated on that in regards to. Yeah, well, we don’t really know what that, that percentage is and if there’s actual loss, but I thought it was an interesting thing to think about.

[00:13:44.640] Yeah, one. And I think actually, just to bring it all together, it’s, you know, these are ideas of things that we could, you know, we would want to work on. So if we, if we, so what have we solved here? Nothing. We’ve put together. We’ve put together a plan. But I think, so if we, if you summarize right, there’s, the first thing that we mentioned is, well, vendor relationships. Right. So is there really suppose that I was, you know, hired by the business, you know, what do you say there have better relationships? Okay. That’s a bit more of a, you know, maybe there’s not something I can go and tackle, but definitely having the single, the single supplier, limited number of suppliers, that’s something that you can, that’s tangible. I think it’s actionable. It’s looking at, you know, and reviewing how many, how many suppliers do you have for all your components? Are they reliable? How are you measuring kind of their, their performance? What is a plan to improve it? Or, you know, maybe it’s going to market or going to, you know, collecting bids from different suppliers to see, hey, this is a huge problem that we need to solve.

[00:14:47.150] So the first one for me would be a project around improving supplier. Yeah.

[00:14:54.250] And to me, there’s two facets that process is. There’s the actual vendor relationships and understanding what is the accuracy of your vendor, what is the performance of your vendor. But then also understanding is there different yields that are produced by different vendors. So we talked about agricultural techniques and these different elements that can influence, I know that I worked on a project and it was very important to understand from our ingredients, the finished good, what was the scrap factor, because there is a significant difference in scrap factor depending on what vendor you are sourcing it from. So even they have the right technology in place to be able to capture that information, then do vendor evaluation depending on not only are they on time, do they deliver the right quantity, but then whenever you’re consuming those ingredients, are you producing the amount of Sriracha that you’re expecting or. No, there’s a lot of shrink in the peppers whenever they come from one vendor, or there’s less shrink whenever they come from another. So it can influence your way in your relationship with the vendor. And I think that having both that technology and the people and the relationships really ties it together to have the best to mitigate that risk.

[00:16:04.090] Yeah, so I think there’s two things there. Supplier kind of diversifying the amount of suppliers that you have. There’s measuring and better kind of performance management, if you will, of the suppliers. I think you’d mentioned as well that diversifying the portfolio as well. So for having complimentary projects. So I think there’s a whole study that could be done around that of, well, there’s pros and cons to doing that. There’s investment that’s required, I would imagine as well, unless you can reuse a lot of the same equipment. But there’s a whole study there to be done on diversifying the portfolio.

[00:16:38.740] You can’t improvise yourself as well. Like if you’re making Sriracha, you’re not going to just say, well, people that buy Sriracha are typically buying noodles or buying these kind of products. So let me just make sure I’m able to offer that to my client. Like what is your production line actually capable of doing and where are you going to be competitive in that market? So there’s definitely a larger study, but it would be interesting to think about what are other products we could offer to compensate that or even work with another partner. As we’re thinking about partner relationships, not only vendor relationship, but other partners that you could potentially substitute. I had a client at some point, and it was very interesting where they produced ice cream. And so there’s a lot of volume in the summer, very little volume in the winter. So what they did is they actually had partnership with other vendors that they could use the production lines for byproducts that they did not necessarily sell, but that they would co manufacture during the winter. So also understanding that if you’re not ready to start another line under your brand, is there any way that you could partner with another non competing product and they could use your line if ever there’s some capacity, there’s some storage or something like that.

[00:17:52.160] So I think that could be an interesting to think about without necessarily saying, I’m adding a product to my name because Sriracha is Sriracha and they’re keeping it simple. And I think that’s why it’s working. But is there any partnerships that could be done?

[00:18:03.680] Yeah, and then the last one, I would actually break it into two. So I think it’s regarding kind of agricultural and saying, I think there is probably some efficiency kind of maybe in the silo of farm to the facility. But then also, so that would be one is looking at how do you improve the kind of efficiency in that process? I think there’s something to look at there. And then there’s also looking at their whole supply chain as well, and looking at is there any kind of waste, like food waste in there that you can tackle and reduce so that more of what comes off the field makes it to the finished product, to the consumer, to the kettle? To the kettle. There you go. And not wasting any. I kind of. We’re not wasting any of the product at any point, be it in kind of the actual, you know, ingredient, if you will, from any ingredient, the whip stage to the finished good that’s expiring on some shelf as well, that, you know, reducing that food waste would ultimately get more sriracha to market and to people who want to consume it.

[00:19:10.680] Yeah. So, you know, kind of to wrap it up to your point before, I don’t think we solved anything. We talked a lot about some of the ideas we had, but what we were able to do is to say, hey, we have this challenge. How can we break it down into smaller, sizable projects to investigate further and see if there could be an opportunity or not an opportunity, and just kind of building that longer term roadmap, which could then be delivered and leveraged professionals that are actually experts into agriculture, experts in environment, experts in even vendor selection or vendor management. Right. Each one of these subjects have very narrow area of expertise that you’d have to partner with someone to be able to dig in and to solve and to actually have concrete understanding of if this could help or not. So we haven’t solved anything, but at least we’ve made a game plan to solve for it and that’s how we would go about it. And we had approached that problem. So, anything to add on that note.

[00:20:14.060] To close on that? No, I think that’s great. I think what I’ll add is a conversation, actually, I was having yesterday with someone on my team, and what I had done effectively with them was this kind of things broken down. What the work needs to be. And my advice was, hey, just go and get to a blocking point on any of these, as many of them as quickly as possible. And so this is kind of advice, I think, to, not advice necessarily, but it’s to anyone who’s many years into their career trying to solve a very big Sriracha type problem or someone who’s maybe starting off and is trying to solve it. A little bit of a kind of more of a technical, smaller challenge is break it down, give yourself a game plan and go and get to a blocking point as quickly as you can. Then go and seek some help from an expert, someone who has more experience in that area, and then unblock yourself. That’s the best way, I think, that you can solve the wide range of difficult problems.

[00:21:10.490] Yeah, I think that’s really key. That’s kind of how this conversation all started and why we got the idea for this podcast is had a discussion of, well, we have this end challenge that we’re trying to solve. How do we break it down? And even us, after decades in consulting and understanding how to think through these things, we get to these blockers and sometimes they’re just bouncing ideas off of someone saying, alright, now I understand how to go about it. I understand who to talk to, because these larger challenges, they’re not something that are solved by one, two, three people, they’re solved by much larger group that have these areas expertise. So to your point, even if you think of a more technical element to it, how do you solve that problem? Break it down into smaller pieces, try to get to a point where you can no longer move forward, ask help from an expert and then just kind of keep moving along.

[00:22:00.860] On that note, we’ve said it all.

[00:22:02.510] Yeah, thanks everyone for watching.