Due to global supply chain disruptions over the past 2 years, Americans are getting used to product shortages, but they were still surprised by the recent shortage of baby formula, putting babies at risk.
As an immediate relief measure, military planes were recently used to transport baby formula from Europe and Australia to the U.S. Also, Abbott Laboratories, closed by the FDA in February, 2022, just resumed production at its Michigan plant. Despite this, Americans learned that this crisis will not end yet.
There is plenty of blame to go around, write Professors Babich (Georgetown U.) and Tang (UCLA) in Industry Week (June 17, 2022). There are many culprits they say, except for one that has been widely blamed: industry concentration, which is an innocent bystander.
The leading suspect is Abbott’s Michigan baby formula plant, which had poor quality control issues for years, but was not shut down by the FDA until Feb., 2022. The crisis would have been less severe had Abbott adopted the Toyota Production System, our topic in Chapter 16, by fixing its own quality issues sooner.
The runner-up suspect is the FDA. Its inaction and lack of urgency dates to 2019 when it was warned about Abbott’s quality issues. The FDA’s bureaucratic inflexibility means that milk formulas sold in Europe are banned in the U.S. because they exceed the FDA’s nutritional standards due to technicalities, like labeling. Its failure to do its own job is one root cause of the shortage.
Then there is the federal Women, Infants, and Children (WIC) program that funds over half of the baby formula purchased nationwide. The WIC contracting process has an unintended outcome of enabling the “approved” state provider to become a near-monopoly of the formula market for that state.
The press blamed the milk formula crisis on industry concentration–too few U.S. manufacturers. Politicians also tagged this as the culprit, as 90% of all production of baby formula is controlled by 4 companies. But industry concentration is a result of economic forces. Milk formula is a staple with stable demand, so there is no incentive for producers to invest in “just-in-case” capacity.
The crisis may continue beyond Abbott’s plant reopening. Once panic buying mentality sets in, it is difficult for consumers to switch back to normal purchasing habits.
Classroom discussion questions:
1. How is this an OM issue?
2. Explain why the WIC program has impacted the shortages.
