BrainTrust Query: How is the food supply chain adapting to the new cost environment?
Weak Links in the Food (Supply) Chain - That was the headline for an article appearing in Tuesday's Wall Street Journal. It explored how participants in the distribution of food stuffs are having to rethink the way they run their businesses due to major cost increases in fuel prices and commodities.
The article discussed the implementation of large-scale software systems in the late nineties and the exploitation of those systems in the earlier part of this decade. But now, according to reporter Ben Worthen, companies are starting to rethink the processes themselves. Cited is Nestlé's installation of new equipment to fill retail containers more accurately in efforts to reduce "overfills." The company is also turning out products in smaller batches, despite reset costs, in order to reduce overproduction and spoilage. Hannaford Brothers is also mentioned as going to more multi-temperature store deliveries to reduce transportation costs. The article also points out how companies who had not yet centralized their planning systems, such as Papa John's Pizza, are now making that a priority.
Discussion Questions: What are some other ways you have seen participants adapting to the new food supply chain cost environment? What does it mean both long-term and short-term for industry players? How is the consumer reacting?
[Author's commentary] From a strictly analytical perspective, I have wondered about how the shift in fuel and commodity prices has affected inventory management. The classic "Economic Order Quantity" model calculates the tradeoff between delivery costs and carrying costs. Currently, delivery costs are skyrocketing and are accompanied by negative carrying costs, because unless it is a perishable or style sensitive item, replacement costs are increasing so fast that the retailer can actually make money on their inventory investment. This means that in general, retailers should be taking fewer and larger deliveries. It also means manufacturers who have had proprietary delivery channels for DSD should be considering pooling their resources or going to independent service providers.
On a strictly retail level, it probably means looking for a more qualified and stable workforce that results in less waste. It could also mean centralizing more production activities. This could mean changing the labor mix in favor of more full timers and looking for ways to save on utilities.
But consumers are also hurting. I always liked the quote that "the food supply chain begins in the farmer's field and does not end until the product passes through the bowels of the consumer." With that graphic image in mind, consider that we have already seen consumers hoarding rice and other fast rising commodities. Intuitively we should see larger shopping baskets, but given that many consumers have reached their purchasing limits, I don't know if this has happened. I would be curious to know if there has been a noticeable shift between high-low and every-day-low-price operators. I could argue either way and wonder if it has been quantified.