BrainTrust Query: How is the food supply chain adapting to the new cost environment?

Discussion
Jun 25, 2008

By Bill Bittner, President, BWH Consulting

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.

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7 Comments on "BrainTrust Query: How is the food supply chain adapting to the new cost environment?"


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Dan Raftery
Guest
13 years 11 months ago

The business of distribution is dynamic by definition. Cost and productivity factors in the supply chain are in a constant state of flux. The only difference recently: the rate of change has sped up. The WSJ article highlighted three companies who understand this and promote continual improvement as a strategic imperative. Companies without a similar operational philosophy need to sprint to catch up. Soon.

Max Goldberg
Guest
13 years 11 months ago

Consumers are hurting. They want the best value for their food shopping dollars. They don’t care about retail back end efficiencies, DSD, inventory controls, how cases are filled, etc. They care about price.

It’s great that retailers and manufacturers are exploring ways to be more efficient. Every cent they can wring out of the supply chain through greater efficiency benefits all parties. The closer they can work together to accomplish this the better.

Doron Levy
Guest
Doron Levy
13 years 11 months ago
I’m looking at this question solely at the retail and customer level. As prices rise, we have to control the controllable. For retailers, it is reducing labour and reducing shrink. We cut costs by cutting staff and the expectation is greater productivity from employees. This ultimately will reduce carrying and handling costs which improves margin. Now, if you have a well trained and motivated staff, that measure works. Of course, this is not some retail Utopia, so chances are productivity and customer service are now suffering. The other factor is shrink. Theft is a big part of it but mostly I am referring to spoilage and breakage. Again, a well trained and motivated staff can reduce these expenses, but because we reduced hours in the first scenario, we have no hope in making sure the dairy is rotated and the eggs are secure. And because we’ve done this, customers are noticing the lack of staff and service so they are buying less. It is a vicious cycle but with training and leadership, stores can cope… Read more »
Lance Jungmeyer
Guest
Lance Jungmeyer
13 years 11 months ago
In the fresh produce industry, suppliers are adapting by reducing their acreage and scaling back their top levels of management. Instead of planting aggressively to seek new business, they are planting more or less what they know they can sell. The squeezed margins are going to cause a lot of suppliers and middlemen to go out of business. Many of these firms have taken on debt in the past decade in order to maintain a leadership position by installing the best pre-sizers, packing equipment, food safety protocol, etc. This was all done because retail buyers demanded such investments if the grower was to remain a supplier. Despite the commitment to improving on their side of the supply chain, many growers rightly complain that retailers are showing little to no loyalty when it comes to purchasing. Retailers are very quick to go outside a contract when the wholesale and farmgate prices drop, yet they expect their contracted suppliers, in the case of undersupply, to stick out their neck financially and buy outside product at inflated prices… Read more »
Ben Ball
Guest
13 years 11 months ago

One impact we may see is a resurgence in the “substitutes” developed long ago as a way to get around availability problems. For example–canned tomato paste/sauce was originally more of a way to get tomatoes when fresh tomatoes were not in season. These products are now out of fashion as “processed” and “not fresh or organic.” But when we can’t afford to bring Chilean tomatoes to Jewel in the winter any more, how attractive will that Hunt’s Tomato Sauce be? I still like spaghetti in the winter, don’t you?

Juli Zoota
Guest
Juli Zoota
13 years 11 months ago

In some parts of the U.S., we may see the melding of two distinct movements: the green/environmental movement & the need to increase efficiencies to control costs. The costs of fuel could actually force many retailers into greener decisions for merchandising stores. For example, carrying locally produced food products could become more appealing given transportation costs for their alternative.

A company “going green” should be better received by the consumer than a company simply cutting products & services for cost sake. The environmentally conscious decision may also be the most economical one. The downside of going local, of course, is that many fresh items which consumers have become accustomed to year-round become seasonal again or unavailable.

Mark Lilien
Guest
13 years 11 months ago

Retailers have to source their lowest-wage employees from the immediate area, because lowest-wage folks can’t afford expensive transportation. Increasingly, employers will see the direct correlation between minutes of travel time and staff turnover.

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