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Strategic Application of SCM in Food Companies: Current ...

  1. 1. Strategic Application of SCM in Food Companies: Current Experience and Future Opportunities Tom Rathje, Research and Development, Danbred North America, Lincoln, NE 68588-0491 Gyu C. Kim, Department of OMIS, COB, Northern Illinois University, DeKalb, IL 60115 I. Introduction. III. The Current State of Supply Chain Management in Food Firms develop strategy at various levels including Enterprise, Systems. Interorganizational, Corporate, Business Unit and Functional/Operational (Digman, 2002). Current thinking The current state of application of supply chain management suggests that competition within some industries is increasingly strategies within the general food industry is widely varied between value systems versus individual firms (Lambert et al., between highly sophisticated and virtually non-existent. An 1998). This evolution partially shifts supply chain strategies example of a sophisticated system is that operated by from the interorganizational to the business-unit level. No Independent Purchasing Cooperative, owned by independent longer is it optimal to focus only on efficiencies within internal Subway sandwich shop franchisees, which, along with suppliers operations but the firm must now consider the level of efficiency and distributors to the cooperative, invested in the development attained by the entire value system. This level of virtual of an extranet supply chain management system to better handle integration can be expected to increase as firms seek new levels $1.8 billion in purchases for Subway stores nationwide (Corbin, of competitive advantage. More importantly, virtual integration 2000). The extranet supports the integration of computer will impact the allocation of resources among various members systems among manufacturers, distributors and ultimately of the value system. Subway stores. The expected savings from the system was in the range of 2-3% of the overall cost of ingredients. The first II. Generic Supply Chain Strategies. phase of the plan will permit tracking of orders from manufacturers and suppliers to distributors. The system will The traditional model of a supply chain was described as linear permit price and performance comparison among distributors wherein products moved linearly in one direction and and manufacturers, monitor contract compliance among information moves linearly in the opposite direction. Two types members of the supply chain and lend support to food safety of technology have become available which have and will initiatives. Any product not meeting safety or quality standards continue to support revolutionary changes in supply chain can be removed from the supply chain at any time. The above strategies: the internet and computing power (Rosenbaum, example is represents a general trend in the food industry toward 2001). The linear model, described above, can be transformed efficient customer response systems (Kurt Salmon Associates, into an interconnected network wherein each participant is 1993). Efficient Customer Response (ECR) is driven from the apprised real-time of customer demand and develops an ultimate consumer backward through the supply chain enabling understanding of how that demand impacts their part of the retailers to more efficiently meet the needs of consumers, keep value chain. Advances in computing power are also important to costs competitive and insure quality. ECR itself is a generic developing efficient supplier networks. Computing power also strategy to leverage information that results in better service to supports decision support analysis to be deployed across the customers. ECR has as its key objectives: system. The formation of a networked, integrated supply chain supports numerous strategy initiatives within the modern firm. • Efficient Store Assortments: Optimize the productivity of In particular, many firms state that enhancing shareholder wealth inventories and store space at the consumer interface. is a core value of the firm. Corporate and operational strategies surrounding supply chains can make significant contributions to • Efficient Replenishment: Optimize time and cost in the replenishment system. this goal (Rosenbaum, 2001), including: • Efficient Promotion: Maximize the total system efficiency  Reducing the working capital demand by replacing of trade and consumer promotion. inventory with information, improving the flow of cash and, • Efficient Product Introductions: Maximize the reducing the inventory of supplies for manufacture. effectiveness of new product development and introduction  Enhancing revenue through more effective customer activities segmentation, delivering the right product at the right time, networked product development, dynamic pricing and more ECR is somewhat unique to the foods industry as its efficient handling of customer service. development was at the consumer end of the value system prior  Cost reduction can be achieved through improved processes to any developments further upstream in the food value system. such as the support of lean manufacturing concepts (e.g. One of the explanations for this development is consolidation J.I.T.), creation of the adaptive organization (versus within the retail sector and the market power garnered by large reactionary), and optimization of all logistics costs food service companies such as Subway, McDonald’s and others associated with an order. (William Reed Group, 2000). As of 2000, 34% of the food  Enhanced fixed capital efficiencies mainly through more market was controlled by the top four grocery store chains. effective use of available capacity, chain modeling to Increasing market power of retailers allows them to place more discover optimum relationships amongst participants and demands upon processors and food manufacturers. These effective outsourcing. demands include delivery of product within a specified time period, loading of pallets to specifications set by the retailer,
  2. 2. packaging and labeling requirements, product specifications, etc. interest of the industry in these applications is borne out by (Anonymous, Food Manufacturer, 2002). In addition to examples of the supply chain management tools available to the consolidation, retailers, being closest to consumers, have the industry. A search of available software and consulting products advantage of market data and thus the power to make decisions for food industry supply chain management supports the for entire value chain (William Reed Group, 2000). The conclusion above. Advanced Food Systems markets increasing pressure upon manufacturers and distributors results FoodDISTRIBUTE, as software package geared toward in manufacturers focusing on the operational strategies of supporting processing, distribution and financial management flexibility, efficiency, cost-effectiveness and asset management. needs of food manufacturers (www.afsi.com/software.shtml). Manufacturers must remain flexible to respond to shifting Specifically, this system supports business to business customer consumer demands and build in efficiencies in order to compete management, inventory optimization and activity based on cost. Asset management becomes important due to the high accounting. Agribuys, another software firm, produces software failure rate of new products and shifting demand of consumers focusing on automation of order processing, delivery tracking and retailers. Large investments in fixed assets are risky for new and logistics for perishable food products products that may fail, resulting more leasing arrangements until (www.agribuys.com/Agribuys10_en_US/prod_modules.html). a product is established in the market. Gill (1996) explores ECR Parity Corporation offers a similar product to Agribuys call further describing ECR as the key driver forcing food ParityPro designed to integrate sales, distribution, and manufacturers to undergo large restructuring efforts in an purchasing, manufacturing and financial information for food attempt to meet the demands of customers (i.e. retailers). Food companies (paritycorp.com). Integrated Distribution Solutions, manufacturers have, and in many cases still do, operate under a located in Omaha, NE, provide a similar line of software decades old business model of purchasing commodities, products aimed at demand planning and product distribution producing in excess, storing product and waiting for orders to (www.ids-world.com). Focusing more specifically on animal roll in. ECR requires manufacturers to be responsive to based products, Aspen Systems, Inc. delivers a more complete customer demands for unique packaging and shipping package that includes not only financial and distribution arrangements along with the flexibility to manufacture in modules but also targets process management and labor, exacting quantities a more diverse array of specialized products. warehouse automation, sales and slaughter management (aspen- ECR has the benefit for adaptive manufacturers of reducing the systems.com/product/index.html). The slaughter management cost for commodities and warehouse space because these module handles grower payments, product yields, market pricing elements are replaced with customer information. At the front and livestock reconciliation. Another animal product-focused end, food manufacturers need to establish links between their company, Data Specialists, Inc., produces a software package internal distribution, warehouse, logistics, and manufacturing aimed at the dairy products industry citing the ability to manage systems with the purchasing and ordering systems of their raw material composition and process formulation, the ability to distribution and retail customers. At the back end, the companies value production based upon dairy markets and movement of need to integrate their own inventory and ordering systems with production to a particular order or customer the ordering and purchasing systems of their suppliers, those (dataspecialists.com). A review of the current state of supply companies that make and market the packaging and basic chain management in the food industry reveals strong trends commodities that go into processed foods. Rosenbaum (2001) rooted in Efficient Consumer Response (ECR) applications by describes unique challenges to retail industries wanting to adapt powerful retail firms. Consolidation among retailers has supply chain strategies, many of which are reflective of the concentrated power in those firms closest to the consumer. experience of food manufacturers. Retailing involves a great Consequently, supply chain strategies have focused on cost deal of promotional activity that acts to distort consumer demand leadership through reducing inventory costs for retailers along and send invalid signals to the supply chain. The distortion of with transaction and distribution costs. Consulting and software market demand forces collaborative decision making and companies have focused on the consumer end of the food value information sharing so that suppliers can truly understand chain, providing supporting technologies to meet the needs of consumer demand. Heinz chose IBM’s Continuous retailers and concurrently, the demand placed upon food Replenishment System to manage daily inventory for its manufacturers by retailers. A very distinct void is the virtually customers and manufacturing plants. This example non-existent application of supply chain strategies further demonstrates the use of off-the-shelf software to gain upstream from food manufacturing companies. information about real market demand. As of the date of the article, 35% of the product movement between Heinz and IV. Opportunities for Future Application of Supply Chain retailers is handled through the automated system. The above Strategies. examples and discussion demonstrate the general trend within the food industry of using Efficient Customer Response (ECR) The very nature of food production, rooted in biology and large as the driving force for investment in supply chain management. numbers of relatively small manufacturers, creates unique Driven from grocers and wholesalers, such systems largely focus challenges for application of supply chain management. In its on application of widely applied supply chain strategies such as simplest form, effective supply chains supply information about reductions in inventory, customization of shipping and product consumer demand to all parts of the value chain. This labeling, use of electronic data interchange to automate ordering communication is notably lacking for producers of agricultural and communication of demand and promotion of joint decision products. Because of the fragmented nature of these suppliers, it making to insure an available supply of required goods. The is challenging to involve producers in integrated networks that
  3. 3. communicate required levels of product dictated by consumer of produce and grains. The uncertainty created by this unique demand. Buhr (2000) discussed these challenges. Buhr states aspect of food production must be addressed during the that the advent of the virtual supply chain supported by application of supply chain management concepts to producers integrated computer networks attaches all members of the value and growers. Biological variation also produces tremendous chain to the consumer in way that could never before be opportunity for differentiation. Variation among genetic lines accomplished through the linear, physical relationships the for meat, produce and grains results in products differentiated by existed prior to the advent of internet technology. It can be superior taste and eating quality. Production systems and argued that the recent trends of contracting supply have been practices themselves can support differentiation strategies. For utilized by purchasers of commodities to improve example, consumers are increasingly interested in animal communication and quality among producers and growers. welfare and organically produced food products. Therefore, However, application of networked supply chains to the production systems utilizing ‘free-range’ production practices, producer level will support new and innovative differentiation for pork fed organically produced grain that is source verified, is strategies at the farm level. Previously undifferentiated products a differentiation opportunity that can be leveraged to enhance the can be source verified and non-measurable characteristics such value of pork products. Weiss and Fagan (2001) reviewed the as non-GMO, ‘free-range’ and ‘organically grown’ and be application of Burlington Northern’s Coal Forecasting Tool. validated through the use of information technology. Networked This tool provides an example of how production of a supply chains permit producers of commodities to leverage their commodity can be better matched to demand. Using this tool, products further into the food value chain if they can clearly Burlington Northern was able to alleviate bottlenecks at coal demonstrate a differentiated product with quality and price mines by linking the production capacity of mines with demand attributes appealing to consumers. Buhr (2000) notes that dictated by utilities. By communicating the information information technology can have a large impact upon market available to the value chain, but formerly unshared with power relationships dictated largely by who controls the participants, Burlington Northern was able to better stage trains information. The current perception, supported by the literature for loading at the mines and ship product in a more timely review presented earlier, is that in food value chains, market manner to meet demand by utilities. Extending the railroad power is concentrated in the hands of retailers, closest to the example to food producers, one can begin to envision how the consumer. Market power diminishes as one moves upstream in key concept of demand for food items can be better the food value chain with commodity producers having the least communicated to growers such that supply is matched closely market power. Information and internet technology provides with expected demand. Such a system would support more commodity producers with a unique opportunity to pursue efficient use of natural resources and reduce the cost associated differentiation strategies in order to compete more effectively for with over and under supply of raw materials. the rewards to value added along the food supply chain. Choosing carefully which supply chains to participate in dictates V. Conclusions and Implications. access to key consumer information that can be leveraged to improve the value added, and payment received, for a This paper reviewed the general concepts of supply chain differentiated food product. Another consideration is the simple management (SCM) and how SCM supports a variety of matching of demand and supply in food systems. Biological interorganizational and business level strategies, particularly cost systems create unique challenges. Particularly noteworthy is the leadership and differentiation. In particular, this review focused time lag between the initiation of the production process and upon the application of SCM in the food industry. Market availability of raw product. Grains require a complete growing power in the food industry is currently concentrated at the retail season of 4-5 months. Livestock require longer periods (ten end of the value chain. Consequently, most application of SCM months in pork production, beef production requires 1 year). concepts has focused upon reducing inventory and transaction Meats and produce have the unique problem of being sold fresh costs for retailers. This has resulted in food manufacturers meaning that after a relatively extended production period, their having to remain more flexible and having to increase their storability in fresh form is quite limited. Therefore, the concept ability to customize products for retailers. Notably lacking is the of just-in-time takes on a new dimension in that demand must be application of SCM beyond food manufactures to producers and forecasted much farther in advance than with non-biological growers of raw materials (i.e. producers of agricultural products. Currently, the commodity markets serve to commodities and produce). It is argued that application of SCM communicate supply and demand in the food industry. This may at the level of the grower will improve the overall efficiency and be an effective and perhaps, pure competition market, but it profitability of the food value chain be reducing the uncertainty inherently increases the risk associated with producing food. A created by the commodity markets. This will be accomplished better communication mechanism would reduce the level of using integrated networks that tie growers and producers into the uncertainty in demand and permit producers to more closely food value chain. Furthermore, the use of integrated networks match supply with demand. Networked supply chains utilizing and information creates differentiation opportunities for internet technology may provide the mechanism necessary to producers of commodities resulting in the potential to better replace the commodity markets as the primary method of position themselves to capture value in the supply chain. communicating demand. Natural biological variation also impacts the available supply. In livestock, animal disease, VI. Bibliography: Available upon request. mating success, weather and other natural phenomena create unpredictability in supply. Similar factors affect the availability

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