Chapter 1 & 14 : Food Supply Chain Management

Lecture Series… Food Safety… Week 1a

•  Fundamental to health, happiness and political stability •  In Europe, there is an abundance in the supply of food of all types

and at prices which are probably the lowest they have ever been when compared to average wage.

•  The food supply chain has progressed from a series of shorter, independent transfers to more unified, coherent relationships between producers, processors, manufacturers and retailers.

•  Food supply chain management aims to guarantee the provision of safe and healthy products that are fully traceable from ‘farm to fork’.

Introduction

•  Quality assurance schemes, production and manufacturing to retailers’ protocols and the application of quality management systems and standards such as HACCP and ISO series.

•  include accurate weighing, refrigeration, controlled atmospheric bacterial growth inhibition, pasteurization, micro-element pollutant detection, bar coding, electronic recognition of packaging, the use of stabilizers, artificial insemination, embryo transplantation, precision seeding, environmentally and welfare friendly animal housing, and organic crop and animal production systems.

The food supply chain management environment

•  These advances indicate some of the many applications of research in biology, genetics, biochemistry, chemical engineering, computing science and other disciplines to agriculture, food manufacture and distribution.

•  logistics as ‘the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and related information flows) through the organization and its marketing channels in such a way that current and future profitability are maximized through cost-effective fulfillment of orders’.

The food supply chain management environment

•  Identification of products with bar codes using optical (electronic) methods such as electronic point of sales (EPoS) (scanning) technology, is employed widely to identify product loca-tions in retail warehouses and stores and to record product movement onto and off vehicles.

•  An example of electronic transmission of information using standard protocols is electronic data interchange (EDI) based on a specific standard to co-ordinate various members of the supply chain (Fynes & Ennis, 1994).

•  The combined use of EPoS and EDI facilitated the implementation of quick response technology in retail operations (Larson & Lusch, 1991) to provide higher sales and lower stock levels through rapid data collection and processing.

The food supply chain management environment

•  The use of the Internet in the food supply chain is a relatively recent innovation largely favoured by food suppliers and multiple retailers (Quarrie & Hobbs, 1997).

•  For example, the major UK food multiple retailer J. Sainsbury introduced Xtra Trade, to allow suppliers to exchange supply chain information over the Internet; Tesco Information Exchange is similar (Anon., 1999).

•  Although it appears to be just another EDI system, the major benefits from the use of the Internet are that it enables both retailers and suppliers to avoid excessive paperwork and each stage of the system is more visible.

The food supply chain management environment

•  Regulatory framework defined by national and international law. This regulatory framework reflects increased consumer concerns about food safety, labeling and product traceability.

•  A development in the food supply chain that advocates this view is efficient consumer response (ECR) where manufacturers, wholesalers and retailers work to meet consumer demands better and more efficiently (Fiddis, 1997).

The food supply chain management environment

•  The major manufacturers, such as Unilever, Associated British Foods, Cadbury, Nestlé, Northern Foods and Geest, have acquired smaller companies, while others, particularly in the declining canning and frozen food industries, have disappeared.

•  This changing structure has implications for man- agers in the food supply chain, including the need to acquire the wide range of skills required to manage large workforces and the longer distances over which primary produce (especially perishable and sensitive goods) has to be transported to processing centers.

The food supply chain management environment

•  The five principal firms in the UK food retail sector are household names generally held in high esteem, and are a significant force in economic activity.

•  Together, they enjoy more than 50% of the total market sales, and in 2002 employed 1.1 million or approximately 40% of all employees in retailing. In 2000, food and drink retailing combined accounted for 2.1% of UK gross domestic product.

•  The retail sector is also dominated by the supermarket format and several strategies have contributed to its rise.

The food supply chain management environment

•  This chapter has introduced the UK food supply chain and outlined its structure and contribution to the economy in terms of sales, value added and employment.

•  Relationships within the chain are complex, have changed and continue to develop.

•  Traditional structures and relationships are increasingly being replaced by larger scale, programmed, information-based sharing relationships which are determined by retailers’ and manufacturers’ standards.

Conclusion

•  The food market is, however, saturated with prospects of low growth.

•  UK primary producers and manufacturers face increased competition from imports and are put under pressure to reduce prices by a highly concentrated retail sector.

•  Economic analysis confirms that there is pressure on the food supply chain because price and income elasticity of demand for various food products are low or negative.

•  In the following chapters, the challenges faced by supply chain managers will be presented with a view to developing a better understanding of that continuously evolving discipline.

Conclusion

•  As a staple product, consumed on a daily basis by almost 300 million persons in the United States, food is available just about everywhere.

•  Food comes in a variety of forms such as fresh, frozen, perishable, non-perishable, processed and unprocessed, and can be purchased from a range of sources including grocery stores, vending machines, farmers’ markets, military commissaries, restaurants, the Internet, mail order, and countless other outlets that sell food products in addition to their normal goods and services,

•  e.g. cinemas, sporting events, gasoline service stations. So great is the contribution of the food industry to the US economy that in 2000 the sector contributed 12.8% of the gross domestic product (GDP) and employed more than 24 million people (Economic Research Service, 2002).

The US Food Supply Chain

•  Historically, the food industry was highly fragmented, comprising thousands of manufacturers, wholesalers and brokers, distributing products to millions of retail outlets, food service operations, and directly to final consumers.

•  However, since the beginning of the 20th century, an interesting phenomenon has occurred in terms of industry concentration.

•  The US food system has developed a distribution concentration that is bimodal; i.e. larger firms have become larger and the number of smaller firms has increased (Rogers, 2001).

The US Food Supply Chain

•  There are many reasons for this concentration or consolidation, including the search for additional economies of scale, vertical integration in the food channel of distribution, an increasing number of contracts, partnerships and alliances between channel members, and the attempts by food manufacturers and retailers to reach an ever increasing number of diverse customer segments (Rogers, 2001; Wrigley, 2001).

The US Food Supply Chain

•  Food wholesalers now do 18% of their total buying on-line, restaurants purchase almost twice as much, and food processors 14%, all via the Internet (Tompkins Associates, 2000).

•  The integration of information systems that are electronic data interchange (EDI) or Internet based into the food supply chain is bringing about improved management of food product inventories, greater efficiency in distribution, and improved customer service levels.

Principal driving forces and trends affecting the food industry

•  Long-term changes in consumer food consumption patterns have resulted from societal developments such as the increase in the number of single parent households, multiple income families with their larger amounts of disposable personal incomes, rising import- ance of leisure activities coupled with a reduced emphasis on work, acceptance of Internet shopping as a viable means of purchasing food items, increasing amounts of away-from-home eating, as well as many other social and cultural changes.

•  These changes have impacted the food industry primarily as a result of the different eating habits of consumers and the mix of food products sought by them (Eco- nomic Research Service, 2002).

Principal driving forces and trends affecting the food industry

•  World food needs are projected to grow. At the same time, at a growth rate of 1.1%, US population will double to more than 500 million during the next 60 years. Pimentel & Giampietro (1994) state that, ‘If present population growth, domestic food consumption and topsoil loss trends continue, the US will most likely cease to be a food exporter by approximately 2025 because food grown in the US will be needed for domestic purposes’.

Principal driving forces and trends affecting the food industry

•  Management orientation/philosophy •  Finally, the orientations and philosophies adopted by corporations

are also significant, and include such concepts as just-in-time (JIT), quick response (QR), efficient consumer response (ECR), and collaborative planning, forecasting and replenishment (CPFR).

•  These approaches, and many others such as total quality management, process re-engineering, and continuous improvement, attempt in some way to optimize customer service and minimize logistics costs in any industry, although especially in the food supply chain.

Principal driving forces and trends affecting the food industry

•  Management orientation/philosophy •  JIT is an approach that attempts to minimize inventories while

maintaining sufficient inventories of products to satisfy the needs of supply chain members and final customers. Many companies in the food industry, as well as most other business sectors, have applied JIT procedures to their operations (Stock & Lambert, 2001).

•  ‘The concept works by combining electronic data interchange (EDI) with bar-coding technology. Sales are captured immediately.

•  This information can be passed on to the manufacturer, who can then notify its raw material suppliers and schedule production and deliveries as required to meet replenishment needs’ (Stock & Lambert, 2001, p. 40).

Principal driving forces and trends affecting the food industry

•  In the retail food sector, ECR, an extension or adaptation of QR, is an import- ant approach to managing demand at the point of sale.

•  With changing consumer needs, firms must be more responsive in providing food products when, where and how customers want them (Hoban, 1998).

•  The ECR strategy was developed in 1994 to improve efficiency in the following four areas (Hoffman & Mehra, 2000):

(1)  Optimising store assortments and space allocations to increase category sales per square foot and inventory turnover. (2)  Streamlining the distribution of goods from the point of manufacture to the retail shelf. (3)  Reducing the cost of trade and consumer promotion. (4)  Reducing the cost of developing and introducing new products.

Principal driving forces and trends affecting the food industry

•  Combined with the use of technology, ECR can have dramatic impacts on supply chain efficiency and profitability.

•  In the instance of a shopper buying a food product at a grocery store, as soon as the item is bar code scanned at the cash register, inventory records are updated; when the reorder point is reached, an electronic order is automatically sent to the supplier, vendor or distribution center where the product is available.

•  The electronic communication can take place using electronic data interchange (EDI) or via the Internet.

•  A variation of this approach is scan- based trading (SBT) which utilizes the same approach as ECR, as well as direct store delivery, except that it employs consignment delivery. Food suppliers manage their own products until they are sold and then electronic payment is made by the retailer to the supplier (Kuhel, 2001b).

Principal driving forces and trends affecting the food industry

•  CPFR, a further development of ECR, adds to ECR by stressing more collaborative relationships and information sharing (Doherty, 1998).

•  It has been estimated that in the grocery industry supply chain alone US$150–250 billion in inventory costs could be saved with the implementation of CPFR (Doherty, 1998).

•  ‘Seamless’ integration of the supply chain can result in significant cost savings.

•  Traditionally, when information or other types of gaps occur between supply chain members, inventory is used as ‘filler’.

•  Reductions of this filler eliminate inventory carrying costs and hence give cost savings.

Principal driving forces and trends affecting the food industry

•  While remaining somewhat traditional, the food supply chain is undergoing changes that will ultimately impact all facets of food production and distribution.

•  The traditional enterprises involved in the food industry such as producers, manufacturers, processors, wholesalers, distributors, agents, brokers and retailers will remain, but their roles will undoubtedly change as a result of numerous trends occurring in the marketplace.

•  The brief overview of the US food supply chain in this chapter identified the components of the supply chain and their respective activities and/or tasks.

•  Various driving forces and trends affecting the industry have been identified and discussed relative to the production, distribution and consumption of food products. The major factors presented have included techno- logy, regulation, environment, and management orientation/philosophy.

Summary

UK US

Match the device to what it measures:

12.8% of US GDP: 2000

24 million people

80% truck distribution

Outsourcing preferred

Smaller EOQ

2.1% of UK GDP: 2000

1.1 million or 40% jobs

Why not in UK?

Type of job in UK?

IT preferred!

Commonalities & Differences