McHugh Software, together with Tompkins Associates and Symbol Technologies, recently commissioned a study to determine the key trends, issues and plans for supply chain management within the Food & Beverage industry.
The sponsors commissioned Porter and Associates, a respected market research firm, to conduct interviews with supply chain executives from a variety of food and beverage firms. Phone interviews were conducted with 30 respondents from North American and European companies. More detailed one-on-one interviews with specific respondents were conducted to provide additional context.
A number of different food and beverage industry segments were included in the survey population, including dry packaged goods, beverage, cheese/dairy, frozen foods, ingredient suppliers, and meat processors. Respondent company size ranged from multi-billion dollar organizations to those with a few hundred million in revenue, with the vast majority being $500 million and above.
Food and Beverage manufacturers are being pressured from multiple sides of the value chain. Perhaps the most prominent pressure results from the continuing shift in the balance of power within the industry from manufacturers to retailers. The on-going consolidation among grocery and other retail channels is concentrating more and more market share and power in fewer retail chains, increasing their leverage to demand price, service and supply chain technology terms to their food and beverage suppliers.
While facing this pressure from their retail customers, food and beverage companies are fiercely competing with each other for growth, market share and profit. Competition remains intense, with companies hoping to squeeze out small gains in market share, often at tremendous marketing and new product development expense.
It is little wonder then that supply chain management is viewed by food and beverage executives as a key business strategy to thrive in this challenging environment. Supply chain initiatives can strip out tens or hundreds of millions in costs and enable a company to achieve competitive advantage. While there are many elements to effective supply chain management, food and beverage executives are seeking significant value from execution-based supply chain management. Survey respondents indicated that logistics initiatives were critical not only to their overall supply chain strategies, but to larger corporate strategic thrusts as well. Noted one respondent: "Of our five key corporate strategies for 2001, three have significant logistics system implications."
Food and beverage executives were surveyed over a broad range of supply chain and logistics topics, from strategic initiatives and technology investment priorities to the effectiveness of such programs as Efficient Consumer Response and Vendor Managed Inventory.
The results clearly show an industry in transition. The supply chain paradigm is changing, having a significant impact on process, technology and investment. It is driving a whole new generation of logistics software applications in such areas as supply chain visibility and event management, on-line metrics and scorecarding systems, available-to-promise and capable-to-deliver technology, and applications for collaboration with key trading partners and logistics service providers.
The survey results show that most food and beverage executives have made adoption of these new supply chain processes and the corresponding investment in new technologies a strategic priority. Yet, the need to maintain a focus on operating cost reduction and functional excellence in such areas a distribution and transportation were also evident.
Key Supply Chain Initiatives
Survey respondents were asked to rate their highest priority logistics initiatives over the next 2-3 years. The results, shown in Figure 1, indicate that operating cost reduction continues to be the primary strategic aim and driver of supply chain investment. Of course, given the relatively low growth in end consumer markets for food and beverage companies, continued retail price pressures, and fierce competition, this cost reduction focus is not surprising.
Improved supply chain scorecarding and metric systems also scored very high, reflecting in part, the poor scorecard systems many companies have in place today and the link between performance measurement, cost reduction and continuous supply chain improvement. Reducing cycle times and improving supply chain visibility also scored high.
At the lower end of the spectrum, efficient consumer response (ECR), third party logistics strategies and support for e-commerce initiatives did not score highly as critical supply chain initiatives. Respondents indicated mixed feelings about ECR, did not anticipate major shifts in 3PL outsourcing levels or strategies, and were not being impacted directly by e-commerce, since consumer direct models are virtually absent in food and beverage companies.
Technology Investment Priorities
Given the wide range of potential supply chain tools and strategies, it is not surprising that food and beverage companies exhibited a broad range of technology investment priorities (see figure 2).
Achieving real-time available-to-promise capabilities ranked as the top investment priority, followed closely by the ability to provide real-time order status. ATP and order status, in fact, are really mirror images of each other. ATP provides the company's fulfillment commitment to the customer, while order status monitors the progress of order fulfillment against this plan. Both capabilities can provide companies with competitive advantage today, but will rise to the "necessary to compete" level within the next 2-3 years.
Collaborative planning, forecasting and replenishment (CPFR) and supply chain visibility also ranked high as investment priorities, while the traditional core application areas of warehouse and transportation management, plus on-line scorecarding, were the next level down of priority scores.
At the low end of the priority scale were labor management systems and ERP, with ratings of 4.58 and 4.10 respectively. The labor management responses suggest that many executives are either not aware of the huge potential savings that are available through increased labor productivity, or do not know that solutions exist today for significant labor cost reduction. For ERP, few companies are looking at major investments in these transaction-oriented systems to solve supply chain/logistics problems.
Analysis and Recommendations
The survey results show an industry facing monumental change in supply chain strategies and technologies. Companies are sticking with core concerns (e.g. - reducing operating costs), while also making investments in many of the new application areas. The results indicate food and beverage companies have made good early strides towards realizing the potential of more integrated logistics processes and technology, but still have a significant way to go before reaching the integrated logistics paradigm that will be the model for the 21st century.
Based on the findings, food and beverage companies should consider five key strategies to drive supply chain and corporate success.
Take Advantage of Low Hanging Fruit
Given the high priority respondents placed on operating cost reduction, it is surprising that implementing labor management solutions was not a major investment consideration. The fact these solutions start providing return on investment almost immediately with a high degree of certainty makes them "low hanging fruit" for cost reduction. Implementing enterprise transportation management can also have significant early payback due to the high cost of transportation for food and beverage companies.
Make Supply Chain Visibility a Strategic Priority
In today's digitally connected world, food and beverage companies must create a digital logistics platform for enterprise and supply chain-wide visibility. Achieving end-to-end visibility should be a key strategic initiative, driving benefits through increased efficiency, lower inventories, and improved fulfillment, while setting the stage for additional value through next-generation command and control.
Improve Supply Chain Metric and Scorecarding Systems
Performance measurement is essential to achieve functional and corporate objectives and to drive continuous improvement. Simply adopting a more comprehensive set of metrics and distributing them to the appropriate managers can drive significant benefits. However, use of logistics scorecarding tools can improve results by providing faster, more consistent responses to actual or incipient problems.
Use Strategic Outsourcing, But Maintain Technology Control.
Food and beverage leaders must continue to use logistics outsourcing strategically, but adopt common, tightly integrated supply chain technology throughout the network, regardless of who manages the facility, to achieve competitive advantage through supply chain excellence.
Pursue Bottom-up Implementation with Top-down Leadership.
To sustain higher-level supply chain initiatives, it is necessary to build on a foundation of core operational excellence. But this bottom-up approach must be driven by top-down leadership. For it is at this level that an understanding exists of how enterprise logistics management, and then, integration and collaboration across the extended supply chain, are critical to corporate success.
Food and beverage companies are operating in a time of both tremendous challenge and tremendous opportunity. Supply chain strategies and technology will ultimately have a dramatic impact on which companies thrive and which companies flounder.
The impact of the Internet and related technologies will be a major factor in this transformation through fundamental changes in key supply chain processes.
We are entering a new era of digital logistics, in which new-generation technology, combined with traditional applications in core functional areas, will strip out millions of dollars of costs and create new growth opportunities through highly differentiated logistics strategies and performance. The Food and Beverage industry is well positioned to take advantage of these opportunities.
Dan Gilmore, Sr. VP of Marketing McHugh Software