The supply and demand equation
Supply chain management and distribution have always been critical. Now, changes among brand leaders and supermarket giants are creating new opportunities for their suppliers.
Supply chain demand
Advances in technology, coupled with an inexorable pressure on margins, have pushed supply chain management to the core of food and drink production. The need to identify and implement cost savings, cut delivery times and improve food safety are the drivers.
It is important to look at supply chains holistically, according to David Wild, president and CEO of Wal-Mart Germany: “You cannot take a narrow view. You have to look at the cost components of each element in the chain from the factory to the shelf in the store.” Analysing and understanding the interaction of different elements – for example, labour costs, fuel costs and time costs – is key to managing the process successfully.
David Wild, President and CEO of Wal-Mart Germany
Roberto Canevari, head of supply chain at Nestlé mineral water subsidiary San Pellegrino, says there are three clear, generic issues. First is the continuing rise in distribution costs, including ‘non-business’ costs such as eco-taxes and restrictions on transportation, and the rising price of fuel. Second is the relentless pressure from customers to respond quickly to their own supply chain information. Third is the challenge of linking logistics within the producer’s overall commercial strategy. Distribution and logistics play a big role in the cost structure of any product, he says.
A diverse market
One of the key challenges in supply chain management across Europe is the variety of customer. In the UK, 95% of food and drink retail is represented by ‘modern’ trade – the big supermarkets. In Italy, by contrast, only 30-35% is supermarkets, whereas around 50% is driven by a range of wholesalers. The remainder is small retailers. Canevari’s challenge at San Pellegrino is to operate a strategy the overlays these different customer markets – each of which has different buying characteristics.
Within the EU, recent European Food Regulation has laid down statutory food safety procedures, including traceability and recall. Article 18 of the Food Safety Directive requires traceability at all stages, and details specific requirements of food producers. For the most advanced companies, the legislation will have less impact, but for many of the smaller concerns it will impose an additional technical and regulatory burden.
Customer collaboration
Success demands closer and closer contact with customers. “The most important thing is that we work more with our customers to find synergies – to really work together on promotions, collaborate on forecasts and find the optimal solutions in terms of cost. This will increase our performance much more than we can on our own. The whole supply chain benefits,” says Canevari. Wild agrees on the importance of close communication. For manufacturers to succeed, he says “they should make the investment in establishing what the retailer really needs”.
Daniel Bernard, president of investment company Provestis and, until earlier this year, president and CEO of French retail giant Carrefour, goes a little further. He points out that his former company has many medium-sized suppliers with whom it shares ‘open books’ and has a history of collaborating with these suppliers to meet customer demands.
The new bar code
Radio Frequency Identification (RFID) could help that collaborative process. RFID gives supply chain managers real-time intelligence on production and delivery of goods.
Like the mobile phone, RFID has moved from nascent technology to global standard in a handful of years. In the US alone, RFID technology spend in the retail sector is expected to top $1bn by 2007, from less than $100m in 2003. Large food retailers and producers, including Metro in Germany, Wal-Mart, Coca-Cola, Kraft, Unilever and Nestlé, are already pushing the technology on their key suppliers.
In North America, RFID implementation in the food and drink sector is almost entirely driven by pressure from key customers. According to a survey by the Computing
Technology Industry Association (CompTIA), 34% of food and drink manufacturers have adopted RFID because of pressure from Wal-Mart. The need to comply with Food & Drug Administration regulations was responsible for a further 24% of manufacturers going down the RFID route, with 13% doing so because of a mandate from the
Department of Defence.
Roberto Canevari, San Pellegrino
To tag or not to tag?
Amongst food manufacturers, the jury on RFID is still out. According to a recent poll of food company executives by Mergermarket, the key question is whether this technology yields benefits when applied to low-unit-cost products. At San Pellegrino, Roberto Canevari is more sanguine: “We’re not doing much now, but we are taking a look. Clearly, RFID will play a big role, especially with higher-margin products that can afford the cost.”
RFID tags currently cost around 20 cents each – the CompTIA report said a unit price of five cents was needed for the system to really take off. That price point is likely to be reached in six or seven years.
RFID is “the new bar code”, according Bernard. He says that retail revenues “are always based on cost savings, and these are almost always a reflection of advances in technology. The cost of RFID will decline in the future.” Bernard says even small suppliers need to embrace new technology: “They need absolutely to be part of the modern supply chain. Better technology means that, as a small producer, you can focus on your job.”
Complex relationships
Compared with many of the retailers they supply, Europe’s food and drink manufacturers are fragmented, with a high proportion of smaller family-owned companies. It is an open question as to whether achieving further supply chain efficiencies – for example, through the introduction of new technologies – will push industry consolidation as well
as co-operation.
Oiliver Le Gall, Investment Director, 3i
Bernard says that the bottom line focus of institutional shareholders means that they can miss the complex interactions, challenges and achievements of a wellco- ordinated supply chain. This creates an opportunity for private equity providers, given their closer focus on the nuts and bolts of the businesses in which they invest.
3i, which has extensive experience of the food sector, believes private equity solutions will play a crucial role in restructuring food and drink manufacturing companies in the medium term, bringing capital and knowledge. “We help companies understand the lessons from the UK, France, Germany, Spain and elsewhere in terms of supply chain management: working with change; understanding the retailer/producer power balance; and identifying where in the supply chain they are capable of adding the most value,” says Olivier Le Gall, investment director at 3i.
The power of innovation
Supply chain dynamics are constantly evolving. “If you were a manufacturer supplying fresh produce to Tesco in the UK twenty years ago, you would have been distributing to 600 shops every day,” says Wild. “Today you would send your goods to five distribution centres once a week.” Despite the need for supply chain excellence, Wild thinks that innovation and manufacturing skills are more important.
Supply chain challenges could become more acute in the medium term. Canevari is gloomy about the long-term impact of congestion and rising fuel costs on Italy’s 100,000 transportation companies. Hauliers can only accept low or negative profitability for two or three years before they start withdrawing from the market, leading to a shortage of trucks.
Canevari thinks suppliers and retailers must come together to push national governments to solve other infrastructure issues too, such as the need for improvements in sea freight and rail capabilities. “Oil is not going back to $40 a barrel. Tax and regulation will keep on coming. Congestion is here and getting worse. As producers we have a
role to play in pushing for solutions from government. It should be on our agenda to work together and find these solutions.”