Delivering performance in food supply chains: an introduction
The aim of this book is to provide a supply chain perspective of the food and drinks industry from farm to fork. The focus is on managing across functions and improving performance by addressing the challenges affecting the industry. The book is targeted at both practitioners and academics who are interested in understanding the key levers of performance in food supply chains. This introductory chapter provides an overview of the scale and structure of the food and drinks supply chain. This is followed by a discussion of the key trends affecting the industry, such as globalisation, price volatility, economic recession, product diversification, sustainability and corporate social responsibility. Six key challenges associated with managing food and drinks supply chains are introduced: managing relationships, aligning supply and demand, managing processes efficiently and effectively, maintaining quality and safety, leveraging technology and managing responsibly. Each of these challenges forms a section of the book and each section comprises three to five chapters. In this chapter we provide a roadmap for the book introducing the reader to the key challenges and discussing the contribution of each topic to supply chain performance.
The earliest human settlements were located in the region between Mesopotamia and lower Egypt known as the fertile crescent. This region had the right conditions to support a stable food supply, such as access to water for agriculture and opportunities for hunting and fishing. Compared to nomadic tribes, these first settlers faced a different set of challenges: trying to balance supply and demand and making decisions about how much food to produce, store, transport and trade. They could be called the first supply chain managers, although the term was not in vogue at the time!
The term ‘supply chain’, emerged in the 1980s to describe ‘a system whose constituent parts include material suppliers, production facilities, distribution services and customers linked together via a feed-forward flow of materials and a feedback flow of information’ (Stevens, 1989). Initially the study of supply chains focused on industries that involve complex assembled products, like automotive, electronics and aerospace. However, food supply chains are different to those in these industries and blindly importing their concepts and tools without recognising the differences would be risky. Some of the main differences are:
• Short shelf life and volatile demand: products often have short shelf life and demand is sensitive to many factors such as weather changes, promotions and special events. Since holding stock to cover against unexpected demand is not an option, responsiveness and speed are more important.
• Impact on the environment: all industries have an impact on the environment; however, food has a disproportionate effect because of the extensive use of resources like water, energy and land, and the unintended outputs such as carbon dioxide (CO2) emissions, pollution and waste.
Food supply chains have evolved over the years, influenced by an array of economic, social, environmental and technological factors. Early supply chains were short, local and relatively simple in terms of the number of activities, inputs and outputs. Modern chains, on the other hand, are global and complex, offering a vast array of products to cater for the ever-changing needs of consumers.
Changes in the food system have brought many benefits for the consumer: economies of scale have helped to keep costs down; quality and hygiene standards ensure food is safe to eat; convenience foods have made cooking easier and quicker; food preservation methods have reduced the need for frequent purchases and allowed the consumption of out-of-season foods; and online shopping has allowed customers to buy food from the convenience of their home (or office). Furthermore, the range of products on offer has expanded greatly, catering for diverse tastes, trends and health requirements. However, these changes have also brought with them new challenges for the industry. Issues such as sustainability, health, nutrition and corporate social responsibly are high on the agenda of most food producers and retailers.
The evolution of food supply chains has taken place at different rates in different parts of the world, depending on factors such as income levels, degree of urbanisation, natural resources, infrastructure and trade policies. However, trends appear to show convergence in food consumption and delivery systems, with developing nations following a similar pattern to that of developed ones (Frazão et al., 2008). This book will take the perspective of food supply chains in developed countries, assuming that chains in other parts of the world are likely to follow a similar path.
In this initial chapter we will provide a top-level view of the global food supply chain, setting the context for the entire book. We will refer to the global food chain as being the complex network of individuals and organisations involved in producing, distributing and trading food and beverages across the world. First we will discuss the scale and structure of the food system, outlining the key players in the industry. We continue with a discussion of the trends and challenges that are shaping food supply chains and establish a structure for the book considering these challenges. Finally, we conclude with a section focusing on the key factors for delivering performance in food supply chains.
The global food chain is extremely fragmented, with millions of participating organisations around the world, and this makes it difficult to assess its structure and scale. Figure 1.1 depicts the general structure of the food supply chain; at one end of the chain we have fishing and agriculture (including agricultural input such as seeds and fertilisers), in the middle there are processors, packaging suppliers, distributors, wholesalers, retailers and caterers, and finally there are the consumers. This is a supply chain in which everybody has a stake.
Estimates for global food retail spending for 2008 range between US$ 3.6 and 4 trillion – up by almost 20% from 2004 figures (USDA, 2008a; Datamonitor, 2009). This trend is expected to continue over the next five years and it has been estimated that by 2013, global sales of food will reach US$ 4,602 billion (Fig. 1.2 presents the trend and forecast of food retail sales over the period 2004–2013). Furthermore, the World Bank estimates that by 2030, worldwide demand for food will increase by 50% from 2009 (Evans, 2009).
Fig. 1.2 Value of global food retail sales (Datamonitor, 2009).
The economic and social role that the food industry plays varies from country to country, but its impact is substantial even in the most developed countries. It has been estimated that the entire food industry is responsible for around 10% of the USA economy (USDA, 2008b) and around 7% in the case of the UK (McDiarmid et al., 2008). Similarly, estimates indicate that in the USA, the food industry employs around 16.5 million people (10.6% of total employment) (USDA, 2008b) and around 3.7 million people in the UK (14% of total) (McDiarmid et al., 2008). In developing countries, figures tend to be considerably higher and it is estimated that around 40% of the world’s labour force is employed in agriculture alone (CIA, 2009). These figures highlight the significance of the industry both economically and socially.
The value of global agricultural output has been growing at an average rate of 2.3% per year since 1961, outpacing the average population growth during the same period which was 1.7% per year (FAO, 2007). This is attributable to substantial increases in developing countries, but also to a shift towards higher value commodities such as livestock and horticulture. This reflects consumer trends which indicate an increasing demand for items such as meat, fruit and vegetables, particularly in developing countries which have experienced substantial increases in income in recent years. A study estimates that between 2000 and 2025 consumption of meat in India will increase by 176% and by 70% in the case of milk and vegetables, but only 26% for grains (von Braun, 2007). Similar trends can be seen in other large, developing countries such as China, Brazil and Nigeria (FAO, 2007). As a result of these changes, the per capita consumption of food around the world has increased by more than 20% in five decades, from an average of 2280 kcal/person/day in the early 1960s to 2800 kcal/ person/day (FAO, 2007).
Food supply chains have been globalising for centuries; however, the pace of change has accelerated in recent years. According to figures from the WTO, global exports of food products have increased from US$ 224,000 million in 1980 to US$ 913,000 million in 2007 (WTO, 2009). However, although the agricultural exports have increased tenfold since the 1960s, the share of agricultural trade compared to merchandise trade has fallen from around 25% to less than 10% (FAO, 2007).
According to the most recent agricultural outlook prepared jointly by the Organisation for Economic Cooperation and Development (OECD) and the Food and Agriculture Organisation of the United Nations (FAO) (OECD – FAO, 2008), growth is expected to continue, at least until 2016 and it is expected to be particularly strong for products such as beef, pork and vegetable oils.
Figure 1.3 shows the top 20 food trading countries. As expected, the largest and most developed economies tend to be the largest traders of food, with the USA being both the leading importer and exporter of food. However, some medium-sized countries, for example the Netherlands and Belgium, appear as some of the leading food exporters in the world.
Fig. 1.3 Top 20 food trading countries (WTO, 2009).
From the perspective of management of a supply chain, globalisation has significant implications because it involves longer and more fragmented chains, which tend to be more difficult to manage. Longer chains require more transport, which has an impact on costs and lead times as well as having environmental repercussions. Moreover, globalisation creates a more interconnected food system which is more sensitive to disruptions.
Over the last couple of years we have experienced substantial volatility in food prices. Figure 1.4 presents the FAO’s food price index, which consists of a weighted average of six commodity groups including, meat, dairy, sugar, cereals, oils and fats. The chart shows that food prices started to rise in late 2006 and reached a peak in mid-2008. The situation was so severe that a food crisis was declared and protests took place in many countries as people struggled to pay for staple foods. The index has decreased substantially over the last year, from 213.5 in June 2008 to 152.1 in May 2009, although current figures are still higher than pre-2007 data. The FAO has recently declared that ‘international prices of most agricultural commodities have fallen in 2009 from their 2008 heights, an indication that many markets are slowly returning into balance’ (FAO, 2009).
The causes of the food crisis in 2008 include a growing demand for food from Asian countries, higher energy costs, certain policies such as support for the use of biofuels, and temporary factors such as droughts leading to poor harvests (Cabinet Office, 2008). Since many of these factors are likely to continue affecting food supply and demand in the future, organisations and governments need to be ready to respond to future food crises.
The demand for food products has also been affected by other economic factors such as the credit crisis, a reduction in consumer confidence and a general economic slowdown. The food industry is less sensitive than other industries to variations in income and the share of food in total spending tends to increase during times of economic slowdown. However, it is possible that consumers will trade down to cheaper alternatives. This has been popularised by the ‘Aldi effect’, referring to the German discount retailer which has seen a substantial increase in sales, whilst other retailers have reacted by expanding their range of own brand products (Lyons, 2008). Another possible consequence of the economic downturn is that customers try to throw less food away and shop more smartly by avoiding unnecessary purchases.
Another significant trend in the structure of food supply chains is the growing size and power of large corporations, particularly in retail. Figure 1.5 compares the sales of the top ten companies in the agricultural input, food processor and food retailer sectors. The chart indicates that the top firms have been increasing in size and this often represents more power.
In supply chain relationships, the term ‘power’ often has a negative connotation, but organisations can choose to use power in different ways. A dominant firm can choose to follow a cooperative approach, acting as a channel captain, helping to improve communication, coordination and performance across the chain. Similarly, they can choose to take an adversarial position, dictating terms and conditions, and using power to exploit their supply chain partners. The balance of power and the way in which companies choose to exercise that power have substantial implications for the structure and management of the chain.
Product diversification has also been dramatic in recent years; the average number of products on offer in USA supermarkets increased from 14,145 in 1980 to 49,225 in 1999 (Richards and Hamilton, 2006). These changes have been made possible by developments in food processing, storage, distribution and retailing.
Diversification is generally positive for the consumer, but from a supply chain management perspective it presents many challenges. First, it involves introducing new products, which are notoriously difficult to forecast. Poor forecasts can in turn produce overstocking and its associated costs, or under-stocking, leading to poor customer service, and could even cause demand amplification upstream of the supply chain, a phenomenon known as the bullwhip effect (Lee et al., 1997; Geary et al., 2006). Furthermore, increased product diversification can lead to increasingly complex warehousing and distribution operations.
In recent years companies in the food industry, particularly major retailers and manufacturers, have appeared to be more concerned with issues of corporate social responsibly and sustainability. Arguably, this reflects changing consumer attitudes such as the emergence of the so-called ‘ethical consumer’, concerned with issues such as fair trade, animal welfare, support for local farmers and impact on the environment including climate change, waste, pollution, pesticides and food miles (Cabinet Office, 2008).
Another consumer trend which is affecting the food supply chain is obesity and the increasing attention given to healthy eating. In many countries, consumers are becoming more health conscious, increasing the demand for products with lower fat, calories or salt, as well organic produce. In the UK this has been reflected in the increasing demand for fruit and vegetables (Cabinet Office, 2008). This trend affects the entire supply chain and companies have to address these issues in order to remain competitive.
Improving supply chain performance involves providing solutions for the conflicts and challenges that are present in the industry. For this reason we decided to structure the book around six key challenges facing the food and drinks industry:
Figure 1.6 depicts the structure of the entire book and presents the chapters included in each of the sections; below we will describe each of the sections and the role of each of the chapters.
Christopher (2005) defines supply chain management as the ‘the management of upstream and downstream relationships with suppliers and customers in order to create enhanced value in the final market place at less cost to the supply chain as a whole’. Following this rationale, we argue that managing relationships is one of the fundamental challenges and one that is particularly relevant in the food and drinks industry.
Part I is comprised of four chapters. Chapter 2, by Humphries and McComie, discusses how the management of relationships can bring benefits to the entire supply chain and advocates the use of a relationship performance measurement approach to support continued improvement. Case studies from the confectionery and bakery sectors are used to highlight the benefits of the approach. In Chapter 3, Hingley and Lindgreen deal with the very important issue of power in supply chains and argue imbalance in power is not necessarily a barrier to entering collaborative relationships or to their success. They propose that accepting power imbalances is a first step in developing collaborative relationships that can be beneficial for all parties involved. In Chapter 4, Julien discusses supplier assessment as an approach to managing supply chain relationships and introduces the hazard analysis and critical control points (HACCP) methodology and the use of standards such as ISO 22000 and the global food safety initiative (GFSI) as tools to manage the relationship across partners in the supply chain. This section concludes with Chapter 5 in which Estrada-Flores discusses the advantages of using a collaborative approach to food innovation and presents a framework for co-innovation.
Aligning supply and demand is an essential activity in any supply chain and failure to do so can lead either to dissatisfied customers or to excessive inventory. The food industry presents particular alignment challenges owing to the seasonal nature of both supply and demand, the high degree of uncertainty in demand and to the relatively short shelf life of many products, which complicates the use of inventory as a mechanism for buffering uncertainty.
Three chapters focus on the challenge of alignment. In Chapter 6, Yurt, Mena and Stevens present the sales and operations planning (S&OP) process as a solution to the alignment problem. In this chapter the authors describe the process and rationale behind S&OP and discuss the challenges in implementing it, using a case study to exemplify the key issues. In Chapter 7, Thomas, Wang and Potter discuss the four key sources of uncertainty in supply chains, namely, supply, demand, process and control systems, and propose an approach for dealing with uncertainty through planning, auditing and performance diagnostics. Finally, in Chapter 8, Chicksand discusses the need for alignment between the marketing and sourcing functions of an organisation and uses a case study from the meat sector to highlight the benefits of such alignment.
The food and drinks industry is notorious for its low margins and recent price volatility has increased the pressure on producers and retailers alike to maintain efficient and effective processes. In Part III, five different approaches to improving efficiency and effectiveness are discussed.
Chapter 9 by Keivan Zokaei, introduces the value chain analysis (VCA) approach as applied to the food industry. This approach, often referred to as ‘lean’ because it aims to use fewer resources, has proven to be effective in many industries and this chapter shows how it can be applied to the food industry using a case study from the pork sector. In Chapter 10, Harrison presents the ‘agile’ approach to supply chain management which aims to master turbulence and improve responsiveness to end customers. Two cases from the fish and salads sectors are used to exemplify the approach. In Chapter 11, Chapman focuses on a major problem affecting supply chain efficiency: shrinkage. He introduces the problem of shrinkage in the food industry and presents structure to help companies address it. Templar and Mena, in Chapter 12, focus on two key indicators of supply chain performance: cost (as a measure of efficiency) and time (as a measure of effectiveness). They outline a methodology to gain visibility of time and cost across the supply chain and use a case study to demonstrate its use. Finally, in Chapter 13, Charles Stephens concentrates on the distribution stage of the food chain and discusses how efficiencies can be gained through integration and collaboration.
In developed countries, food safety tends to be a given as people assume the appropriate systems are in place to eliminate safety risks. However, major incidents like salmonella in peanuts in the USA, melamine in milk produced in China and avian influenza in UK poultry have highlighted the vulnerabilities of food systems. Given the potential implications of food scares, companies tend to take this issue very seriously.
The three chapters in Part IV provide different perspectives of food quality and safety. In Chapter 14, Garcia Martinez takes the perspective of the customer and the perception of risk in the system. Baines, in Chapter 15, focuses on the use of standards, both pre-farm gate (SQF1000, GlobalGAP and ISO 22000) and post-farm gate (SQF2000, BRC Global, IFS and ISO 22000), to maintain quality and safety. Finally, in Chapter 16, Theuvsen discusses the use of a quality management system across the supply chain.
Technology has had a major impact on the way supply chains are managed. Information and communication technologies, for instance, have made possible almost instant communication between customers and suppliers across the chain. This fast flow of information has allowed companies to be more responsive to changes in demand, making supply chains more effective in delivering the required products on time. Other technologies in packaging, processing and refrigeration have allowed food to be stored for longer, maintaining its quality and appearance. This has enabled many other supply chain trends such as global sourcing and the use of complex distribution networks.
Part V contains five chapters looking at different technologies that are having an impact on the management of food supply chains. Hobday, in Chapter 17, looks at intelligent packaging and its impact on issues such as traceability, inventory management and waste minimisation. Chapter 18, by James and James, discusses the role and impact of refrigeration technologies in the supply chain and how to design and improve a cold chain system. In Chapter 19, van der Vorst, van der Zee and Tromp present the use of simulation and modelling to improve supply chain management and uses a case study of fresh fruit to highlight the potential impact of this technology. In Chapter 20, Vlachopoulou and Matopoulos discuss the impact of information and communication technology (ICT) and e-business in food supply chains and analyse the factors that influence the adoption of such technologies. Finally, in Chapter 21, Pramatari, Karagiannaki and Bardaki discuss the use and impact of radio frequency identification (RFID) technologies in food supply chains.
Sustainability and CSR issues have already been discussed as one of the key trends in the industry. It is no surprise that as customers become more concerned with issues such as global warming, pollution, deforestation and overfishing, companies in the food chain try to address their concerns by embarking on initiatives to reduce or eliminate the negative impact of their operations on the environment.
Part VI includes three chapters. First we have Fisher, McKinnon and Palmer in Chapter 22 discussing the issue of food transport, specifically looking at vehicle emissions and the impact on global warming. In Chapter 23, Alvarez discusses the development and use of environmental and fair trade standards and discusses how companies can become engaged in this field. Finally, Bourlakis and Matopoulos in Chapter 24 conclude the discussion by analysing future trends in technology and the environment.
In this chapter we have introduced the concept of food and drink supply chains as complex and continually changing systems which, at their core, involve farmers, processors/manufacturers, retailers and consumers. Around these core groups there are many other participants such as hauliers, wholesalers, packaging providers, government agencies and non-governmental organisations, all with different roles and different needs which have to be satisfied. To succeed in using a system with multiple stakeholders, organisations need to tick many boxes:
These are the challenges managers in the food industry are facing and in this book we will provide different perspectives on how to deal with these challenges. There is no silver bullet in dealing with them, in some cases there is not even a clear path to resolving them. However, it is by understanding different approaches and exploring alternatives that we can continue developing solutions to these challenges. We hope this book can serve as a stepping stone in this process of exploration.
Ultimately we are all participants in the food and drink supply chain. We want this supply chain to deliver quality products to our table in a safe and efficient way, but we also need to recognise that these chains are a result of our individual decisions, the products we buy, where, when and how often we buy them. We all play a role in shaping the food supply chains of the future.
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