Home: Issue 2 2009 › Lead Story › Now is the time
Now is the time
02/10/2009 | Channel: Retail, Manufacturer
Jeremy Hammant takes a look at the pressures on food manufacturing supply chains
Recent figures showing that the country has now entered a period of deflation are at odds with most consumers’ experiences of grocery shopping. After years of falling prices in real terms, food inflation in Britain has been rising faster than almost anywhere else in Europe. Whilst commodity prices are now falling these reductions will take time to work their way through the food supply chain and are likely to be offset by the weakness in the exchange rate.
Consumers have responded to the recession by moving some of their spend to the discount retailers, such as Aldi and Lidl. The strength of this response can be seen in Aldi’s recent results in the UK, with sales up by a quarter over the past year. In addition, all of the grocery retailers are experiencing growth in own label products. The share of own label products has now reached over 40 per cent in some traditional grocery retailers, and over 90 per cent in discounters. Asda says that sales of its budget range of Smart Price baked beans, which retail for just 20p for a 420g tin, have grown by more than 50 per cent over the last year.
What are the implications of these developments for the food manufacturing companies and how should they respond? A key issue is that the majority of food manufacturers are producing both branded and retail own label products, often in the same factory and on the same production line. These manufacturers are now in an unenviable situation of facing pressures bearing down on them from both ends of their supply chains. At one end, the grocery retailers continue to exert pressure for ever-lower prices, whilst at the other end the pressure comes from the increasing cost of raw materials. In addition there is a growing need for manufacturers to invest in the environmental agenda and demonstrate their supply chain sustainability credentials.
For the majority of food manufacturers the focus over the last few years has been on growth; both organic and through mergers and acquisitions. The recent round of consolidation that has taken place among UK food manufacturers, such as Premier Foods takeover of RHM, has enabled manufacturers to realise cost savings through operational synergies. In addition it has enabled them to build sufficient scale to offer grocery multiples very competitive prices for both branded and own label products.
In order to fund their growth many companies have taken on high levels of debt. These companies are now facing mounting pressures to reduce working capital and release cash. We believe that how these organisations manage their supply chains will be a critical success factor in their survival and success in the next few years.
While supply chain thinking and ideas of best practice have developed and stabilised over the last 30 years, their application in most companies is still immature. The big idea behind supply chain management is that managing the interactions between the functions and entities in the chain for the benefit of the whole chain, rather than the individual company, will yield a dramatically better overall performance. This can take many forms, but typically organisations benefit from more free cash due to less inventory and assets, better trading margins and lower operating costs. There has never been a better time to implement this thinking across the food supply chain – and realise benefits for suppliers, manufacturers and retailers.
From our experience of working with some of the world’s leading food manufacturing companies we have identified ‘five supply chain maxims’ to ride the downturn and prosper in the recovery.
When times are good and businesses are buoyant investment invariably goes into activities such as new product launches and market development – product ranges expand and more customers are added. Sales revenue increases and if it comes at a slight dilution of overall margin then so be it. The situation is now very different, and our first maxim is ‘reduce unprofitable complexity’. It is crucial to truly understand how both customers and products erode margin. Our experience is that 15 per cent of either or both customers and products erode more than 50 per cent of the profit potential. Designing this group out or designing their profitability back in is a key step to connect the supply chain to the company’s financial performance. We also find that these unviable activities often detract from profitable activities as well as creating losses in their own right.
In the current climate, demand is likely to be unpredictable and volatile; companies must be able to respond to demand changes without having to resort to holding lots of inventory and capacity surpluses. Our second maxim is ‘design, plan and execute for agility’. Agility is about fast flexible processes to meet real customer demand and ensuring that inventory will be at levels that will not be a risk to the business. Speed is the key; fast and accurate processes have been shown to improve customer service and reduce inventories and manufacturing assets.
Despite the fact that academics and consultants tend to see ‘lean’ and ‘agile’ as two competing philosophies we believe that both are essential for successful supply chain management. Our third maxim is ‘synchronise and integrate to eliminate waste’. In our experience lean management methods can cut waste and cost along the supply chain, streamlining flows and making operational performance a central focus. Companies that have applied this generally admit that there is still much more to play for; however they are in a strong position entering the downturn. Biffa Waste Services estimate that at least 500,000 tonnes per annum of food waste is generated and disposed of by food retailers in the UK. Some of this waste is unavoidable but much could be reduced through more efficient systems.
In addition to the retail waste there is also waste produced during the production and processing of food. The total supply chain opportunity is staggering and leads directly to our fourth maxim: ‘collaborate to leverage performance’. Companies cannot survive without their key suppliers and customers as well as their service providers. In the downturn there will be further aspects of their operations that they can no longer afford to control directly. Building and nurturing key relationships along the supply chain will help them give you more for less; whereas if you just negotiate on price you will miss out on benefits and they will leave you high and dry when times get tough. For many this will be a new skill and mindset. The future will be about co-operating and competing through shared supply chain capability.
Manufacturers must continue to ensure that their operations are delivering what their customers want. Our final maxim is therefore ‘build in customer service excellence’. Service excellence is often discussed as a marketing imperative, but seldom connected to the true cost of non-performance both in sales and recovery costs. Outstanding performance protects the customer base that you want to keep and avoids the costs to replace them when they leave, as well as making good your mistakes. Operational excellence led by supply chain design and planning is a critical capability.
Together, the application of these maxims will release cash from stock and assets, protect the profitable parts of the business and create the focus for future growth. Now is the time for food manufacturing companies to take a fresh look at their supply chains in order to survive the downturn and thrive when it is over.
Jeremy Hammant is a partner at LCP Consulting. LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience in the field, it identifies where supply chains make major contributions to how businesses operate profitably and compete effectively.
For further information, visit: www.lcpconsulting.com.
Consumers have responded to the recession by moving some of their spend to the discount retailers, such as Aldi and Lidl. The strength of this response can be seen in Aldi’s recent results in the UK, with sales up by a quarter over the past year. In addition, all of the grocery retailers are experiencing growth in own label products. The share of own label products has now reached over 40 per cent in some traditional grocery retailers, and over 90 per cent in discounters. Asda says that sales of its budget range of Smart Price baked beans, which retail for just 20p for a 420g tin, have grown by more than 50 per cent over the last year.
What are the implications of these developments for the food manufacturing companies and how should they respond? A key issue is that the majority of food manufacturers are producing both branded and retail own label products, often in the same factory and on the same production line. These manufacturers are now in an unenviable situation of facing pressures bearing down on them from both ends of their supply chains. At one end, the grocery retailers continue to exert pressure for ever-lower prices, whilst at the other end the pressure comes from the increasing cost of raw materials. In addition there is a growing need for manufacturers to invest in the environmental agenda and demonstrate their supply chain sustainability credentials.
For the majority of food manufacturers the focus over the last few years has been on growth; both organic and through mergers and acquisitions. The recent round of consolidation that has taken place among UK food manufacturers, such as Premier Foods takeover of RHM, has enabled manufacturers to realise cost savings through operational synergies. In addition it has enabled them to build sufficient scale to offer grocery multiples very competitive prices for both branded and own label products.
In order to fund their growth many companies have taken on high levels of debt. These companies are now facing mounting pressures to reduce working capital and release cash. We believe that how these organisations manage their supply chains will be a critical success factor in their survival and success in the next few years.
While supply chain thinking and ideas of best practice have developed and stabilised over the last 30 years, their application in most companies is still immature. The big idea behind supply chain management is that managing the interactions between the functions and entities in the chain for the benefit of the whole chain, rather than the individual company, will yield a dramatically better overall performance. This can take many forms, but typically organisations benefit from more free cash due to less inventory and assets, better trading margins and lower operating costs. There has never been a better time to implement this thinking across the food supply chain – and realise benefits for suppliers, manufacturers and retailers.
From our experience of working with some of the world’s leading food manufacturing companies we have identified ‘five supply chain maxims’ to ride the downturn and prosper in the recovery.
When times are good and businesses are buoyant investment invariably goes into activities such as new product launches and market development – product ranges expand and more customers are added. Sales revenue increases and if it comes at a slight dilution of overall margin then so be it. The situation is now very different, and our first maxim is ‘reduce unprofitable complexity’. It is crucial to truly understand how both customers and products erode margin. Our experience is that 15 per cent of either or both customers and products erode more than 50 per cent of the profit potential. Designing this group out or designing their profitability back in is a key step to connect the supply chain to the company’s financial performance. We also find that these unviable activities often detract from profitable activities as well as creating losses in their own right.
In the current climate, demand is likely to be unpredictable and volatile; companies must be able to respond to demand changes without having to resort to holding lots of inventory and capacity surpluses. Our second maxim is ‘design, plan and execute for agility’. Agility is about fast flexible processes to meet real customer demand and ensuring that inventory will be at levels that will not be a risk to the business. Speed is the key; fast and accurate processes have been shown to improve customer service and reduce inventories and manufacturing assets.
Despite the fact that academics and consultants tend to see ‘lean’ and ‘agile’ as two competing philosophies we believe that both are essential for successful supply chain management. Our third maxim is ‘synchronise and integrate to eliminate waste’. In our experience lean management methods can cut waste and cost along the supply chain, streamlining flows and making operational performance a central focus. Companies that have applied this generally admit that there is still much more to play for; however they are in a strong position entering the downturn. Biffa Waste Services estimate that at least 500,000 tonnes per annum of food waste is generated and disposed of by food retailers in the UK. Some of this waste is unavoidable but much could be reduced through more efficient systems.
In addition to the retail waste there is also waste produced during the production and processing of food. The total supply chain opportunity is staggering and leads directly to our fourth maxim: ‘collaborate to leverage performance’. Companies cannot survive without their key suppliers and customers as well as their service providers. In the downturn there will be further aspects of their operations that they can no longer afford to control directly. Building and nurturing key relationships along the supply chain will help them give you more for less; whereas if you just negotiate on price you will miss out on benefits and they will leave you high and dry when times get tough. For many this will be a new skill and mindset. The future will be about co-operating and competing through shared supply chain capability.
Manufacturers must continue to ensure that their operations are delivering what their customers want. Our final maxim is therefore ‘build in customer service excellence’. Service excellence is often discussed as a marketing imperative, but seldom connected to the true cost of non-performance both in sales and recovery costs. Outstanding performance protects the customer base that you want to keep and avoids the costs to replace them when they leave, as well as making good your mistakes. Operational excellence led by supply chain design and planning is a critical capability.
Together, the application of these maxims will release cash from stock and assets, protect the profitable parts of the business and create the focus for future growth. Now is the time for food manufacturing companies to take a fresh look at their supply chains in order to survive the downturn and thrive when it is over.
Jeremy Hammant is a partner at LCP Consulting. LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience in the field, it identifies where supply chains make major contributions to how businesses operate profitably and compete effectively.
For further information, visit: www.lcpconsulting.com.
