Dealing with Food Industry Pressures
Written By: Predrag Jakovljevic
Published On: November 2006
Dealing with Industry Pressures
Food and beverage is by far the largest industry in the world, but that doesn't mean that it is a straightforward "piece of cake" for most food and beverage manufacturers and distributors to capture a bigger "slice of the pie." With the growing power of mega-retailers, along with fragmented markets; intricate supply chains; increasing government regulations; variable raw materials; seasonality; package proliferation; and limited shelf life, manufacturers and distributors certainly have many challenges on their plate, and even industry giants cannot afford to sit back. Given this backdrop, how can the small-to-medium food manufacturer cope in the face of the same external pressures, with comparatively fewer resources?
Part Five of the series Food and Beverage "Delights."
Earlier notes on the food and beverage industry have examined the major issues and resulting pressures on food and beverage manufacturers today, and analyzed what these pressures mean to them (and in some cases looked at the actions that could alleviate the conundrum):
We'll turn now to the strategies and accompanying systems that can help meet these challenges.
Large and midsized manufacturers with very strong brands can typically push their way in to gain a share of the channel master's business. Midsized manufacturers with weaker brands have a larger challenge in gaining the channel master's business, and smaller manufacturers with weak brands or no brands must rely on smaller retailers and private labels. In all cases, the food and beverage manufacturer must compete on many fronts. A major competitive tool is the development of internal operations based upon strong systems, since reducing costs and improving customer service demands operational excellence. In addition, in today's world, that means having systems in place that increase abilities, not hamper them.
Integrated Product Development
Shifting consumer demands dictate that food manufacturers must quickly develop products to meet these demands. Retailers and consumers will not wait, opting instead to switch to products and manufacturers that meet their needs. The fact that consumers and retailers do not wait means that time to market is a key to success. Reducing time to market requires that trends be identified quickly, and (perhaps more importantly) that the time be as short as possible between the decision to develop a new product and the point at which it hits the shelf. Anyone involved in the food industry well knows that most new products fail: of all new products proposed, only 2 percent make their way to the marketplace. And of these, 50 percent do not succeed, which means that the risk is high.
To meet the demands of consumers and retailers for new products, the food manufacturer must invest in new product development and introduction (NPDI) processes. Consumer and retailer demand are not constant, and today's product line will not meet the demands of tomorrow's market. While investment in new product development is required, the food and beverage manufacturer must work harder to leverage these investments into the right product, towards getting to market at the right time. To meet these demands, it is mandatory that systems be in place to allow both development and commercialization of new products. Such systems should let companies move from a formula-by-formula model to one that leverages global product platforms, whereby common components can be used, and processes can easily be specialized with scenting, coloring, labeling, or packaging to suit a local market or customer. This approach should ensure consistency and brand integrity, no matter how many new products the food producer needs to meet changing requirements.
Enterprise applications play a major role in new product introduction. A midsized manufacturer reports that the time between producing an acceptable test batch and reaching full production was thirty to forty-five days. The delay resulted from the difficulties involved in gathering all the necessary information, securing appropriate in-house approvals, and establishing the required database (bills of materials [BOMs], formulas, routing, quality, etc.). The combination of workflow systems common to most enterprise resource planning (ERP) systems, and the improved ease of use of current systems can cut that delay and reduce overall time to market. Using an astute product lifecycle management (PLM) solution, user companies can begin building their product platforms through requirements-based intelligent searches for approved vendors of compliant materials and certified equipment, which should help to minimize time to market. Throughout the development process, food companies can ensure that their efforts are on the right track by using advanced modeling and optimization tools that integrate information about best practices, laboratory inspection management systems (LIMS), assay results, and regulatory requirements (see Preparing for Product Development in Process Manufacturing).
Will a new product be good for both the market and the manufacturer? One key to this question is setting the right price—one that the consumer sees as good value, and that the manufacturer sees as having the right margin. Deciding on a price that provides an acceptable margin should be easy, but too many midsized food manufacturers lack the cost information to make informed decisions. Quality costing information means the ability to make the right pricing decision for new products, and the ability to maintain margins on existing products. This often has to include the more comprehensive capabilities needed to support a broad range of requirements in price management, promotional spending, deal discounting, and rebates. The solution thus has to address the food manufacturers' needs, whether they are dealing with large companies using volumes to negotiate better pricing, or with smaller companies that have banded together to increase their leverage through cooperatives. Manufacturers often have to be able to adjust pricing, promotional spending, and discounting limits, and monitor results based on many factors, including product line, customer, territory, sales manager, salesperson, distributor, and broker to optimize the value realized from each sale.
In any case, the system has to provide uninterrupted visibility across purchasing, inventory management, manufacturing, and sales to support comprehensive cost and profit analysis. To that end, support for actual costing exposes all material and operational costs, whereas with co-product and by-product tracking, companies should be able to account for all downstream costs, and link benefits back to primary products. Costing functionality usually has to be deep enough to extrapolate pricing per unit based on raw materials cost, whereas some solutions also automatically track repetitive shipments, so that the distributors always get the volume discounts and promotional rebates they deserve. Additionally, many manufacturers have to link all costs from trade promotions and channel incentives back to finished goods, to accurately determine the actual profit on each product sold.
As mentioned before, food safety is an absolute requirement, since having control over what we eat is a constant concern, and food nutritionists, scientists, and environmentalists watch over the food industry for health and safety reasons. Core to most regulations is tracking and tracing. Being able to track product "from farm to fork," or in a "one up and one down" fashion combines the collection of appropriate information, the organization of that information, and the retrieval of information as required. Batch control of food products—from planting and growing, through food preparation and storage, to stocking on the supermarket shelf or at the food services outlet—is an industry requirement, and information technology (IT) is the only practical way to track food products all along the supply chain.
Regulatory compliance costs money, as it includes initial investments in systems, devices, training, etc. Perhaps more important is the ongoing cost of people and the loss of productivity. However, non-compliance can be even more costly. The question is, how much risk is a company willing to take? Non-compliance can lead to fines, shutdowns, loss of market share, or even the end of the company. For most, these risks are overwhelming, and compliance with regulations is mandatory and non-negotiable. Regulations apply to all companies without regard to size. Thus, small and medium companies have the same requirements as large companies, but with significantly fewer resources with which to address them. Regulations demand the collection, organization, and retrieval of information. For all but the simplest food companies, a manual approach to compliance is difficult, if not impossible. Examples of simple food companies include a manufacturer with a very limited product line, few ingredients, a simple process, and few customers. The vast majority of food manufacturers do not fit into this definition.
Most companies must therefore rely on computerized systems to meet regulations at a practical cost. Computerized systems can assist in collecting the information required, do an outstanding job of organizing data, and produce the information required in a timely and organized fashion. At the heart of compliance should be a company's ERP system as a comprehensive solution that helps it monitor, track, and control critical internal and external activities. All standard processes should be documented this way, and all operations and results tracked and logged to support the company's detailed reporting requirements. Capabilities in the areas of end-to-end traceability, specification management, and change management provide the control and predictability needed to detect and address exceptions early in the process: when potential issues are identified, the food producer can thus quickly determine the underlying cause and make the necessary corrections.
Many manufacturing companies still operate manual paper-based traceability systems where data is handwritten onto batch sheets, but there is growing concern around such systems from supermarkets, fast food outlets, and consumers. The process of analyzing such data quickly and efficiently typically turns into a nightmare, especially if there is a need to go back several years, as in a case of some food scare-induced product traceability and recall. Companies need systems that can provide comprehensive traceability information at the touch of a button—a full paperless audit trail of raw material traceability by lot and batch number.
In order to reduce the potential causes of a recall, minimize the scope of a recall should it occur, and manage the recall to a rapid conclusion, quality control and specification matching must help the manufacturer and distributor immediately identify and act on variations from specifications. Further, bidirectional lot tracing must help them quickly link every step in the supply chain for every ingredient, and determine the current location of ingredients, products, co-products, and by-products. The lot tracing must also give all participants the ability to rapidly facilitate the recall process should it be necessary, and to thoroughly document the final disposition of all recalled products.
In other words, complete reporting on lot lineage, showing all usage of lots from vendor to manufacturing to end consumer, is a must-have. The system should also provide the ability to query sales orders; see all raw material and finished good lots used for specific shipment; evaluate lots from vendors or manufacturing to see all the end users who received shipments; and track lot properties with allowable "criteria" for each lot.
There are other functionalities that support food manufacturing audits and quality assurance concerns without being a direct response to bioterrorism regulation compliance. Those functionalities include automatic quality assurance (QA) of incoming products; various product grades with or without usage or holds; tracking of original country for raw materials; and so on. Additionally, attribute tracking should enable monitoring of unlimited product attributes uniquely for each batch or lot, and proactively ensure that delivered products meet individual customer expectations. While the need for food safety is absolute, compliance must be affordable and effective. When evaluating compliance options, food companies must consider approaches and suppliers based upon the practicality of the solution, the ability of the solution to work in the environment, and the affordability of the initial and ongoing costs.
About the Authors
Predrag Jakovljevic is a principal analyst with Technology Evaluation Centers (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP and related applications, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade (Serbia [the former Yugoslavia]), and has also been certified in production and inventory management (CPIM) and integrated resources management (CIRM) by APICS.
Olin Thompson is Lawson's vice-president of industry strategy. He has over twenty-five years of experience as an executive in the software industry, and has been called the "father of process ERP." Thompson is a frequent author and award-winning speaker on such topics as gaining value from ERP, supply chain planning (SCP), e-commerce, and the impact of technology on industry. He can be reached at firstname.lastname@example.org.