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Food and Beverage "Delights"

Written By: Predrag Jakovljevic
Published On: October 30 2006

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Background

We all have to eat and drink—food and beverages not only sustain us, but also delight us, and we devote much of our time to their selection, preparation, and consumption. The food we eat comes from an industry that, in the US, is a $700 billion (USD) industry, or one sixth of the total industry output. In the European Union (EU), food and beverage expenditures average about 13 percent of household consumption. A major portion of the global economy involves harvesting, processing, storing, and distributing food and drinks, ensuring a plentiful supply at supermarkets, restaurants, and other food outlets.

Part One of the series Food and Beverage "Delights."

It takes a highly sophisticated global food producing and distribution industry to provide the variety and choice we expect. Succeeding is certainly not easy, owing to fickle consumers, powerful retailers, increasing regulations, globalization, complex management for pricing and trade promotions, and more. Furthermore, margins are razor-thin, the competition is furious, consistent product quality is anything but a given, and innovation is an absolute requirement. Enterprise application software is a key tool for the industry; however, while there are many vendors currently interested in seriously contesting, only a handful provide what the industry truly needs.

Still, food producers and distributors have used information technology (IT) to help them handle customer demands and the rapid increase in business volumes. Their experiences and business process improvements have even set new standards that other supply channels have been quick to adopt for achieving the same business benefits. Food companies and enterprise applications vendors have to continue to work together to improve the efficiency of food processing, storage, and distribution operations, so that food products can be harvested, stored, and moved to the dinner table more quickly and at a lesser cost.

Defining the Industry

The first reality of the food and beverage industry is the fact that no single-faceted food and beverage industry exists, since one can talk about general groceries and related products, packaged frozen foods, dairy products, poultry and poultry products, confectionery, fish and seafood, meat and meat products, fresh fruit and vegetables, grains and field beans, etc. Indeed, what we call the food and beverage industry is really a series of industries or categories, each with both common features (across the board) and unique characteristics (see figure).

For example, the supply chain requirements for a fish processor are very different from those of a company that makes dry cereal or scotch whiskies (see Must-have Requirements for the Whisky Industry). In the food industry, these different types of companies, defined by their products, are called categories. For more examples of categories, one can always go to the local grocery store or a large supermarket and look at the signs (categories) above the aisles.

It is also true that food and beverage companies have a wide variety of channels between their plants and the ultimate consumer. Broadly defined, three markets exist for food manufacturers:

  • The food service market consists of those locations where food is consumed outside the home: restaurants, cafeterias, vending machines, etc.
  • The retail market consists of the food purchased at retailers for consumption at home—for example, supermarkets, convenience stores, etc.
  • The ingredient market consists of ingredients provided to other food and beverage companies.

In North America, people nowadays eat approximately half of their food away from home, while the remainder is eaten at home.

Market Differences

The retail, food service, and ingredient markets logically call for different products, either in terms of the product itself (as in peanut butter versus whole peanuts) or the packaging (with an eight-ounce jar for retail, a five-pound plastic bottle for food service, and a fifty-pound box for ingredient customers). The relationships between buyer and seller also vary by channel. Large buyers deal directly with most manufacturers, whereas food distributors often play a role in the channel when volumes do not dictate a direct relationship. Most food manufacturers use food brokers as outsourced sales representatives. The truck or railcar load to customer distribution centers delivers some products, while some products (including dairy, soft drinks, salty snacks, and bakery) are delivered directly to retail customers and some operators.

Fast-moving products, some of which have an extremely short shelf life, characterize the food and beverage supply chain. Frequently, there is only one day between the manufacture of a product and its best-sold-by date, so that order accuracy and rapid fulfillment are critical. Warehouse management systems (WMS) are critical to improving product throughput, minimizing inventory, reducing operating cost, and minimizing product damage (a $1.5 billion [USD] cost in the US, according to the Grocery Manufacturers of America [GMA]).

The shorter the shelf life of products, the more critical warehouse management and aging handling functions become. For example, fresh fish lose 50 percent of their market value every day. Not only do food and beverage companies face intense competition and extremely tight margins in the manufacture and distribution of their products, but they also face unique inventory control challenges such as managing stock rotation according to expiration dates, as well as monitoring temperature levels, which can strain already tight budgets. A major health food retailer recently had to devise a web-based application that monitors items near expiry and pushes them out to the stores before they are out of date, and therefore perished or simply no longer saleable.

Food and beverage companies may operate one, two, or three parallel supply chains. Namely, products can be defined as dry (no refrigeration required), chilled (refrigerated but not frozen), or frozen, and each type requires different warehouse conditions and transportation equipment. For example, since a large portion of the food industry is dedicated to storing and packaging frozen food products, there are many warehouse management issues associated with cold storage. Grower cooperatives plant a variety of vegetables from spinach, carrots, peas, beans, and cauliflower, to sprouts and celery.

In a typical northern hemisphere setting, the harvest begins in May, and the last vegetables are brought in towards the end of December. The produce is delivered to a freezing unit, where it is quick-frozen to around 20C and stored in bulk containers in the cold store. Over a twelve-month period, the frozen vegetables are prepared, processed, and consumer-packaged. They are then re-stored or shipped to customer distribution centers or public warehouses specializing in chilled and frozen product distribution. According to IBS, a European enterprise resource planning (ERP) and supply chain management (SCM) provider, computer-controlled packaging lines and warehouse automation can improve efficiency and space utilization by as much as 40 percent, with considerable production and distribution cost savings.

Warehouses in the food industry are typically high product throughput, labor intensive, and multi-temperature environments. As for this last point, radio frequency (RF) technology may not always be the best solution for sub-zero temperature environments, as RF devices can suffer from rapid battery depletion, and the heavy gloves that need to be worn may slow the way hand-held or wrist-mounted RF devices are used, or even lead to mistakes. A more practical long-term solution in such an environment, albeit with a more expensive initial investment, is a voice-directed operation using voice recognition (VR) technology. Manhattan Associates, the WMS leader, reports that the productivity improvements derived from the VR technology over traditional RF-driven solutions, in any environment—temperature-controlled or not—can typically be 20 to 30 percent higher.

Food and beverage is one of a few process-manufacturing industries that differ from many discrete industry counterparts. Process manufacturing idiosyncrasies stem from both material-oriented requirements (such as integrated quality management, potency management, shelf life controls, pallet and packaging management, and item-level units of measure [UOM] control and conversions) and production-oriented requirements (such as bi-products, co-products, alternative materials, catalysts, and waste products management; recycles handling; process and product yield; scheduling to the minute, or sequencing; rate-based material call-off; flexible material backflushing; and lot traceability, including work in progress [WIP] traceability on a single manufacturing order). For more information on typical process manufacturing requirements, see Process Manufacturing: Industry-specific Requirements, Process Manufacturing Software: A Primer and What Makes Process Process?.

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 olin.thompson@us.lawson.com.

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