Strategic Application of SCM in Food Companies: Current Experience and Future Opportunities

Tom Rathje, Research and Development, Danbred North America, Lincoln, NE 68588-0491
Gyu C. Kim, Department of OMIS, COB, Northern Illinois University, DeKalb, IL 60115
I. Introduction.
Firms develop strategy at various levels including Enterprise,
Interorganizational, Corporate, Business Unit and
Functional/Operational (Digman, 2002). Current thinking
suggests that competition within some industries is increasingly
between value systems versus individual firms (Lambert et al.,
1998). This evolution partially shifts supply chain strategies
from the interorganizational to the business-unit level. No
longer is it optimal to focus only on efficiencies within internal
operations but the firm must now consider the level of efficiency
attained by the entire value system. This level of virtual
integration can be expected to increase as firms seek new levels
of competitive advantage. More importantly, virtual integration
will impact the allocation of resources among various members
of the value system.
II. Generic Supply Chain Strategies.
The traditional model of a supply chain was described as linear
wherein products moved linearly in one direction and
information moves linearly in the opposite direction. Two types
of technology have become available which have and will
continue to support revolutionary changes in supply chain
strategies: the internet and computing power (Rosenbaum,
2001). The linear model, described above, can be transformed
into an interconnected network wherein each participant is
apprised real-time of customer demand and develops an
understanding of how that demand impacts their part of the
value chain. Advances in computing power are also important to
developing efficient supplier networks. Computing power also
supports decision support analysis to be deployed across the
system. The formation of a networked, integrated supply chain
supports numerous strategy initiatives within the modern firm.
In particular, many firms state that enhancing shareholder wealth
is a core value of the firm. Corporate and operational strategies
surrounding supply chains can make significant contributions to
this goal (Rosenbaum, 2001), including:

Reducing the working capital demand by replacing

inventory with information, improving the flow of cash and,
reducing the inventory of supplies for manufacture.
Enhancing revenue through more effective customer
segmentation, delivering the right product at the right time,
networked product development, dynamic pricing and more
efficient handling of customer service.
Cost reduction can be achieved through improved processes
such as the support of lean manufacturing concepts (e.g.
J.I.T.), creation of the adaptive organization (versus
reactionary), and optimization of all logistics costs
associated with an order.
Enhanced fixed capital efficiencies mainly through more
effective use of available capacity, chain modeling to
discover optimum relationships amongst participants and
effective outsourcing.

III. The Current State of Supply Chain Management in Food

Systems.
The current state of application of supply chain management
strategies within the general food industry is widely varied
between highly sophisticated and virtually non-existent. An
example of a sophisticated system is that operated by
Independent Purchasing Cooperative, owned by independent
Subway sandwich shop franchisees, which, along with suppliers
and distributors to the cooperative, invested in the development
of an extranet supply chain management system to better handle
$1.8 billion in purchases for Subway stores nationwide (Corbin,
2000). The extranet supports the integration of computer
systems among manufacturers, distributors and ultimately
Subway stores. The expected savings from the system was in
the range of 2-3% of the overall cost of ingredients. The first
phase of the plan will permit tracking of orders from
manufacturers and suppliers to distributors. The system will
permit price and performance comparison among distributors
and manufacturers, monitor contract compliance among
members of the supply chain and lend support to food safety
initiatives. Any product not meeting safety or quality standards
can be removed from the supply chain at any time. The above
example is represents a general trend in the food industry toward
efficient customer response systems (Kurt Salmon Associates,
1993). Efficient Customer Response (ECR) is driven from the
ultimate consumer backward through the supply chain enabling
retailers to more efficiently meet the needs of consumers, keep
costs competitive and insure quality. ECR itself is a generic
strategy to leverage information that results in better service to
customers. ECR has as its key objectives:

Efficient Store Assortments: Optimize the productivity of

inventories and store space at the consumer interface.
Efficient Replenishment: Optimize time and cost in the
replenishment system.
Efficient Promotion: Maximize the total system efficiency
of trade and consumer promotion.
Efficient Product Introductions: Maximize the
effectiveness of new product development and introduction
activities

ECR is somewhat unique to the foods industry as its

development was at the consumer end of the value system prior
to any developments further upstream in the food value system.
One of the explanations for this development is consolidation
within the retail sector and the market power garnered by large
food service companies such as Subway, McDonalds and others
(William Reed Group, 2000). As of 2000, 34% of the food
market was controlled by the top four grocery store chains.
Increasing market power of retailers allows them to place more
demands upon processors and food manufacturers. These
demands include delivery of product within a specified time
period, loading of pallets to specifications set by the retailer,

packaging and labeling requirements, product specifications, etc.

(Anonymous, Food Manufacturer, 2002). In addition to
consolidation, retailers, being closest to consumers, have the
advantage of market data and thus the power to make decisions
for entire value chain (William Reed Group, 2000). The
increasing pressure upon manufacturers and distributors results
in manufacturers focusing on the operational strategies of
flexibility, efficiency, cost-effectiveness and asset management.
Manufacturers must remain flexible to respond to shifting
consumer demands and build in efficiencies in order to compete
on cost. Asset management becomes important due to the high
failure rate of new products and shifting demand of consumers
and retailers. Large investments in fixed assets are risky for new
products that may fail, resulting more leasing arrangements until
a product is established in the market. Gill (1996) explores ECR
further describing ECR as the key driver forcing food
manufacturers to undergo large restructuring efforts in an
attempt to meet the demands of customers (i.e. retailers). Food
manufacturers have, and in many cases still do, operate under a
decades old business model of purchasing commodities,
producing in excess, storing product and waiting for orders to
roll in. ECR requires manufacturers to be responsive to
customer demands for unique packaging and shipping
arrangements along with the flexibility to manufacture in
exacting quantities a more diverse array of specialized products.
ECR has the benefit for adaptive manufacturers of reducing the
cost for commodities and warehouse space because these
elements are replaced with customer information. At the front
end, food manufacturers need to establish links between their
internal distribution, warehouse, logistics, and manufacturing
systems with the purchasing and ordering systems of their
distribution and retail customers. At the back end, the companies
need to integrate their own inventory and ordering systems with
the ordering and purchasing systems of their suppliers, those
companies that make and market the packaging and basic
commodities that go into processed foods. Rosenbaum (2001)
describes unique challenges to retail industries wanting to adapt
supply chain strategies, many of which are reflective of the
experience of food manufacturers. Retailing involves a great
deal of promotional activity that acts to distort consumer demand
and send invalid signals to the supply chain. The distortion of
market demand forces collaborative decision making and
information sharing so that suppliers can truly understand
consumer demand. Heinz chose IBMs Continuous
Replenishment System to manage daily inventory for its
customers and manufacturing plants. This example
demonstrates the use of off-the-shelf software to gain
information about real market demand. As of the date of the
article, 35% of the product movement between Heinz and
retailers is handled through the automated system. The above
examples and discussion demonstrate the general trend within
the food industry of using Efficient Customer Response (ECR)
as the driving force for investment in supply chain management.
Driven from grocers and wholesalers, such systems largely focus
on application of widely applied supply chain strategies such as
reductions in inventory, customization of shipping and product
labeling, use of electronic data interchange to automate ordering
and communication of demand and promotion of joint decision
making to insure an available supply of required goods. The

interest of the industry in these applications is borne out by

examples of the supply chain management tools available to the
industry. A search of available software and consulting products
for food industry supply chain management supports the
conclusion above. Advanced Food Systems markets
FoodDISTRIBUTE, as software package geared toward
supporting processing, distribution and financial management
needs of food manufacturers (www.afsi.com/software.shtml).
Specifically, this system supports business to business customer
management, inventory optimization and activity based
accounting. Agribuys, another software firm, produces software
focusing on automation of order processing, delivery tracking
and logistics for perishable food products
(www.agribuys.com/Agribuys10_en_US/prod_modules.html).
Parity Corporation offers a similar product to Agribuys call
ParityPro designed to integrate sales, distribution, and
purchasing, manufacturing and financial information for food
companies (paritycorp.com). Integrated Distribution Solutions,
located in Omaha, NE, provide a similar line of software
products aimed at demand planning and product distribution
(www.ids-world.com). Focusing more specifically on animal
based products, Aspen Systems, Inc. delivers a more complete
package that includes not only financial and distribution
modules but also targets process management and labor,
warehouse automation, sales and slaughter management (aspensystems.com/product/index.html). The slaughter management
module handles grower payments, product yields, market pricing
and livestock reconciliation. Another animal product-focused
company, Data Specialists, Inc., produces a software package
aimed at the dairy products industry citing the ability to manage
raw material composition and process formulation, the ability to
value production based upon dairy markets and movement of
production to a particular order or customer
(dataspecialists.com). A review of the current state of supply
chain management in the food industry reveals strong trends
rooted in Efficient Consumer Response (ECR) applications by
powerful retail firms. Consolidation among retailers has
concentrated power in those firms closest to the consumer.
Consequently, supply chain strategies have focused on cost
leadership through reducing inventory costs for retailers along
with transaction and distribution costs. Consulting and software
companies have focused on the consumer end of the food value
chain, providing supporting technologies to meet the needs of
retailers and concurrently, the demand placed upon food
manufacturers by retailers. A very distinct void is the virtually
non-existent application of supply chain strategies further
upstream from food manufacturing companies.
IV. Opportunities for Future Application of Supply Chain
Strategies.
The very nature of food production, rooted in biology and large
numbers of relatively small manufacturers, creates unique
challenges for application of supply chain management. In its
simplest form, effective supply chains supply information about
consumer demand to all parts of the value chain. This
communication is notably lacking for producers of agricultural
products. Because of the fragmented nature of these suppliers, it
is challenging to involve producers in integrated networks that

communicate required levels of product dictated by consumer

demand. Buhr (2000) discussed these challenges. Buhr states
that the advent of the virtual supply chain supported by
integrated computer networks attaches all members of the value
chain to the consumer in way that could never before be
accomplished through the linear, physical relationships the
existed prior to the advent of internet technology. It can be
argued that the recent trends of contracting supply have been
utilized by purchasers of commodities to improve
communication and quality among producers and growers.
However, application of networked supply chains to the
producer level will support new and innovative differentiation
strategies at the farm level. Previously undifferentiated products
can be source verified and non-measurable characteristics such
as non-GMO, free-range and organically grown and be
validated through the use of information technology. Networked
supply chains permit producers of commodities to leverage their
products further into the food value chain if they can clearly
demonstrate a differentiated product with quality and price
attributes appealing to consumers. Buhr (2000) notes that
information technology can have a large impact upon market
power relationships dictated largely by who controls the
information. The current perception, supported by the literature
review presented earlier, is that in food value chains, market
power is concentrated in the hands of retailers, closest to the
consumer. Market power diminishes as one moves upstream in
the food value chain with commodity producers having the least
market power. Information and internet technology provides
commodity producers with a unique opportunity to pursue
differentiation strategies in order to compete more effectively for
the rewards to value added along the food supply chain.
Choosing carefully which supply chains to participate in dictates
access to key consumer information that can be leveraged to
improve the value added, and payment received, for a
differentiated food product. Another consideration is the simple
matching of demand and supply in food systems. Biological
systems create unique challenges. Particularly noteworthy is the
time lag between the initiation of the production process and
availability of raw product. Grains require a complete growing
season of 4-5 months. Livestock require longer periods (ten
months in pork production, beef production requires 1 year).
Meats and produce have the unique problem of being sold fresh
meaning that after a relatively extended production period, their
storability in fresh form is quite limited. Therefore, the concept
of just-in-time takes on a new dimension in that demand must be
forecasted much farther in advance than with non-biological
products. Currently, the commodity markets serve to
communicate supply and demand in the food industry. This may
be an effective and perhaps, pure competition market, but it
inherently increases the risk associated with producing food. A
better communication mechanism would reduce the level of
uncertainty in demand and permit producers to more closely
match supply with demand. Networked supply chains utilizing
internet technology may provide the mechanism necessary to
replace the commodity markets as the primary method of
communicating demand. Natural biological variation also
impacts the available supply. In livestock, animal disease,
mating success, weather and other natural phenomena create
unpredictability in supply. Similar factors affect the availability

of produce and grains. The uncertainty created by this unique

aspect of food production must be addressed during the
application of supply chain management concepts to producers
and growers. Biological variation also produces tremendous
opportunity for differentiation. Variation among genetic lines for
meat, produce and grains results in products differentiated by
superior taste and eating quality. Production systems and
practices themselves can support differentiation strategies. For
example, consumers are increasingly interested in animal
welfare and organically produced food products. Therefore,
production systems utilizing free-range production practices,
for pork fed organically produced grain that is source verified, is
a differentiation opportunity that can be leveraged to enhance the
value of pork products. Weiss and Fagan (2001) reviewed the
application of Burlington Northerns Coal Forecasting Tool.
This tool provides an example of how production of a
commodity can be better matched to demand. Using this tool,
Burlington Northern was able to alleviate bottlenecks at coal
mines by linking the production capacity of mines with demand
dictated by utilities. By communicating the information
available to the value chain, but formerly unshared with
participants, Burlington Northern was able to better stage trains
for loading at the mines and ship product in a more timely
manner to meet demand by utilities. Extending the railroad
example to food producers, one can begin to envision how the
key concept of demand for food items can be better
communicated to growers such that supply is matched closely
with expected demand. Such a system would support more
efficient use of natural resources and reduce the cost associated
with over and under supply of raw materials.
V. Conclusions and Implications.
This paper reviewed the general concepts of supply chain
management (SCM) and how SCM supports a variety of
interorganizational and business level strategies, particularly cost
leadership and differentiation. In particular, this review focused
upon the application of SCM in the food industry. Market power
in the food industry is currently concentrated at the retail end of
the value chain. Consequently, most application of SCM
concepts has focused upon reducing inventory and transaction
costs for retailers. This has resulted in food manufacturers
having to remain more flexible and having to increase their
ability to customize products for retailers. Notably lacking is the
application of SCM beyond food manufactures to producers and
growers of raw materials (i.e. producers of agricultural
commodities and produce). It is argued that application of SCM
at the level of the grower will improve the overall efficiency and
profitability of the food value chain be reducing the uncertainty
created by the commodity markets. This will be accomplished
using integrated networks that tie growers and producers into the
food value chain. Furthermore, the use of integrated networks
and information creates differentiation opportunities for
producers of commodities resulting in the potential to better
position themselves to capture value in the supply chain.
VI. Bibliography: Available upon request.