Remember that classic fairy tale Goldilocks and the Three Bears? In the story, Goldilocks wanders into the Bear family’s house in search of food that was not too hot and not too cold and a bed that was not too hard and not too soft. It was all about getting things just right, which is a perfect analogy for supply chain professionals who must manage fresh produce inventory levels.
Achieving the optimal Goldilocks level of inventory requires you to strike a balance between supply and demand. In this fairy tale supply chain, there is just enough inventory to satisfy demand with no extra product and no waste. Every customer gets the quantity and grade of product desired.
In real-life fresh produce supply chains, supply shortages and overages occur frequently. When there’s a shortage of supply, you can’t meet demand at a reasonable cost and may lose customers. When there’s a supply overage, you can’t sell product at a reasonable profit and face the risk of spoilage. Either situation leaves someone unhappy.
Given the financial implications of supply-demand imbalances, it is imperative to understand why imbalances occur and what you can do about them. It is not an easy task because fresh produce supply and demand levels are dynamic. You need both proactive and responsive strategies to get those inventories just right.
Why Imbalances Occur
Balancing supply and demand is difficult in any industry. Supply chain risks such as late deliveries and defective products are a reality. External demand influencing factors, including economic conditions and employment rates, fluctuate over time. And, demand patterns are not always stable. Collectively, these issues make it challenging to forecast and meet customers’ inventory requirements.
Unlike a factory that can quickly adjust production line speed to match demand with consistently high quality output, it is not easy to synchronize produce and changing customer requirements. Lead times to grow, harvest, and deliver vary in length and by commodity. Yields are not guaranteed and product quality is tied to growing conditions. Collectively, these issues make it difficult for suppliers to know how much inventory will be available to fulfill demand.
Forecasting Supply
Predicting and producing supply is not an exact science; what is good for increasing the supply of one crop may be detrimental to another, notes Ryan Fernandez, supply chain director for Sun Rich Fresh Foods, a processor and importer in Brampton, Ontario. “We grow many products very close to each other but they react in different ways,” Fernandez notes. “A random day of freeze can be really good for some crops but damaging for others. The rains in California made many growers happy, but the grape growers have to worry about mold.”
Understanding downstream demand isn’t much easier. Seasonal demand is a challenge, especially for commodities with highly concentrated consumption.
Remember that classic fairy tale Goldilocks and the Three Bears? In the story, Goldilocks wanders into the Bear family’s house in search of food that was not too hot and not too cold and a bed that was not too hard and not too soft. It was all about getting things just right, which is a perfect analogy for supply chain professionals who must manage fresh produce inventory levels.
Achieving the optimal Goldilocks level of inventory requires you to strike a balance between supply and demand. In this fairy tale supply chain, there is just enough inventory to satisfy demand with no extra product and no waste. Every customer gets the quantity and grade of product desired.
In real-life fresh produce supply chains, supply shortages and overages occur frequently. When there’s a shortage of supply, you can’t meet demand at a reasonable cost and may lose customers. When there’s a supply overage, you can’t sell product at a reasonable profit and face the risk of spoilage. Either situation leaves someone unhappy.
Given the financial implications of supply-demand imbalances, it is imperative to understand why imbalances occur and what you can do about them. It is not an easy task because fresh produce supply and demand levels are dynamic. You need both proactive and responsive strategies to get those inventories just right.
Why Imbalances Occur
Balancing supply and demand is difficult in any industry. Supply chain risks such as late deliveries and defective products are a reality. External demand influencing factors, including economic conditions and employment rates, fluctuate over time. And, demand patterns are not always stable. Collectively, these issues make it challenging to forecast and meet customers’ inventory requirements.
Unlike a factory that can quickly adjust production line speed to match demand with consistently high quality output, it is not easy to synchronize produce and changing customer requirements. Lead times to grow, harvest, and deliver vary in length and by commodity. Yields are not guaranteed and product quality is tied to growing conditions. Collectively, these issues make it difficult for suppliers to know how much inventory will be available to fulfill demand.
Forecasting Supply
Predicting and producing supply is not an exact science; what is good for increasing the supply of one crop may be detrimental to another, notes Ryan Fernandez, supply chain director for Sun Rich Fresh Foods, a processor and importer in Brampton, Ontario. “We grow many products very close to each other but they react in different ways,” Fernandez notes. “A random day of freeze can be really good for some crops but damaging for others. The rains in California made many growers happy, but the grape growers have to worry about mold.”
Understanding downstream demand isn’t much easier. Seasonal demand is a challenge, especially for commodities with highly concentrated consumption.
In addition, consumers can be fickle: fresh produce purchasing patterns can change quickly based on culinary trends or the introduction of a new diet. And, retailers instigate short-term demand spikes with promotional activities. If the upstream suppliers are not given advance notification of the promotional plan, they may not have sufficient product to meet demand. balancing inventory
The inability to understand and serve customer demand is the worst-case scenario, according to Joe Watson, vice president of domestic business development for the Produce Marketing Association and a 32-year grocery professional with Rouses Markets, a chain with stores in Louisiana, Alabama, and Mississippi.
“When you don’t have enough inventory, you lose sales you can never get back,” Watson states. “It’s even worse if it’s an item that’s on promotion, because you’ve got customers looking for that product. Now you can’t meet their needs.”
Excess inventory is also problematic. Both Fernandez and Watson cite the “cost implications of expiring unsold produce. Being slightly understocked can reduce that shrink, notes Dr. Glenn Richey, Eminent Scholar of Supply Chain Management at Auburn University.
Avoiding overstock scenarios also reduces inventory carrying costs and minimizes the opportunity costs for other products that could have used that field, warehouse, and transportation capacity.
Although supply-demand balancing and forecasting will never be perfect, produce professionals continue to pursue improvement by understanding the challenges and adopting supply chain strategies to minimize inventory overage or shortage risks.
Proactive Strategies
The best way to avoid supply-demand imbalances is to practice risk avoidance. Produce companies should first identify their high frequency and preventable inventory overage or shortage risks. Then, logical supply chain strategies should be initiated to prevent the risk from occurring in the first place. The latter, of course, is easier said than done.
A straightforward strategy involves cross-chain collaboration. Many problems can be avoided with ongoing communication between trading partners. Information about anticipated crop yields, product availability, and promotional activities should be shared and discussed. The more insight suppliers and buyers generate about these issues, the better.
“The key for partners is to communicate openly,” suggests Dr. Richey. “Be transparent about your needs and expectations. Develop joint forecasts that combine both economic trends and a bit of managerial intuition concerning the customer’s requirements.”
“There has to be transparency and retailers need to have great partnerships with their suppliers,” adds Watson. “Information sharing creates a clear understanding of volume requirements. When supplies get tight, you have a better chance of being covered with the product you need.”
Fundamentals of Inventory Management
Another valuable strategy is to proactively manage inventory. Visibility of on-hand levels at each node in the supply chain, traceability on what is moving between facilities, and information on harvest plans can provide an accurate chainwide picture of inventory levels. The short shelf life of many produce commodities also makes inventory management essential.
“Probably 80 percent of my team’s time is spent trying to make sure they have the right amount of inventory, both locally in our facilities and in transit,” says Sun Rich’s Fernandez. “We buy a lot of product from overseas, so you must have enough in-transit inventory that arrives in time to supplement on-hand inventory.”
Ranking and Categorizing
Segmentation is another key strategy. Prioritizing your key commodities, suppliers, and customers based on their financial impact will help you allocate time and resources appropriately. For example, if 80 percent of your profitability comes from 20 percent of your customers, then they should be the focus of your forecasting, inventory management, and product allocation activities. Such efforts will naturally drive collaborative partnerships and will ensure that you can procure important products when in short supply.
“Customers should work with suppliers to categorize produce items with an ‘A’ to ‘D’ coding,” asserts Dr. Richey. “Watch the high demand ‘A’ items closely and keep suppliers in the loop about real-time changes in demand. Develop strategic plans for dealing with these products.”
One way to actively manage key products and formalize relationships with key partners is to establish contracts. A supply contract requires that a supplier commit to supply a fixed or minimum quantity of a particular commodity for a fixed term, usually extending over the life of the season, and at a fixed price (see sidebar for more information on contracts). These contracts promote stability in an otherwise volatile supply and demand scenario.
“The overall purpose is to create shared risk for market price fluctuations while providing a steady supply of product,” explains Jason Read, an attorney with Rynn & Janowsky, LLP in Newport Beach, CA. “The buyer has a steady supply of product. The shipper has a steady customer and is not at the whim of market ups and downs. Growers appreciate having that locked-in, fixed selling price for their product.”
The contract also promotes product availability for the customer. “When “supplies are tight, the buyer has a better chance to be covered with the needed product at the contract price,” notes Watson. “Especially with weather extremes, which can cause huge swings in available supply.”
Responsive Strategies
It’s not possible to eliminate every potential supply-demand balancing problem; unexpected events occur and unusual situations arise, but that’s no excuse to be ill prepared. Supply chain managers must participate in strategic scenario planning to mitigate risks of over- and under-supply situations.
An important tactic for ensuring product availability is to establish secondary sources of supply for primary commodities. In the case of a demand surge not covered by a contract or a supply chain disruption at your primary supplier, a fallback plan is needed. A properly vetted backup supplier can provide enough product to fulfill short-term inventory requirements.
“If the primary supplier doesn’t have the goods needed to meet demand, then I’m calling trusted secondary suppliers who can meet product specifications and deliver in a reasonable amount of time—while protecting my cost model as much as possible,” Watson says.
Fernandez notes that Sun Rich is pursuing local vendors to create a buffer stock of needed commodities. “The local distributive model becomes more relevant as forecasts and weather patterns change versus prior years. You can tap into it when needed to fulfill additional demand,” he adds.
Another responsive strategy is to adjust inventory allocations. Postponing product distribution will generate a more accurate picture of customer quantity and location requirements. Reallocating inventory among customer orders helps with demand spikes and slumps. Both tactics require transportation flexibility, timeliness, and proper handling to maximize product shelf life and sales.
“If we see a drop in volume, we reach out to our vendors,” points out Fernandez. “Before they put product onto a vessel, we may reassign it to other customers. If it’s already on its way, we can try to redirect the product to another customer or one of our other facilities.”
As a last resort, it may be necessary to go to the open market. When inventories are tight, brokers will charge whatever the market will bear. Watson notes that in critical situations such as a major promotion, some buyers will decide to take the financial hit to obtain the product needed to serve customers. And when excess inventories exist and product must be moved before it expires, selling to a processor, offering a deep discount to wholesalers, or working with a food bank can avoid a total loss.
Summary
Achieving a workable balance between supply and demand does not occur spontaneously. Instead, there must be deliberate and sustained efforts to understand the causes of supply-demand imbalances and to minimize their frequency and severity.
Growers, processors, and retailers must embark upon a joint initiative to align production output with marketplace requirements. Proactive strategies involving collaboration, inventory control, and segmentation will sidestep some challenges. Responsive strategies involving secondary suppliers and inventory reallocation can minimize the direct impact of unavoidable disruptions. Collectively, these efforts will help fresh produce supply chains converge on inventory levels that would please Goldilocks—not too much and not too little, but just right.
