By its nature, fresh produce is a difficult business; product availability is impacted by weather and seasonality, sales volume is driven by fickle customers, and price is fungible. Combine these revenue-squeezing issues and profitability is an ongoing challenge.
The area in which produce companies can exert some influence is supply chain cost control. It’s not easy, but it’s not impossible. Well-devised savings and cost avoidance efforts will find their way to the bottom line—as long as businesses understand the challenges, adopt high impact strategies, and drive decisions with data analysis.
The Challenges
If produce companies could focus strictly on reducing supply chain costs, they could make a significant dent in their operating expenses. Unfortunately, competing interests and requirements detract from the effort.
First, cost efficiency is not the only priority. Savings initiatives must be balanced against the service requirements of key customers and end consumers. For example, achieving maximum shelf life forces suppliers to sacrifice economical truckload delivery processes. “Retailers want the freshest product possible which has resulted in smaller, more frequent orders,” explains Cynthia Klein, a 25-year produce industry veteran and CEO of CK Solutions Group, LLC in Bakersfield, CA.
Second, well-intentioned mandates are cost escalators. Increased food safety regulations require compliance efforts that alter processes and add documentation. Stringent transportation regulations, such as reduced driver hours of service and mandatory electronic logbook requirements, shrink freight capacity.
And, retailer demands for corporate social responsibility force growers and processors to undertake expensive social audits. “These unprecedented added costs are mounting like I have never seen before,” confirms Mark Hayes, who has been in the industry for 45 years and is president of Twin Garden Sales, Inc. in Harvard, IL.
Finally, isolated efficiency initiatives can be counterproductive. Too often supply chain processes and partners operate independently and efforts to save money in one area lead to higher overall costs. For example, when a procurement group purchases product in larger quantities unintended consequences can result. Price discounts may be achieved but higher storage costs and increased product waste may also result from this functional suboptimization.
In sum, the fresh produce supply chain is unlike other food channels and this makes cost control more difficult, according to Ed Treacy. “With dry groceries, you can focus on the costs. With fresh, you also have to focus on food safety, product quality, and getting it to the stores on time because you’re working with very little safety stock,” explains the Produce Marketing Association’s vice president of supply chain efficiencies.
By its nature, fresh produce is a difficult business; product availability is impacted by weather and seasonality, sales volume is driven by fickle customers, and price is fungible. Combine these revenue-squeezing issues and profitability is an ongoing challenge.
The area in which produce companies can exert some influence is supply chain cost control. It’s not easy, but it’s not impossible. Well-devised savings and cost avoidance efforts will find their way to the bottom line—as long as businesses understand the challenges, adopt high impact strategies, and drive decisions with data analysis.
The Challenges
If produce companies could focus strictly on reducing supply chain costs, they could make a significant dent in their operating expenses. Unfortunately, competing interests and requirements detract from the effort.
First, cost efficiency is not the only priority. Savings initiatives must be balanced against the service requirements of key customers and end consumers. For example, achieving maximum shelf life forces suppliers to sacrifice economical truckload delivery processes. “Retailers want the freshest product possible which has resulted in smaller, more frequent orders,” explains Cynthia Klein, a 25-year produce industry veteran and CEO of CK Solutions Group, LLC in Bakersfield, CA.
Second, well-intentioned mandates are cost escalators. Increased food safety regulations require compliance efforts that alter processes and add documentation. Stringent transportation regulations, such as reduced driver hours of service and mandatory electronic logbook requirements, shrink freight capacity.
And, retailer demands for corporate social responsibility force growers and processors to undertake expensive social audits. “These unprecedented added costs are mounting like I have never seen before,” confirms Mark Hayes, who has been in the industry for 45 years and is president of Twin Garden Sales, Inc. in Harvard, IL.
Finally, isolated efficiency initiatives can be counterproductive. Too often supply chain processes and partners operate independently and efforts to save money in one area lead to higher overall costs. For example, when a procurement group purchases product in larger quantities unintended consequences can result. Price discounts may be achieved but higher storage costs and increased product waste may also result from this functional suboptimization.
In sum, the fresh produce supply chain is unlike other food channels and this makes cost control more difficult, according to Ed Treacy. “With dry groceries, you can focus on the costs. With fresh, you also have to focus on food safety, product quality, and getting it to the stores on time because you’re working with very little safety stock,” explains the Produce Marketing Association’s vice president of supply chain efficiencies.
Strategic Savings Initiatives
Although supply chain costs must sometimes take a back seat to other priorities, produce professionals continue to pursue savings agendas. They’ve harvested most of the low hanging fruit and it is now necessary to address the more difficult issues to uncover hidden opportunities. “When I think of all the ways in the last three years we’ve cut costs, there’s not much more that can easily be done,” ob-serves Hayes. “It forces you to think outside of the box to maximize the efforts of all involved.”
Collaboration
Cross-chain collaboration is a strategy that offers significant savings opportunities and performance benefits. Each of the experts discussed the importance of respectful relationships, information sharing, and a long-range perspective. Chasing one-sided benefits and quick wins jeopardize relationships and drive future costs higher.
Nowhere is this more true than in transportation. Overly aggressive rate negotiations destroy goodwill and impede future access to cost-efficient capacity. Klein cautions against such tactics: “Many shippers beat carriers down in loose markets. When the market tightens, the gains from beating the carriers turn 180-degrees very quickly—the hero-to-zero concept becomes very real and these shippers end up paying more for less.”
Instead, produce companies would be wise to concentrate their freight with core carriers and brokers to promote mutual success. “When we have loads moving on a year-round basis, we get favored rates from trucking companies,” Hayes explains. “We parlay our volume into cost savings, not only for us—we also pass savings onto our grower base.”
Visibility
Visibility enhancement is another strategy for uncovering hidden savings pros-pects. Information sharing in near real time enhances understanding of what is happening outside of one’s immediate purview. This opens a world of possibilities for supply chain productivity improvement, product waste reduction, and disruption management.
“Let’s get visibility through the entire supply chain,” Treacy advocates. “It helps with identifying bottlenecks, challenges, deficiencies, and opportunities. Deal with these issues as they’re happening and work together to finetune the process to make it work more efficiently and reduce costs.”
Greater visibility of harvest schedules will also support procurement processes. In-transit updates on freight location and load arrival times enable distribution center labor planning. And, timely point of sale information facilitates accurate de-mand forecasting. Each supports better resource utilization and drives availability of fresher product.
Technology
Technology deployment is another strategy mentioned by the experts. Technology facilitates visibility, rapid information sharing, and decision support. The most effective tools extract data from multiple systems to provide temperature tracking, inventory location, and support-related requirements.
Increasingly, the technology is portable and cloud-based which reduces investments in equipment, software licensing, and implementation processes. Thus, technology should be viewed as a strategic facilitator of supply chain efficiency rather than as a costly expense.
Technology also supports supply chain network redesign. Over time, networks can lose efficiency if the supply base expands or contracts, transportation rates significantly increase, demand patterns and volume change, or customer service requirements become more stringent. Modeling tools help produce companies map out their existing networks and costs, and allows them to test various facility relocation, reduction, or expansion scenarios. The cost and service implications of each option can be thoroughly analyzed before any realignment decisions are finalized.
Segmentation
Segmentation is not a new strategy but it can be rather helpful when assessing supplier costs, customer re-quests, and product profitability. Rather than lumping all suppliers or customers into one group and establishing a single supply chain strategy, the groups are stratified for analysis, prioritization, and resource allocation.
Customers are often segmented on an 80/15/5 basis. The “A” customer group is a small group of very large customers that collectively account for 80 percent of revenue. They warrant a far greater level of supply chain service and much more competitive prices than the “C” customers—a very large group of small, infrequent buyers that account for only 5 percent of revenue. Giving “C” customers the same level of attention and service as the “A” group wastes resources. Lower service prioritization and imposition of service fees to “B” and “C” customers are logical approaches to supply chain cost savings.
On the supply side, understanding the performance of the A, B, and C groups can help a buyer evaluate performance more effectively and drive future purchase decisions. Better yet, when individual suppliers can be identified and analyzed, problems can be pinpointed to their sources, and improvement initiatives can be more targeted.
Treacy notes that some retailers are implementing the DataBar codes on PLU stickers for loose product to facilitate this analysis. He explains: “By adding the stacked barcode on the PLU sticker, which is unique to the supplier, they can now close the loop from a category management standpoint. The retailers will know their sell-through by supplier and item, not just by item.”
These four tried-and-true strategies are neither easy to implement nor quick hits. They require a strong time commitment and the engagement of multiple internal departments and companies along the supply chain.
Yet this type of collaborative engagement and coordination of supply chain processes is key to uncovering hidden savings that one organization cannot independently achieve.
Monitoring Success
Performance measurement is the only way to determine if savings initiatives are successful. It is essential to monitor the results before and after the strategic modification to quantify the impact over time. However, performance analysis must go beyond financial outcomes. Produce companies cannot afford to have product safety and quality, delivery timeliness, and product availability performance levels slip when pursuing cost reduction. Thus, the service impacts of cost savings initiatives must be also monitored.
Supply chain costs should be measured at a macro and micro level to target savings efforts toward larger opportunities. Klein notes the value of capturing the big picture, through measurement of “costs per cooler to understand the effects and efficiencies of the entire supply chain—from field to production to cooler to transport to retail.” Upward trends in these ‘big picture’ numbers can signal a need to take corrective actions.
Treacy believes breaking down total costs and landed costs is a valuable advanced capability. “People are getting more sophisticated and there are more tools available to support analysis,” he explains. “Cost is not just one number, it’s not just 8 percent of sales. People are realizing that if they start looking at cost down to the component level, then they can understand what is driving total cost and make better decisions.”
One of the major cost components is transportation and it is projected to in-crease, particularly during peak season. Hayes notes that there are fewer carriers willing to haul fresh produce, electronic logbooks drive greater compliance with hours of service regulations, and many freight movement hours are burned up while drivers wait for freight. As the freight pool shrinks, measurement becomes more important to understanding and managing costs.
Klein suggests using a transportation management system to capture data on cost per mile, route, carrier, and region. Then, use this knowledge to pursue annual or seasonal rates from carriers rather than being reliant on the spot market.
Understanding costs is particularly important when working with retailer requests for year-round contracts. In-complete cost knowledge can lead to poorly conceived bids.
“From week to week, month to month, and year to year, you really have to know your costs so you can play the evolving contracting game,” Hayes advises. “If you miscalculate, then all of a sudden, you put everyone’s income in jeopardy.”
Concluding Thoughts
In terms of cost management in the fresh produce industry, the quick wins and easy hits have been fully exploited. Companies must now navigate more complex supply chains and deal with external forces that drive costs higher. The only option is to adopt strategies with the potential to drive efficiencies across the chain and reduce waste—this means making robust commitments to collaboration, visibility, technology, and segmentation.
At the same time, produce companies must balance cost with service, monitor performance, and adapt to new conditions. This is the environment in which cost savings must be pursued, according to Treacy, who concludes, “It’s a juggling act. It’s a challenge. That’s part of what makes this industry fun because it changes every day and there’s always opportunity to improve.”
