The Future of Food – Information Technology

In the introductory blog on the future of food I talked about the process of predicting the future and how we can apply it to the future of food, specifically, the food processors, manufacturers and distributors that Lawson deals with everyday. I identified the major forces that impact the food industry as shown in the diagram on the right.

This installment talks about Food Information Technology

Information Technology has had and will continue to impact the food industry just like it impacts all of us on a daily basis. As hardware becomes more powerful, band width increases and software engineering continues to evolve, more things become possible. No one predicted Google or Tweeter or Facebook but they have had a major impact on the way we do things. We cannot really predict the future impact of technology but we know that we will be impacted and our job is to take advantage of these changes and innovations.

IT will help food companies increase the level of communication and customer service along the supply chain. Increased sharing of information up and down the supply chain, with little or no delay will increase the quality of decision making at every level and drive even more cost and stock outs out of the supply chain

Technology will increase the effectiveness of promotion efforts. For example, the concept of coupons can be targeted at individual consumers using data from loyalty cards. If we want to introduce a new product, tie a “buy one get one free” offer linking a product that the individual consumer buys frequently to the new product.
Consumer notification would be done electronically and redemption done automatically at the check-out. If the consumer can be indentified in the store (their cell phone?) we can remind them of the offer as they pass the slot with the new or favorite product.

In an effort to stream line the supply chain real-time POS can give the supply chain advance notice of demand. Of special interest are fresh categories where daily shipments are a must.

Today, technology is addressing a traditional problem with systems – the ability to actually leverage the massive amounts of data that must be feed into these systems. The concept of business intelligence continues to expand and has become a must have for most companies. Business intelligence has gone from making history more understandable (green bar reports to graphs and analysis) to alerting us to events as they happen and will extend to predictive applications in the future – - it will tell you what will happen and alert you to actions required to avoid future problems.

I am certain I have missed some forces from food and information technology that impact the future of the food processor, manufacturer and distributor. Give me your ideas and opinions.

Later, we will examine what these various forces mean to how we run our business in the future.

The Future of Food – Food Technology

In the introductory blog on the future of food I talked about the process of predicting the future and how we can apply it to the future of food, specifically, the food processors, manufacturers and distributors that Lawson deals with everyday. This installment talks about Food Technology.

Food Technology continues to evolve. New processing techniques and ingredients continue to both lower cost and increase the options for manufacturers and consumers. Some examples follow.

Engineered foods drive us into new products and categories. We will continue to offer consumers foods that increase their health, quality of life and bring our existing product lines to new audiences. Food technology will also help us to move brands into new categories resulting in growing and changing assortments. This will bring a new level of competitiveness from non-traditional competitors. A well established brand in an unrelated category will now enter your market space, changing your competitive balance.

Food Technology will help us extend shelf life including expanding the definition of fresh foods. We will be able to offer products that deliver the benefits of fresh products but offer the supply chain and the consumer extended shelf life. While these foods will extend shelf life a drive to lower cost and increase responsiveness in the supply chain will act as an opposite force negating some of these advantages to the trade.

I am certain I have missed some forces from food technology that impact the future of the food processor, manufacturer and distributor. Give me your ideas and opinions.

Later, we will examine what these various forces mean to how we run our business in the future.

The Future of Food – Retailers

In the introductory blog on the future of food I talked about the process of predicting the future and how we can apply it to the future of food, specifically, the food processors, manufacturers and distributors that Lawson deals with everyday.  I identified the major forces that impact the food industry as shown in the diagram on the right.

This installment talks about retailers.  For simplicity, I have called them retailers but I am including food service.  These organizations are our path to the consumer.  What they do, how they do it, what they demand, all have an impact on our future.

The impacts food processors, manufacturers and distributors come from two different groups.  Channel masters are the big guys, the ones that control the majority of the volume in any one geographic market, of course that includes global players like Wal-Mart and McDonalds, but most countries or regions have a small number of players who dominate.  For example, in Europe, many countries the top three retailers controlling between 50 and 90% of the retail market.  The second group is the specialized chains or niche retailers.  They may not impact total volume, but they have specific needs and, as a group, can have a mayor impact on specialized manufacturers or distributors.

Niche retailers need unique products.  They do not want to see the same products in the larger, general line retail stores.  Unique products may require unique recipes, process and ingredients.

The channel masters have lots of power (money talks).  When they “suggest” a change or improvement, most of us have to say “thank you.”  Yes, we can push back, we can negotiate with them but they control the volume and they are your path to the consumer.

Most of the channel master’s power comes from controlling volume, but some also comes from consumer loyalty.  Most of us (consumers) select retail stores that are convenient and have the right selection and price point.  Once established, consumer loyalty is a major factor in the retailer’s success, giving them long term demand that we need.

Many of the channel masters have a “three brand” policy (yes, it may be four) that means only a limited number of brands will be carried, and, typically, one of them is the house brand.  If you are not successful at being one of the other brands, you get zero demand from that retailer.  Often that means if you are not one of the top brands in a category, maybe you should ask yourself if you should be competing for that business.  Maybe competing to be the supplier for the house brand is the right strategy.  Some large food manufacturers have a policy that states that if they cannot be one of the top three brands in a category, they exit that category and concentrate on categories where they can be one of the top three.

Some shocking news, price pressures from the channel masters will continue, forever.  We must learn to live with it and learn to keep our margins (see the blog “Living and Thriving with Channel Master Customers“for more on this.

The retailer’s price pressure is part of their reaction to their needs for profits.  That need for profits also lead them to cost reduction programs.  Most of these efforts can fall under the umbrella of attempting to stream line their operations.  They want to stream line their administrative processes to save cost, for example, limiting paper work, or automating business processes.  Things like doing EDI their way or providing invoices electronically, in their format are attempts to minimize their administrative cost. 

The second area of stream lining is the supply chain.  Demands for cross docking, mixed pallets, ASNs, etc. are all examples of efforts to streamline the supply chain, speeding product more quickly from the supplier to the consumer.  These efforts are an attempt to “shorten” the supply chain relative to time or distance.

In some cases, the retailer finds it financially beneficial to own or control parts of the supply chain.  For example, many channel masters run their own dairies or bakeries.  Most channel masters have their own distribution networks or near captive logistics companies.

I am certain I have missed some forces from the retailers that impact the future of the food processor, manufacturer and distributor.  Give me your ideas and opinions.

Later, we will examine what these various forces mean to how we run our business in the future.

The Future of Food – Introduction

The Future of Food

I am reading a book about the future, The Extreme Future by James Canton.  It talks about nanotechnology, longevity medicine and lots of other things.  It also talks about a method of predicting the future.  Of course, that got me thinking about the future of the food industry – specifically the food processors, manufacturers and distributors that Lawson deals with everyday.

The method starts by indentifying the major sources or categories of change and then looking at the specific forces within those categories.  By examining those forces, we should be able to understand what will actually happen and suggest what needs to be done to take advantage, or avoid the results of those changes.  Of course, this is all based upon what we know, think we know, about the future today, but the results are informative.  And, I find it fun to think about the future of the food industry.

So that means a series of blogs.  This one gives you my thoughts on the major sources or categories and future installments will give you my thoughts on the forces within those categories.  Of course, this is all opinion, so please wade in and share those opinions with us all.

What are the major sources or categories of change?  In no specific order:

• Consumers – The consumer is king.  They drive the retailers.  And the consumers will continue to act like, well consumers.
• Retailers – This includes food service.  These organizations are our path to the consumer.  What they do, how they do it, what they demand, all have an impact on our future.
• Food Technology – we know this will change what is possible in foods
• Information Technology – this will change what is doable and what is practical
• Governments – regulations will continue to evolve and more types will be added
• Competitors – we have a very competitive market, what our competitors do or don’t do will impact what we need to do or what opportunities will present themselves
• Purchases (inputs) – Ingredients, packaging materials, energy, and transportation are required to make and transport our products to markets. 
• Labor – The availability, geography, quality of labor presents opportunities and challenges.

 

And since I like pictures:

 

Contaminated Data?

When reality and the data in your system do not agree, you have contaminated data. The system says you have 10,000 cases but you actually have 9,850. A customer’s ship-to address is out of date.  You have the same piece of information in two places in two applications or even two systems, but they do not agree.  All are examples of contamination. 

Contamination can be caused by many things.  Transactions causing a change in the data may have been inaccurately recorded. In the inventory example above, one of the many transactions that change the on-hand quantity could have been inaccurate. Maybe the physical act was flawed.  When material is placed in a location, the location is incorrectly reported, resulting in two pieces of contaminated data.

Contaminated data may do no harm, unless a decision will be based on the contaminated data. Contaminated data can have a negative impact on business. Catastrophic problems include a recall, losing a customer or a major financial write-off. Less of an impact is carrying too much or too little inventory or shorting a customer unnecessarily. 

Contaminated data is often a sleeping problem. It may cause problems that are minor enough to remain hidden, but may be used in a way that causes problems. For example, if a lead-time is incorrect, order calculations will be incorrect, resulting in either over stocking or out of stocks. The contaminated data may lay dormant until something changes. A recipe may be wrong, but the first shift operator knows that and corrects it on the fly. Occasionally, you make it on the second shift and then the problems start and the product is not made correctly because the recipe is wrong and has been for months or years.

Spot checks can detect some problems. Auditors send out verification letters to customers or suppliers. Cycle counts or physical inventory provide a precise picture of reality. 

An M3 customer recently pointed out a big win from using Lawson Business Intelligence.  He stated that putting the information in a more digestible form and in front of people who can judge it best was helping his company find the contaminated data.  These people can locate logical inconsistencies.  They know the reality of the business and can use it to de-contaminate your data.

Chances are your data is contaminated.  Chances are that it is leading to bad decisions, customer dissatisfaction or other things that are not good for your company.  Be on the look-out for sources of contamination and eliminate them.  Give the people who know the reality of your business best a way to inspect the data in the normal course of their work and it will pay big dividends.

How much are you willing to pay for really accurate costs?

Working with a chilled foods manufacturer, the discussions turned to product cost.  The CFO declared he needed to improve the accuracy of his costs.  He wanted to know the actual cost of every tub of coleslaw they shipped.  I asked for his definition of actual cost.  He said he wanted the cost of the ingredients and packaging materials for the actual lots used, the cost of the labor down to which people worked on that tub, how much time they spent and their actual labor rates.  I assured him that M3 could provide what he wanted but only with a lot more data.

To reach his objective, think of the detailed data that would have to be captured. Which lots of ingredients is easy, he already knows that.  However, the labor on the line at anyone point in time, at the detail level he wanted would be difficult, if not impossible, and very expensive.  I had tour his plant, he had lots of people on the lines and they were shifted back and forth frequently as lines speeded up, went down, etc.  He would have to have each employee record (or a supervisor record) who was on which line down to the minute.  If the workers did it, they might spend more time reporting where they were than making coleslaw.  If a supervisor did it, they would probably have to add a time keeper to the floor staff.  His objective meant adding cost to the floor and maybe a hit to the production numbers.

Then I asked him what business decisions he would make differently if he knew the actual cost for each tub of coleslaw.  I suggested that he might want to charge differently for each tub, he suggested I was crazy — of course I was on that suggestion, I was trying to make a point.  I suggested that he could select only the lower cost lots of ingredients to make product, he told me that I did not understand his business; they had to use up all the ingredients they purchased.  I asked if he would staff with lower pay grade people or less people, he stated that his plant people were mostly day workers and he paid them minimum wage.

He could not come up with a decision that he would make differently if he know the actual cost of each tub.  He did tell me that he would use them to get the average cost per shift, day, etc.  But that is what he could get without the cost of gathering all that data from the floor.

His objective was improved costing, but the cost of improved costing outweighed the benefit.  Improving costs information frequently means using the costing functionality already available in M3.  The challenge and the cost is usually gathering the right data at the right level of detail … and that cost money

The Four Ps of Food Safety

Food Safety is in the minds of consumers, in the news, in government meetings, in stockholder meetings.  Of course it is a very important industry and consumer issue. 

How aggressive should you be in food safety, first “What’s the Risk?”  The issue is, the higher your risk, the greater your need for a proactive strategy.   For example, fresh fruits and vegetables, meats and dairy are all higher risk than processed foods.  Of course, we need not look far to come up with horror stories (who was Peanut Corp of American again?  Google them and find 1.4 million articles about their food safety incident and their going out of business)

When it comes to the contributions of systems, many times the focus of the discussions reduces to track and trace issues.  Where tracking and tracing your product is vital, the subject is much bigger.  Let me propose a framework for these discussions, the Four Ps … Prevent, Prepare, Prove and Proactive Response (ok the fourth P is pushing the idea too far).

Prevent – If we could be 100% certain we could prevent a food safety incident, we would not need to discuss the topic any further (with the exception of the prove step).  For preventing an incident, the best defense is a good offense.  Techniques like supplier certification, sanitation, quality control and HACCP are vital.  For success, we need a management commitment to food safety.  We need to build a quality fence around your business.  But prevention does not exist by itself; we must integrate food safety into operational systems.  Your business systems and business process have a part in prevention. For example, your business system should provide integrated product specs during procurement, vendor quality ratings, in-bound testing, quality specs as part of inventory, quarantine, aging, date sensitive picking, plant maintenance, and of course lot tracking

Prepare – Good preparation starts with the assumption that you will have a incident and prepares you to respond.  Preparations require the integration of food safety data with operations.  That includes automatic collection, storage and analysis of food safety data.

Your Business System should provide Automatic lot tracking and tracing, data collection imbedded in all transactions, location management with lot history, quality, etc.

Prove – Today, the regulatory bodies, major customers, consumers and top management all want proof that your recall system will respond when it is needed.  To prove it can work, we need to test our recall system, often.  Your Business System should provide provide for mock recalls and track and trace validation.

Proactive Response – Proactive response calls for proactive strategies.  First, all incidents must be taken seriously.  We must respond quickly and completely to any incident or even potential incident.  Remember, over-response is often less expensive in terms of dollars and PR than under-response.  That calls for a management commitment to a proactive response strategy.

Your Business System should provide Rapid recall support.  To meet the four hour target set by the bioterrorism act, your system must provide the information in minutes not hours.

Costing – a key to profitability

Every food company needs to focus on profitability. For management, no profits means no job. For the business, no profits mean no long term business.
To drive profits, we focus on sales and we focus on cost control. The focus on sales is vital, but the results are not under our control – only customers can decide to buy more product. Our focus on sales is trying to convince the customers to buy more, but they decide.
Cost is different; we control most of our cost. Yes, many outsiders impact our cost (labor market, ingredient suppliers, commodity prices, etc.) but we make the decisions. The key to controlling our costs is to focus our efforts on the right places. We cannot run a successful program to “cut costs” without deciding on the specific areas to work on, where do we aim?
Too many companies do not have the information to correctly aim their cost control efforts. The “where do we aim?” question is answered by feel and experience. While feel and experience may be OK, does it really target the high potential areas for cost control? And, how do we know?
As a general statement, many (maybe most) food companies lag other industries in costing. They lack the information and business processes to get a good picture on the cost of their products. Typically, that means that the company knows if it is making or losing money, but it has only a guess at which products are winners and which are losers. It also means that it is difficult to determine which customers are winners and losers.

Living and Thriving With Channel Master Customers

A channel master is the king pin of the channel – retailers like Wal-Mart and Tesco, operators like McDonalds, distributors like Sysco.  Channel master business is good. Everyone likes increased volume. But the impact of this business can be bad for the bottom line.  How can manufacturers meet the demands of the channel master and preserve their business?

The channel master has the volume and the power to dictate how business will be done, pricing, product and anything it wants to dictate.

To gain and maintain the channel master’s business, most manufacture must play by the channel master’s rules. Remember, they demand or suggest and your options are limited, mostly to saying “thank you”. To meet their demands means the right systems and business processes, often established to meet the demands of the specific channel master. Many manufacturers are involved with multiple channel masters. Since the different channel masters have different rules, these companies must build customer interfaces and business processes that can look different to the different channel masters plus one version for their other customers.

 Core systems can be the same if the connections can match the demands of the channel masters and other customers and the core systems have the functions to service the various needs of various customers. Since each channel master will change its demands over time, the manufacturer must build a business infrastructure that can easily and quickly change with demands.  Flexibility in both operations and systems is required to meet the ever-changing demands of the channel masters. If the business process/system cannot change fast enough, either customer service, cost or both suffer.  Often, a manufacturer has a challenge keeping up with the changes and setting priorities from how to change systems to logistics to which product to run first.

Margin erosion is the real impact of the channel master. While the volume opportunity offered by the channel master is great, they also set pricing, product, and service requirements. The manufacturer is dictated many of the variables that make up profit margins. As volume increases, the unit price usually decreases as the cost of the product may stay the same or even increase and cost of service increases. The final result is the real impact on the business, margin erosion. 

The manufacturer has few options. Of course it could refuse to meet the demands of the channel master and pay the price (lose the business) or do something about the eroding margins. Margin erosion can either be accepted or addressed. Since volume, price, product, and service requirements are set by the channel master, the manufacture must reduce the cost of providing the product and services demanded by the channel master. To address margin erosion, address cost.  Systems must play a key role in both identifying cost reduction opportunities and providing business processes that will reduce the cost of products and service.

Channel master business is good. Everyone likes increased volume. But the impact of this business can be bad for the bottom line. A manufacturer must proactively build the ability to satisfy the channel master’s demands and continually search for cost reduction to maintain margins.

Starting the Conversation

Welcome to the Lawson Food & Beverage blog. We have created this outlet to share insight and commentary on a wide variety of issues that are relevant to companies in the food & beverage industry. We’ll talk about everything from dealing with big customers, to food safety to production trends to supply chain challenges and countless other potential topics.

By way of introduction, I’m Olin Thompson, and I will be the primary contributor to this blog. But I will also tap the expertise of others within the Lawson Food & Beverage team – and possibly some outside sources for additional content. As the Industry Strategist for the Lawson Food & Beverage business unit, my job is to stay on top of trends and business challenges that confront the companies we serve in the food industry.  I’ve been involved in providing food companies with ERP for over 40 years, so I’ve had a chance to not only see and understand the inner workings of the industry, but I’ve also been in most categories and I think I know my way around many of them.  In the past, I have also written for a number of magazines, including serving as a contributing editor for Food Engineering.

I look forward to building an ongoing dialogue among others in the food & beverage industry. I also welcome your comments on this blog. And, if you have topics you think might be of interest to others, let me know. It’s the best way for us to build an ongoing discussion about key issues that affect all of us in this industry.

You can always reach me at olin.thompson@lawson.com