From a supply chain disruption perspective, this week has proven to be a rather concerning one for food related supply chains within the United States. And, there may well be added implications in the weeks to come.
Two developments have dominated business and general media; a widespread outbreak of a strain of bird flu that is currently spreading across upper U.S. Midwest states, and a listeria outbreak that has forced a well-known branded producer to suspend sales of its entire product line-up.
Avian Influenza Outbreak
An Iowa chicken farm raising upwards of 3 million chickens is the latest to suffer the effects of what is being described as sharp escalation of bird flu that, according to one report, is rattling the U.S. poultry industry. Iowa is reportedly the largest producing state for egg production. The latest outbreak reported yesterday brings the estimated total number of chickens and turkeys affected by avian bird flu to nearly 8 million.
The largest two turkey producers, Butterball and Hormel Foods have each reported significant supply chain challenges as outbreaks occurring in Minnesota and Wisconsin are where turkeys are predominantly raised.
To mitigate the further spread of the virus, farmers must destroy all birds confirmed to have the virus. The Governor of Wisconsin declared a state of emergency earlier this week authorizing state officials to issue quarantine directives related to feed and poultry.
The states impacted thus far include Arkansas, Iowa, Minnesota, Missouri and Wisconsin. No human cases of avian influenza have been detected and U.S. health officials indicate the current outbreak poses no human health risk. None the less, consumers are obviously rattled and concerned by the news. Farmers and meat processors are on high alert and are taking measures to monitor stocks as well as visitors to farms.
Listeria Related Product Recall
The other important development concerns Texas based Blue Bell Creameries which on Monday, widened a series of voluntary recalls to now include all of its branded ice cream, frozen yogurt, sherbet and frozen snacks branded products distributed among 23 states and various international locations. The recall was prompted after samples of chocolate chip cookie dough ice cream tested positive for the potentially deadly disease, listeria. Thus far, health officials have traced 8 reported illnesses amounting to three deaths which have been linked to contaminated ice cream, but active investigations continue. According to an FDA advisory and a Blue Bell press release, the illness was tracked by health officials to a Blue Bell production line in Texas, and later to another production line in Oklahoma. Consumers are warned not to eat the recall products and throw away or return any purchased product.
Blue Bell itself has taken relatively swift action by actively removing products from retailers and other food service facilities it serves. A statement from Blue Bell’s CEO Paul Kruse apologizes to consumers along with a firm commitment to fix the problem. Blue Bell is implementing a “test and hold” process for all products made at all of its manufacturing facilities, meaning that all products will be tested first and held for release to the market only after the tests show they are safe. Other actions include daily cleaning and sanitizing of equipment, expanded testing and additional employee training.
As is the usual for these types of recalls, the recall news spreads fast and wide with the amplification of the Internet and social media. At this writing, we performed a Google search of the terms “Blue Bell listeria’ which yielded over 2000 web postings thus far. From our tracking of previous high visibility product recalls, there will likely be more short-term impact to the brand before this situation is resolved.
Supply Chain Matters applauds Blue Bell for taking such prompt and far reaching actions. Not many consumer packaged goods companies would recall the entire product line.
The turmoil among consumer product goods focused supply chains promises to increase with the implication of today’s business media headlines concerning Nestle and Unilever. These implications relate to ongoing merger and acquisition developments and the continuing effects of foreign currency headwinds, which are negatively affecting U.S. producers while positively impacting European based firms.
While speaking at its Annual Meeting this week, Nestle’s Chairmen acknowledged that the combination of H.J. Heinz and Kraft Foods, being orchestrated by 3G Capital Partners and Berkshire Hathaway would create a formidable competitor, particularly in the United States. Because of this, the global CPG provider indicated to shareholders that it will accelerate its shedding of marginal performing businesses.
Readers may recall that CPG industry icon Procter & Gamble is similarly involved in a shedding of non-performing or non-core businesses.
According to a report published by The Wall Street Journal, Nestle Board Chairmen and former CEO Peter Brabeck-Letmathe indicated that Berkshire Hathaway and 3G have “pulverized” the food industry.
The CPG company has already sold off ice cream and water related businesses, has struck deals to sell the bulk of its Jenny Craig diet business as well as an ice cream business and is reported to be in talks to sell its frozen food business. The CEO further indicated that Nestle needs to better leverage its global scale more effectively. According to the WSJ, that could imply even more added pressure on suppliers for better buying terms.
Earlier today, Nestle announced its operating results for the March-ending quarter. Those results included an overall 4.4 percent organic growth of which 2.5 percent was attributed to pricing moves. Sales increased a mere 0.5 percent with the effects of negative foreign exchange attributed to 4.5 percent. In its full-year outlook, the company remained committed to achieve organic growth of around 5 percent while improving margins.
That level of sales growth challenges many of today’s large global CPG producers.
The positive or not so positive shadow of foreign currency effects was further evident in the operating results of Unilever, whose first-quarter total sales rose 12 percent largely due to the effects of a stronger valued U.S. dollar, amounting to a 10.6 percent boost. Once more, Unilever indicated that factoring current exchange rates, its full-year earnings growth would be in the 7-8 percent range.
On the flip side, U.S. headquartered CPG producer Colgate Palmolive indicated a 9 percent negative impact on sales while Procter and Gamble indicated in January that it was anticipating currency swings to curb profit by as much as 12 percent.
Thus the pending Heinz-Kraft combination coupled with the current foreign currency shifts is indeed precipitating more industry turmoil. Many CPG businesses are being pitched for sale and/or consolidation.
When penning our Supply Chain Matters commentary related to the Heinz-Kraft announcement we opined that a clear message was now sent to consumer product goods supply chains that business-as-usual was no longer acceptable, and that further industry changes and developments were inevitable.
Add the current effects of currency and those in the industry negatively impacted may well initiate changes in product sourcing, promotion and distribution to help offset currency effects. Meanwhile, product innovation in more natural and less processed foods remains the key to longer term growth, whether by acquisition or by supply chain sourcing and development.
There is literally a new playbook for global based CPG firms and their respective supply chain teams, and be prepared for constant change in the months to come.
Survey of Retail and CPG CEO’s Reflects Today’s Realities of Higher Costs Associated With Online Customer Fulfillment
A new joint study of senior retail and CPG industry CEO’s conducted by PwC under the sponsorship of JDA Software confirms what many in our supply chain community have believed; the increasing profitability challenges being brought about by the higher costs associated to today’s online customer fulfillment demands.
This study, The Omni Channel Fulfillment Imperative, reinforces that an enormous amount of money, energy and time is being spent by retailers and consumer goods manufacturers to improve their Omni-channel fulfillment capabilities. While this may not be surprising given the current business environment, the report reveals an unexpected and disturbing fact: only 16 percent of companies openly indicate that they can fulfill Omni-channel demand profitably.
The survey itself included a reported 410 retail and consumer goods companies from eight different countries. The authors included some CPG company’s views in order to gain perspectives from both ends of the customer fulfillment supply chain, along with the reality that may CPG firms have increased their direct online fulfillment presence. Nearly 51 percent of responses were reportedly weighted toward the classification of top 250-1000 retailers, while 22 percent represented the top 250 retailers.
Supply Chain Matters had the opportunity to speak with Wayne Usie, Senior Vice President of Retail Industry at JDA Software about this study and its messages. Usie aptly pointed out that most retailers remain optimistic for top line revenue growth, they are acknowledging that their firms originally designed their supply chains around the bulk movement of goods from suppliers, through distribution centers and eventually to stores and consumers. Today’s business demands of Omni-channel and online customer fulfillment require a far different set of capabilities. The other important insight is that in their original design that emphasized distribution center centric flows, retail supply chains can often mask the true source of customer channel demand. That has a significant influence on how to plan and efficiently position inventory associated with today’s Omni-channel dynamics.
From our lens, other important perspectives brought forward by this study was the indication by 71 percent of CEO’s polled that Omni-channel fulfillment was a top priority for retail business. Keep in mind that merchandising and sales strategies have often been top priorities for retail businesses. This different perspective, we believe, is the new reality of online and Omni-channel reflecting that the fulfillment supply chain has become an important focus.
Other profound findings were the indication that 67 percent of CEO’s believe that the cost to fulfill orders across channels is increasing, and that 88 percent (a near total consensus) cited transportation and logistics as a fulfillment capability that needs the most attention. Supply Chain Matters believes that this is a reflection of the continued high costs trending of free or same-day shipping that is impacting retail supply chains, especially those with lower product margins. Much of the survey data reflects the threats brought about by global online retailers such as Amazon, Wal-Mart. The major global package carrier’s increase in rates and the shift to dimensional-based freight pricing this year has not helped and probably added even more concerns and needs for alternative methods.
Question 9 of this survey queered on likely internal challenges likely to occur over the next 12 months. Indications were remarkably equally balanced and also from our lens, point to many supply chain related implications including inventory management, effectively integrating physical stores with online business models and failing to consistently meet customer expectations across all channels. Reflecting on such a listing, we believe that the data is yet another revealing indication that not all customers can have the same fulfillment service-level dimensions, hence the need for more discernable supply chain segmentation strategies, aligned to expected customer service and business profitability needs.
The complete PwC Survey as well as a summary infographic can be accessed at this web link. (some registration information required). A further perspective of the survey can be garnered in a posting authored by Wayne Usie on JDA’s Supply Chain Nation blog.
Supply Chain Matters will reflect more on the effects of Omni-channel retail in our live coverage of the upcoming JDA FOCUS 2015 conference occurring later this month.
Disclosure: JDA Software is a Lead sponsor of the Supply Chain Matters blog and a client of its parent, The Ferrari Consulting and Research Group LLC.
The term Predictive Commerce has been brought forward in the context of connecting up and downstream, Omni-channel product demand sensing with an integrated, single-model, end-to-end supply chain planning and execution. In some sense, it can be viewed as an enhanced iteration of demand-driven supply chain response capability for complex distribution and long-tail product demand environments. Supply Chain Matters is of the view that this capability warrants further consideration by supply chain and sales and operations planning (S&OP) teams, in the context of a transformative effort requiring careful thought and investment.
Predictive Commerce was most recently brought forward in a recent published white paper from supply chain planning technology provider ToolsGroup, titled Predictive Commerce: Helping Companies Return to Growth.
This paper defines such capability as:
“Predictive Commerce is a strategy that enables this shift (in planning methodologies) and revolutionizes the way companies think, see and plan their end-to-end supply chain. It connects supply chain strategy, planning and execution into an end-to-end planning process. The key technology enabler is a single underlying model”
This paper describes examples of predictive commerce applications that include real-time product demand sensing linked to dynamic replenishment processes. The example brought forward is a large coffee shop brand, namely Costa Express, leveraging machine telemetry feeds from 3000 self-dispensing coffee machines to trigger coffee bean, cups and flavored syrup replenishment needs among supporting distribution replenishment centers. In another retail industry example, product demand sensing is linked to dynamic replenishment and product segmentation to minimize last mile delivery costs by utilizing existing channel inventories. A further example is connecting product demand sensing and predictive orders with the needs for transportation capacity and optimization.
We concur and re-iterate that the most important takeaway for industry supply chain teams to ponder is that Predictive Commerce or other similar type capabilities that fuse supply chain planning and execution in a single information model require a transformative strategy that brings together such capabilities. This is particularly important in an environment where legacy applications or ERP backbone systems were implemented under the notions of planning and execution being two separate hierarchical processes and data sets that fed different information streams back and forth. Today’s Omni-channel and online fulfillment demand streams are far more concentrated in SKU level and location specific planning and execution dimensions. That implies a single data model with far more granular data and information streams as well as requirements to plan inventory investments at multiple tiers of the supply chain.
The good news is that advanced information technology now available in today’s marketspace can provide such capabilities in a less disruptive manner. A single data model approach opens far more enhanced capabilities in leveraging analytics and deeper supply-chain wide intelligence. It further paves the way for the ability to leverage more predictive and prescriptive planning methods for supporting near real-time customer fulfillment execution requirements.
In addition to technology, there are important people and business process elements to consider in such a transformation. Business processes, whether internal or externally focused, need to be well understood by all participants and have an “outside-in” perspective. Deep collaboration among customers and suppliers is essential. Do not neglect the change management and skills impact for people in managing an overall supply chain environment. Especially those that are driven by complex by faster-moving, exception-driven events vs. day-to-day sequential business processes.
Predictive Commerce can indeed be a meaningful competitive differentiating capability for distribution and online fulfillment sensitive supply chains. Such a capability requires a transformative strategy, often aligned with supply chain segmentation. It is indeed a “crawl-walk-run strategy anchored in people, process and advanced technology.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Disclosure: ToolsGroup is a current client of Supply Chain Matters ® parent, the Ferrari Consulting and Research Group LLC.
Supply Chain Matters has featured numerous prior commentaries regarding the difficult challenges and structural business challenges facing large consumer packaged goods producers and their associated supply chain ecosystems. Yet while the industry continues to respond with severe cost cutting and a sense of crisis, the industry may well be overlooking the more important strategic need for meaningful investments in organic and sustainable food supply chain capability and supplier development.
Currency headwinds and activist investors focused on short-term shareholder value and increased earnings add more cost cutting pressure to the crisis. Signs of increased merger and acquisition activity, most recently the announced HJ Heinz and Kraft Foods mega merger, add more turmoil and stark actions surrounding CPG supply chains.
Today’s consumers demand healthier food choices and more natural ingredients, shunning high volume, well-known iconic food brands. Consumers are more interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonalds, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers.
In a previous commentary, we advocated the need for CPG producers to focus on increased product innovation and quicker introduction of new and healthier products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. However, we have wondered how the ever increasing consumer needs for more organic and sustainable food products can be fulfilled among current food supply chains. Is there a discernable capacity shortage?
A recent report published by The Wall Street Journal, Hunger for Organic Foods Stretches the Supply Chain (paid subscription or complimentary metered views) brought forward such a perspective. According to the report, the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Mentioned specifically are organic and natural foods producer Hain Celestial Group, soup maker Pacific Foods and fast casual restaurant chain Chipotle Mexican Grill recruiting, financing and training more farmers willing to utilize and adhere to organic methods. Some producers such as Hain Celestial have had to initiate long-term buying agreements, as much as three to five years, to insure the transition to more organic supplies. Two years ago, Chipotle began providing financing incentives to help black bean farmer’s transition from conventional to organic production. This fast-growing restaurant chain that prides itself on higher quality, ethically based food ingredients recently took the bold step of suspending sales of its pork product in nearly a third of its restaurants after discovering a supplier was not complying with animal welfare standards.
With increasing reports of supplier bullying and cost squeeze tactics occurring among the larger traditional packaged foods producers, we wonder if that approach actually lends itself to required investments in organic and sustainable food supply. If the ultimate strategy among activist investors is ultimately to squeeze existing costs across the entire conventional processed food supply chain to free-up cash to fund acquisitions of smaller, more organic and healthier food producers, will such innovative and dedicated producers wither amidst an environment of draconian cost-cutting?
By our lens, it may be an argument for supply chain and individual brand segmentation anchored on market differentiation and segments.
For us, one tenet appears obvious, the industry needs to respond to growing consumer tastes by actively investing in boosting capacity and capability in organic, sustainable and healthier food products. To do otherwise is opportunity lost.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters ® blog. All rights reserved.
When a report directly impacting supply chain strategy is featured as a front page article in The Wall Street Journal, we are certainly going to bring it to Supply Chain Matters reader attention. When that report correlates with other related reports, namely supplier squeeze or bullying tactics, rest assured we will bring it to greater industry supply chain visibility.
We have previously featured reports of supplier bullying strategies involving certain consumer product goods supply chains, and quite recently, supplier squeeze tactics among certain commercial aerospace supply chains.
Today’s WSJ report (paid subscription or free metered view) indicates that last month, Wal-Mart began an effort to place increasing pressure on its North America based suppliers to cut the cost of their products. According to the report, the retailer is telling suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. Apparently new executive leadership is embracing the concept of supplier squeeze in order to lower existing prices at retail stores. Wal-Mart recently raised salaries for store associates which have added a new cost burden. Further reported is that this effort has already caused renewed supplier tensions among suppliers who are already attuned to the retailer’s relentless focus on inbound cost. The new tensions for suppliers are that they potentially have less control on the way their individual branded products are marketed to Wal-Mart consumers.
This new WSJ report revisits a previous report of Wal-Mart’s current dealings with well- known consumer products goods provider Procter & Gamble and its cash cow product, Tide laundry detergent. The retailer recently began merchandising Henkel’s Persil laundry detergent directly aside of Tide in a move that the WSJ now clearly declares was an attempt to pressure P&G to lower the price of its market-leading laundry detergent.
Yesterday, Amazon released the news of a Dash Button, a physical version of its 1-click ordering. An Amazon Prime member sets up the device to correspond to a certain product and places the physical device in a convenient place (perhaps inside the cupboard or cabinet where household products are stored). When the supply runs low, the user can press the button to order more of that product, which directly communicates with Amazon via a Wi-Fi connection. It is literally an electronic Kanban replenishment system in a B2C setting. A total of 255 products from 18 brands are reported as being available through the Dash Button program and surprise-surprise, P&G and its Tide detergent is noted as a participant. That may well be another motivation for Wal-Mart to place direct pressure on its most longstanding and loyal supplier partner. This is also not the first time that P&G and Wal-Mart have openly sparred over P&G’s collaborative efforts with Amazon.
As survey methodology often depicts, a single data point is an observation, a second similar data point is of interest and a third data point within a short period of time is the early indication of a building trend.
Supplier squeeze tactics are often prevalent in times of significant economic stress when preservation of cash is a critical corporate objective. Industry supply chains experienced many forms of such tactics during the great recession that began in 2008-2009 and some suppliers actually succumbed to bankruptcy as a result. Today, global supply chain activity and output as manifested in the J.P. Morgan Global Manufacturing PMI Index has recorded 27 months of consecutive expansion. Thus, motivations for current supplier squeeze tactics have taken on different motivation, perhaps more related to short-term Wall Street and consequent stockholder expectations. In any case, it is by our lens, a concerning trend with the potential to provide setbacks to efforts towards deeper collaboration and/or partnerships with suppliers. Consider that Wal-Mart has embarked on a multi-billion dollar initiative to influence suppliers to source more products within the United States. Wal-Mart gives, and then takes-away.
A short-term business outcomes perspective can permeate across the many levels of the value-chain and procurement teams and financial senior executives need to be reminded of the consequences for longer term supplier partnerships directed at product, process and customer fulfillment innovation. Focus on the P&G dynamics with Wal-Mart, both rather savvy and determined business partners who have experience in good and not so good times, and in the savvy of push-back. Many suppliers, particularly smaller scope suppliers do not have the leverage of a P&G, and thus, there resides the current risks in supplier management.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.