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The State of U.S. Logistics Remains Concerning and Requires Attentiveness

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The following Supply Chain Matters commentary is our annual reflection on the Annual State of U.S. Logistics Report. Normally, our postings typically average 350-400 words of blog content for reader benefit. Rather, this is a longer length advisory report to educate our readers that will be also be made available for separate complimentary downloading in our Research Center within the next few days.

 

The 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report, the latest which reflects on 2014, has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and Container_Termprocurement professionals. Since our inception, Supply Chain Matters has provided specific commentary and our view of the key takeaways from the report.  With the latest report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.

Our editorial commentaries for both the 2012 and 2013 State of Logistics reports expressed concern towards a continued trend for increased logistics, transportation and inventory costs. The latest report depicting 2014 activity is no exception.

The report summary begins: “Total logistics costs increased only 3.15 percent in 2014.” The underline and emphasis of the word “only’ is ours since we were astounded by such use depicting normalcy. Considering the low rate of inflation, interest rates and the dramatic reduction in the costs of crude oil in 2014, from our lens, an overall 3.1 percent in the cost of logistics in the United States should remain a concern for industry supply chains. These total costs have now climbed beyond the peak level reached in 2007, prior to the global recession.  In theory, U.S. logistics efficiency and productivity should be trending positive.

We first call attention to the report’s references to U.S. GDP values as a point of reference comparison.  The report authors have utilized nominal GDP as a consistent baseline as compared to real GDP. Nominal GDP includes all the changes in market prices that have incurred during any year including inflation or deflation, while real GDP is reported as a percentage increase from a specific base year. To provide our readers a sense of the difference for 2014, nominal GDP growth for the U.S. was reported as 3.9 percent while real GDP averaged between 2.6-2.9, percent, depending of which cited source, over the past six quarters. For the 2010-2014 recovery period from the severe economic recession, The World Bank reported annual real GDP growth as averaging 2.2 percent annually. This difference is significant when reporting and charting logistics costs as a percentage of GDP.

Lesson in economics aside, we advise readers to pay close attention to specific logistics and transportation cost increases. As an example, total U.S. logistics costs rose by nearly $43 billion in 2014, compared to a $31 billion increase reported for 2013. For the period 2010-2014, U.S. logistics costs have risen 18.2 percent or $223 billion, almost 7 percentage points higher that real GDP growth in that same period. Factor whatever GDP growth number you want but the takeaway message should be one of concern and diligence to the trends of why such increases are occurring.

Other highlights and some observations of the latest 2014 report are noted below.

  • Inventory carrying costs in 2014 rose another 2.1 percent, compared to the 2.8 percent increase reported in 2013 and the 4.0 percent increase reported for 2012. Overall business inventories were reported as rising by $52 billion or 2.1 percent in 2014. The second and third quarters were noted as high water marks for 2014 and that obviously reflects the impact of the U.S. west coast port disruption, as industry supply chain teams increased safety stock levels in anticipation of contract labor talks. Manufacturing inventories were reported as down slightly. Interest costs remained well below 1 percent and thus increased costs for taxes, insurance, warehousing, depreciation and obsolescence occurred. The cost of warehousing rose 4.4 percent, reflecting near capacity utilization rates.

 

  • Overall transportation costs were reported as rising 3.6 percent, with the largest component, trucking, up nearly 3.0 percent. The current fragile state of the U.S. trucking industry was again highlighted. The report cites anecdotal evidence indicating that loads are heavier and more trucks are moving near full capacity. Cited are estimates from the American Trucking Association (ATA) estimating the current truck driver shortage as being between 35,000 and 40,000 drivers, which should remain of concern.

 

  • U.S. rail costs were reported as increasing 6.5 percent on top of a similar percentage increase reported for 2013. Total carloads were up 3.9 percent, the highest since 2006 and overall rail traffic was reported as increasing 4.5 percent. The U.S. railroad industry operating remains operating at near capacity, despite the addition of 1300 new or rebuilt locomotives and nearly 4500 new rail cars put into service.

 

  • Costs for water based transportation rose 8.9 percent in 2014, the second highest reported growth sector. U.S. East Coast ports were noted as experiencing the biggest percentage gains in traffic pick-up because of the West Coast port disruption. Another challenge that manifested itself in 2014 was the impact of the larger, mega container ships calling on U.S. ports, and resultant disruptions related to the availability of container truck chassis, along with the time required for unloading and re-loading. One rather important trend noted was that the monthly average number of containers imported from China was more than 10 percent higher than average monthly shipments for the last four years. From our lens, that seems to be a reflection of even more freight being routed by ocean container vs. air. Air freight revenues were reported as declining 1.2 percent with international air freight down 3.6 percent.

 

  • The revenue growth trajectory of U.S. non-asset based services and Third Party Logistics (3PL) providers continued in 2014. Revenues pegged for the third-party logistics (3PL) sector were reported as $157.2 billion, an increase of $10.8 billion or 7.4 percent over 2013. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 20.5 percent in 2014, on top of the 7.2 percent growth reported for 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones. We continue to believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.

 

The Looking Ahead portion of the 2014 report provides another important takeaway for our readers, one that we have already reinforced in our predictions for this year. The report specifically states:

The capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.

The report later summarizes:

To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”

Thus, our 2015 Supply Chain Matters Prediction for a turbulent year in global transportation more likely will take on a multi-year context.

Supply Chain Matters submits that the overall takeaways from the 2014 State of Logistics are once again dependent on the reader frame-of-reference.

If you reside anywhere in the transportation and 3PL logistics sector, your reaction is likely positive. Business is very good indeed. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding added investments in capacity and delivery of services. Distribution center operators and real estate interests are included, especially in light of the pending shift of more ocean container traffic in favor of U.S. East Coast ports, as well as the dramatic changes in distribution flow-through and drop-ship footprints required by more online customer fulfillment needs.

If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.

 

Once again we offer the following insights:

  • Procurement, supply chain planning, B2B business network and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of 2014 data is to insure that the cost, service and inventory benefits derived by contracting services with respective 3PL’s outweighs the continuing pattern of increasing 3PL services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s will have to invest more in technology and services, adding more motivation to increase fees.

 

  • Approaching transportation spend as the singular dimension of cost reduction remains an unwise move, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes. The data for 2014 indicates that more and more supply chain teams are exercising strategies to assure consistent and reliable transportation capacity and logistics services.

 

  • Similarly, we again encourage S&OP teams to re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point and fulfillment center trade-offs and costs of carrying inventory. Today’s global logistics environment remains dynamic and complex. Decision-making data must reflect this state, along with the assumption that overall logistics costs are trending higher.

 

  • In order to reduce overall cost and asset investments, senior supply chain leaders in certain industries have contracted more and more services to 3PL’s and other service providers. Insure that your teams are continually analyzing cost and benefit tradeoffs. Maintain periodic reviews of costs and benefits on a more frequent basis.

 

  • Both FedEx and UPS initiated dimensional-based pricing on ground shipments effective in 2015, and initial financial results from both of these carriers indicates positive impacts in revenues. This area continue to have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy for certain classifications of products. Be watchful of this area.

 

  • Last year’s Supply Chain Matters commentary reflecting on the State of U.S. Logistics observed that the U.S. economy showed more promising signs of manufacturing growth. The latest report of 2014 activity paints a more cautionary picture regarding manufacturing and logistics growth. The logistics industry must tackle troubling capacity and productivity constraint trends along with their impact on customer costs. There has also been too much of a tendency to maintain fuel surcharges and fees to boost revenue and profitability levels even higher.

We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication on supply chain objectives and needs.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Quantified Impact of the Expanded Panama Canal for U.S. Bound Container Shipping

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The Boston Consulting Group (BSC) and C.H. Robinson have just released a new joint study, How the Panama Canal Expansion is Redrawing the Logistics Map, (sign-up required for complimentary report) which we feel should be essential reading for multi-industry sourcing, procurement, logistics and transportation teams. This study should motivate such teams to undertake more frequent and ongoing analysis of existing MSC_Ship_2supply chain networks involving ocean container movements, in light of the opening of the scheduled 2016 expanded Panama Canal. According to this new study, the difference will be significant shifts in port volumes and resultant transportation costs.

The joint BSC-Robinson study predicts that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. east coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing ports of Savannah and Charleston. The study concludes that this container routing shift will permanently alter the competitive balance among U.S. east and west coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing.

Supply Chain Matters has previously viewed similar studies that analyzed the impact of the expanded Panama Canal on U.S. east coast ports.  We therefore reviewed in-detail, this latest joint study from BSC.  The research is grounded in a data point indicating that last year, 35 percent of East Asia container traffic was routed to U.S. East Coast ports. The baseline 2020 assumption of the report is that without the Panama Canal expansion, east coast share would rise to 40 percent if current economic. energy and shipping trends remain constant. However, factoring the upcoming Panama Canal expansion, the study authors predict that the east coast share could reach up to half of port volume.

Like any sound analysis, the BSC research tested three broad scenarios that included:

  • A weaker growth rate for the U.S. recovery.
  • A shift in manufacturing sourcing that favors different Southeast Asia and U.S. nearshoring.
  • The potential of over-expansion of port infrastructure.

When all the analysis is included, the BSC model suggests the emergence of three classifications of ports:

  • Advantaged- concluding that New York-New Jersey and the southeastern ports of Norfolk, Savannah, and Charleston stand to gain added share volume.
  • Neutral or Unclear- notes unclear impacts to the U.S. east coast ports of Baltimore, Miami and Norfolk.
  • Disadvantaged- concludes that while Los Angeles- Long Beach ports will continue to be the fastest routing option for reaching major population centers in the U.S., these ports will face new competition and/or lost business from competition in the region east of Chicago. The southeastern portion of the U.S. is the area designated as having the most economic benefit from the expanded Panama Canal routing.

BSC provides certain caveats. They include the very key assumption as to how efficient U.S. east coast ports become in their ability to efficiently unload and load the larger Panamax plus class of ocean container ships along with which of the four possible economic scenarios actually occurs. Supply Chain Matters has also raised such concerns, observing that the underlying logistical challenges caused by much larger container ships that affected U.S. west coast ports remain challenges for all U.S. ports that plan to service such ships.

We believe that the joint report outlined actions for readers bears consideration for multi-industry supply chain teams, logistics and transportation services providers as well as U.S. port operators and legislators.

This report’s takeaway for shippers is that the opening of an expanded Panama Canal next year will provide increased options but greater complexity. Shippers will likely need to take a much more segmented and detailed approach to possible supply routings that weigh cost vs. service time considerations.  We would not hesitate to add that this message implies more dynamic and frequent use of supply chain network modeling analysis techniques to provide product sourcing and sales and operations planning teams with continual analysis of the various cost and service scenarios for container routings.

For carriers, including U.S. railroads, the message is about interrelated decisions in investments, pricing, routing and customer development decisions. Investments in key U.S. east coast ports and supporting infrastructure is an obvious consideration along with a caution that future changes in key tariff rates could well change the overall economics for shippers. Reports indicate that investments in new warehousing and logistics facilities adjacent to the advantaged east coast ports has been steadily increasing and land costs are exploding due to this increased demand.

The BSC study concludes that time-sensitive cargo will continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings. Carriers need to consider these options.

For logistics services providers, the BSC message is to help shippers and carriers sort out these changing scenarios. For non-asset based LSP’s, there are key investment decisions remaining to be considered for customers and their routing needs.  BSC rightfully points out that LSP’s have the opportunity to be an important partner for customers in helping them to navigate these transportation changes.

Supply Chain Matters would add that carriers and LSP’s as a community, need to step-up and provide their customers with the added intelligence and service options they need to take maximum advantage of the Panama Canal expansion opportunity. We hasten to add that any entity looking to alter these decisions through self-advantage should be called out by shippers.

Finally, we re-iterate that individual supply chain teams themselves insure that they undertake their own analysis of their respective supply chain networks.  Such analysis can no longer be an occasional project but rather a more frequent activity matched to ongoing developments or events.

In this continuing environment of supply chain complexity and change, strategic and tactical network decisions should not be solely delegated to third parties, and remain the responsibility of individual supply chain teams.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters ® blog. All rights reserved.

 


Demand Sensing Lessons Learned in China

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As thought leaders in supply chain management, we often point out the critical importance for firms to more quickly sense geographic or regional changes in product demand and respond to such changes with integrated supply and fulfillment capabilities. This week, The Wall Street Journal highlights (paid subscription) how certain high-profile consumer product goods companies were hampered in China by not having such capabilities.

The report notes that a sudden change among China’s consumer buying trends suddenly occurred as millions of consumers elected to shift their buying practices away from larger retail outlets in favor of online marketplaces. The WSJ indicates that an estimated 461 million Chinese consumers, nearly a third of the population, are now shopping online. Further cited is Nielsen data indicating that nearly half of Chinese consumers are buying groceries online, compared to a quarter of consumers on a worldwide basis. Global CPG firms such as Beiersdorf, Colgate-Palmolive, Nestle and Unilever were reportedly laggard in the sensing of this channel buying shift.

For Unilever alone, the shift toward online buying accounted for a 2.7 percent drop in global revenues. The CFO of Unilever is quoted as indicating that CPG firms in China were “too slow to react to the changes in the marketplace.” Another Unilever executive is quoted as indicating: “It’s very, very difficult for us to be absolutely sure (of inventory levels) because the visibility across the extended supply chain in China is not that great.”

Many CPG firms distributing products in China had targeted their merchandising and inventory strategies towards large retailers and thus were not able to sense the changed buying patterns until inventories grew.

Many of these firms are likely to have acquired important learning and are re-focusing supply chain strategies more towards online fulfillment channels including more direct presence.  There will obviously be further learnings in the months to come.

Suffice to state that in today’s complex supply chain universe, generalized market support and distribution strategies will not suffice.  Each major market requires its own set of product demand planning, sensing and supply chain response strategies.

Bob Ferrari


Are Ocean Container Megaships Benefitting Industry Supply Chains? – Perhaps Not

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Our readers who closely follow our global transportation and logistics related commentaries are well aware that Supply Chain Matters has penned our share of rants related to the ocean container shipping industry. For reference, you can review examples of a rant in March of 2013 and a follow-on rant in May of 2013.

Because we are an independent blog, not beholden to industry ties or influence, we felt compelled to offer our point of view to educate industry supply chain teams on the implications and consequences of such strategies. That also compelled us to predict at the beginning of this year, that 2015 would be a turbulent year for global transportation, and indeed, that prediction continues to unfold.  MSC_Ship_2

 

The ongoing strategy of contracting for and introducing ever larger super-sized container ships defies the realities of an industry that has gross overcapacity.  Instead, the shipping line dominants, particularly Maersk, are exercising a strategy that in essence, forces other shipping lines to either match such investments or consolidate capacity with other carriers.

Now for those supply chain professionals who do not necessarily subscribe to blog commentary and viewpoints, The Wall Street Journal’s Logistics Report (primary sponsor being UPS, Inc.) has penned its own recent commentary: OECD Says Economic Gains From Big Ships Are Sinking.

The report cites a recent study from the Paris based Organization for Economic Cooperation and Development’s (OECD) International Transport Forum which suggests that the operating cost benefits of megaships to ocean container lines are more than offset by the economic costs on port infrastructure and logistics impacts related to having to load and unload these vessels. A quote from this report indicates:

The development of the world container fleet over the last decade is completely disconnected from developments in global trade and actual demand.”

The OECD researchers indicated that the new mega container ships allow carriers to benefit from $25 in operating cost savings per container, amounting to $200 million in operating benefits starting in 2017. Meanwhile, the costs for improving ports, re-dredging harbors, expanding transport and logistics networks to accommodate these megaships is estimated to be more than shipping line savings.

The WSJ Logistics report further cites research from McKinsey estimating that a 20 percent gap between shipping capacity and demand will persist until at least 2019.

““The effect of this overcapacity is low freight rates, which will undermine the profitability of the container shipping sector.”

We would add our prior observation that indeed, that is the strategy at-play, eliminate marginal carriers by financial stress and force consolidation among consolidated, multi-carrier capacity networks.  The recent U.S. west coast port disruption, although primarily brought about by the effects of labor contract renewal negotiations, was also compounded by the building effects of mega container ships having to be unloaded and re-loaded in just a few days. To gain additional insights on the economics, check out the last paragraph of the recent WSJ Logistics article which cites OECD statements as capacity break-even estimates.

Supply chain teams should therefore not assume that the U.S. west coast port disruption was just a one-time aberration. As more and more megaships enter service over the coming months and years, disruptions are a real possibility if particular ports are not prepared to support the newer mega container ships. Inventory and component sourcing strategies will have to be carefully managed. Nor should transportation teams rest on the current effects of overcapacity leading to cheaper spot container shipping costs.  As the marginal shipping carriers succumb or consolidate, the survivors will want to recoup profitability.

Expect a turbulent year in global transportation not only in 2015, but the next three years as well. Perhaps that continues to motivate smaller and mid-market companies to continue to outsource logistics and transportation needs to global-based 3PL’s who have the savvy and expertise to be able to navigate through such troubled waters.

Bob Ferrari


A Track Record of Persistent Shortages of Life-Saving Pharmaceutical Drugs

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Supply shortages involving critical drugs across multiple pharmaceutical focused supply chains should not be a surprise to our Supply Chain Matters readers.  We have called attention to this situation since 2011-2012.  However, what should be of concern is the ongoing persistence of this problem and how it impacts timely and quality-focused delivery of life-saving healthcare services.  Further, there are now brewing perceptions that the industry may have other intentions, namely, not concentrating on the increased supply needs of generic drugs.

On Monday, The Wall Street Journal featured a page one report: Drug Shortages Plaque U.S. Medical System. (paid subscription required)  The report cites University of Utah Drug Information Service stats indicating that the number of drugs in short supply in the U.S. has risen 74 percent in five years. Once more, a graph indicating the reasons for such shortages has the top three categories listed as: “Unknown” accounting for 47 percent; “Manufacturing shortages” accounting for 25 percent; “Supply and demand” accounting for 17 percent. These statistics, by our lens, should not by any stretch, be viewed or perceived as being complimentary to pharmaceutical supply chains, especially when “Unknown” is the leading reason.

The article’s authors cite interviews with company executives, pharmacists and regulators pointing to several causes that are noted as not building enough production capacity, not adequately maintaining production equipment and failure to control contamination in aging plants. There is a further observation that crackdowns on shoddy quality by the U.S. Food and Drug Administration (FDA) have worsened the shortages because some companies have responded by shutting down all production of a particular drug.  But the authors also point to another theme: (we quote)

Many of the scarce drugs are older, injectable treatments that can be complex and costly to manufacture, but which command relatively low prices because they aren’t protected by patent. Hospitals and doctors’ offices are the main buyers of the drugs. Companies can’t easily increase prices because insurers reimburse many generic hospital-administered drugs under a payment system that is more frugal than for other medicines.

This theme of generic drug shortages is similar to previously reported shortages.

A U.S. federal law passed in 2012 provides the FDA with increased powers to prevent and resolve drug shortages. Supply Chain Matters called reader attention to the new powers of the FDA in a 2012 commentary on the crackdown on Ranbaxy. According to the WSJ, the number of declared new shortages decreased by 44 in 2014, from a peak of 251 in 2011.  That obviously is some progress made in the last four years but more is definitely needed.

The article goes on to call attention to continued global-wide shortages of critical drugs such as BCG, a potentially life-cycle drug utilized to treat bladder cancer and how specific manufacturers have not responded to market need. It notes how doctors have been forced to either postpone or suspend BCG treatments since shipping delays are expected to persist in next year.

Supply Chain Matters is calling attention and making wider visibility to the continued supply shortages because we feel strongly that the industry needs to face up to its problems and work with regulators and physicians in constructive solutions to such problems. Supply shortages will continue to motivate illicit and unsavory global distributors to introduce more counterfeit or lower quality supply in the market.

The open question remains as to which organization is directing supply chain supply strategy.  In the meantime, quality healthcare outcomes continue to be at-risk.

Bob Ferrari

 

 


Overcoming the Crisis of CPG Big Food Industry Supply Chain Disruption

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Included in our Supply Chain Matters Predictions for Industry and Global Supply Chains (available for no-cost complimentary downloading in our Research Center) are what we predicted would be certain extraordinary industry-specific challenges. The packaged consumer product goods and food industry, specifically large, global branded firms and their supply chains, has been included in our list for the past three years.  As we approach the mid-way point of 2015, the crisis of “Big Food” has now reached its most disruptive and dynamic point, with consumers sending a very clear message regarding healthier food choices and more natural ingredients in their buying preferences.

The crisis has had acute market, channel, investor and operational implications which continue to cascade among cross-functional CPG supply chain and product management teams. Rather than reminding our readers residing in the industry of the constant pain points they already know and deal with each week, we would rather provide help in providing perspectives on helpful ways to manage in such an environment.

Our previous commentaries have noted that setting continuous improvement goals predicated on months of key performance indicator history, or industry benchmarks is not going to cut it. Managing from the rear-view mirror perspective is not going to cut it. The crisis of big food is moving at unprecedented transformational light speed, which we will touch upon later.

As large CPG firms continue to serve up grim or disappointing financial results as a result of these forces, as well as others, Supply Chain Matters offered three important strategies for our CPG industry readers. They included a critical need for increased product innovation and quicker introduction of new products in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams anticipate such market changes with the ability to sense and respond on a more timely basis.  The focus clearly turns toward an outside-in perspective, allowing the supply chain to respond as quickly as possible to market opportunities or threats. Today, natural and organic foods have a high online presence including online outlets such as Amazon Fresh. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.

As more global food companies turn their attention to acquiring more organic, sustainable and/or ethical food supply chains, we offered pointers for more effective supplier management, specifically an emphasis toward longer-term buying agreement that assist smaller suppliers in the required investments needed to produce healthier food.  We noted how industry observes pointed to Hain Celestial, Pacific Foods and Chipotle Foods as good examples for these strategies.

In this commentary, we call reader attention to two industry focused articles published this month that are now drawing very wide interest and attention among traditional print and social media channels. They offer similar industry observations but slightly different tactics, because their prime industry audience is different.

The AdvertisingAge’s arictle Big Food’s Big Problem: Consumers Don’t Trust Brands, addresses the current crisis from a branding lens concluding that:

Quite simply, big brands are losing one of their most valuable assets: consumer trust. And the fight to regain it will shape the industry for years to come.”

The article cites Boston Consulting Group and IRI data indicating that some $18 billion in sales have shifted from large to smaller CPG firms from 2009 to 2014. Major retailers, convenience foods and restaurants are responding to consumer desires are now shifting supply chain sourcing, retail assortment and merchandising strategies away from processed to feature more natural and organic food products on shelves or on menus. On the subject of acquisition of other more desirable brands as a strategy, the message is avoiding some major mistakes incurred by the likes of Kellogg with its acquisition of Kashi.  It further advocates for a hands-off strategy in terms of blended marketing strategies.

What we believe is an even more profound article, one that we highly recommend, was one published by Fortune, The War on Big Food. We view this article as one with a perceptive product operations and supply chain perspective, in addition to branding.

Need more facts related to industry change- the article cites a Credit Suisse equity analyst as declaring that the top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. A former Con Agra executive who know runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”

Fortune observes that almost all big CPG companies are radically re-thinking their own product recipes while some are attempting to buy their way into the natural space through acquisition. Brought forward on a positive acquisitions theme are the positively perceived strategies of Campbell’s in its strategies with Boathouse Farms, General Foods in its acquisition of Annie’s Foods. The most important takeaway here was a perspective of acquiring more agile talent and resources and allowing the new entrant to continue to be independent in marketing and distribution strategy needs. The CEO of yogurt producer Stonyfield Farms notes that major food companies can bring their acumen, deeper pockets and global supply chain scale “but they should stay the heck out of their brand.” Rather than homogenize acquisitions into the huge supply chain, the acquired company determines best competitive strategy in its market segment.

Positive examples of rethinking existing recipes are Nestle and Hershey with their new ingredient approaches to current iconic brands. In the case of Hershey, it was helping longstanding suppliers understand that the company was committed to GMO-free or growth hormone free milk products. An important takeaway- for now, Hershey is reportedly willing to adsorb the added costs for the ingredient changes while it looks for savings elsewhere.

A final important takeaway of the Fortune article came from Hain Celestial’s CEO who admitted to the magazine that he is often grilled on a regular basis on margin growth. His reply to Fortune: “ If your products are non-GMO, organic and have no artificial ingredients you’re always going to give up 10% to 15% on margin.” He questioned whether other big CPG companies are really willing to leave such margin on the table. That perspective is ever more echoed by the post Heinz-Kraft merger and the notion of 3G Capital’s current assault on the industry.

For this author, the most important and powerful analogy describing current global CPG and food industry supply chains  is indeed winning short-term battles to satisfy activists while losing the longer-term war of the brand and of the supply chain’s efficacy in fulfilling consumer needs. The supply chain’s goal is in the end, delivering satisfaction and service for product consumers.

In times of crisis, one has to invest in accelerated transformation, more agile business processes and better technology to accomplish such objectives. Many years of investment made up processed food supply capabilities and distribution channels and similar longer-term investments will be required to augment and sustain fresher, organic and artificial ingredient free supply chains. Work with and continue to educate your senior management teams in the balancing both short and long-term needs.

Bob Ferrari

© 2015 The Ferrari consulting and Research Group LLC and the Supply Chain Matters© blog. All rights reserved.


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