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It is also one of the two remaining categories (along with meat) which is virtually all own label and thus over which they can exert considerable influence and control.
As a result, over the past 15 years, the fresh produce department has moved from the back of the store to the front and has doubled its shelf area in store and the growth has occurred without substantial growth in consumption volume but with significant growth in expenditure. INTRODUCTION Food safety legislation and Supply chain integrity Success factors in the fresh produce supply chain :
Insights from the UK PRESENTED BY :
ADITI GUPTA Presents recent evidence of Supply Chain developments in the UK fresh produce industry, based on interviews with chief executives from some of the country's most successful suppliers.
The evident success factors included: continuous investment, good staff, volume growth, improvement of measurement and control of costs, and innovation. UK food retailers --the most sophisticated in the world.
The demands placed on suppliers, particularly of own label produce, render the British food manufacturing industry one of the most efficient and innovative in the world.
Historically, the fresh produce industry has lagged in its approach to marketing and merchandising, seemingly resigned to the status of commodity traders.
The ascendancy of the multiple retailers and the key strategic importance of own label products has elevated the fresh produce industry to a position where suppliers have a genuine opportunity to break out of the commodity trap and take the fresh produce category out of the trading environment. Key drivers: UK Fresh Produce Industry Understanding the factors driving the growing importance of the fresh produce category provides the key to understanding their approach to vertical co-ordination and the steady move towards fewer larger suppliers operating in dedicated supply chains for specific supermarket customers.
There are four key factors that have driven the transformation of the fresh produce industry in recent years:
Food safety legislation and supply chain integrity.
Rationalisation of the supply base.
Innovation. It is relatively a static market with intense competition among the top four (Tesco, Sainsbury's, Asda, Safeway) which account for almost two-thirds of grocery sales.
Strategies adopted were :
based essentially on location and size .
based on differentiation, with own label-fresh produce and meat in particular. Own label has become a key factor in the major supermarkets' attempts to differentiate themselves from the competition.
Own label products in the UK are not aimed at price-sensitive, quality-insensitive consumers.
They account for close to one half of all foods purchased in UK supermarkets and the fresh produce category is almost exclusively own label. Example Changing the location of fresh produce within the retail stores yielded immediate benefits.
“ Asda attribute a 50 per cent increase in their fresh produce sales directly to the relocation of their fresh produce counter from the back to the front of their supermarkets but inevitably resulted in problems over wastage, as retail managers lacked the knowledge to handle the increased volumes. Pre-packing substantially reduced wastage problems and enabled supermarkets to introduce greater control over quality, presentation and pack size. “ The 1990 Food Safety Act gave the process of vertical co-ordination, driven backwards from the retailer rather than forwards from the grower/processor, further impetus, with the growth of own label increasing the need for improved due diligence and tighter supply chain control.
It also requires buyers to take all ``reasonable steps'' to ensure that the food they receive from upstream suppliers is safe.
Upstream firms need to monitor more carefully their food handling to satisfy their downstream customers. Retailers drew up codes of practice, covering all aspects of crop management and issued them to their suppliers.
The industry developed a generic farm assurance scheme for domestic fruit and vegetables, highlighting best practice in integrated pest, disease and crop management systems.
Protocols have been drawn up for individual products by growers and retailers (the NFU-Retailer Integrated Crop Management Partnership) and are now established as the baseline industry standards for safety and quality.
“A good example of the control that supermarkets can exert on suppliers, and the priority they attach to supply chain integrity is the recent formation, by Tesco, of a ``hit squad'', empowered to call on any supplier, day or night, to test their compliance systems.” TESCO DOING IT RIGHT Rationalisation of the supply base The search for improved supply chain integrity and greater consistency in the quality of fresh produce coupled with the need to squeeze costs out of the supply chain, through greater control (either directly or indirectly) has resulted in the rationalisation of the supply base, with retailers seeking to deal with fewer, larger, technically efficient and innovative suppliers.
The major supermarkets now deal with just a few suppliers and take every opportunity to pass responsibility (and associated costs) for quality control and procurement, storage and distribution upstream to their key suppliers, in return for which the chosen few are rewarded with volume growth. The race is on for retailers to find the best partners with whom to take on the competition. As a result, the power struggles between buyers and sellers is being replaced by intense competition between chains. It will create growing tensions between supply chain partners, unless a way can be found to remove price as the key point of difference between suppliers (in the eyes of the retail buyer) and between retailers (in the eyes of the final consumer).
It is here that innovation provides the key. Innovation The volume of fresh produce sold as raw product still accounts for the bulk of supermarket sales, but significant year-on-year growth is almost exclusively in ready-prepared vegetables and the growth is huge.
The success of prepared salads in the UK, in contrast with the experience in the USA, is largely due to the efficiency of the supply chain. In the UK prepared salads will be in the retail store within two days of harvest and consumed within five days of harvest-half the time which salads spend in transport and inventory in the USA. Thus, quality is maintained and waste is minimized. Thus, innovation drives value creation –
new varieties (sweeter, juicier, crispier, improved visible characteristics etc.)
new formats (pre-prepared, mixed salads, stir-fry packs etc.)
extended shelf life and production efficiency (processing, storage, packaging and logistics technology).
The shortening of product life-cycles and lead times for introducing new products and new technology keeps the market moving on. Retailers look for innovative suppliers with the ability to invest in processing capacity and professional product development programmes.
However, innovation is difficult to achieve and exploit in a sector which offers low margins for suppliers and in which the rewards for first movers on new products are limited and short- lived. Nevertheless, given the importance of growth and the fact that most of the growth has been in value-added products, investing in product innovation is the only way in which fresh produce suppliers can break out of the commodity trap. Key Characteristics of Successful fresh produce suppliers The implementation of efficient consumer response (ECR) and category management (CM) programmes by the major retailers over the past two years has resulted in a fundamental examination, by retailers, of their suppliers. This process not only enabled supermarkets to identify those suppliers best equipped to implement ECR and CM, it also enabled them to identify the level of commitment from their fresh produce suppliers, which in turn assisted them in their rationalization of the supply base and the search for technical excellence and competitive edge in the fresh produce supply chain. Key indicators for the development of successful partnerships in the fresh produce supply chain –
Pro-active relationships across all aspects of the business.
Complete electronic integration
Strategic orientation – does the senior management have the vision to take the business forward ?
Ability to exploit market information.
Organizational structure and business culture – ability to meet customer needs at every level of business.
Ability to measure and control the full costs of servicing customer requirements
Ability to innovate (new product development, marketing, supply chain management).
Supply chain management (integrity and efficiency).
Product range management (such as category planning and NPD).
Promotion and merchandising (tends to be retailer led in fresh produce but supplier led in fmcg). STRATEGIC ORIENTATION At the corporate level retailers look at the resources which suppliers have at their disposal. Clear desire to deal with large players (ones which are perceived more sophisticated and knowledgeable) . WHAT COMPANIES SAY ABOUT STRATEGIC ORIENTATION All of them recognized the importance of the multiples and the need to deliver unbeatable service but the extent to which retail customers had any formal input into the strategic planning process was limited
The largest suppliers interviewed took a more independent view. Supermarket accounts were managed with precision, but the strategic orientation of the business evolved from within, with little explicit input from key customers
One exception to this, a medium-sized player with a dedicated customer with whom corporate objectives were explicitly aligned. EXPLOITATION OF MARKET INFORMATION Currently there is a distinct lack of market research in the fresh produce industry that struggles to break out of the commodity trap. Yet product knowledge is one of the few areas where suppliers can (and should have) an advantage over their customers.
Small-scale fresh produce companies need to wear big company clothes and tailor them to their budget - “market knowledge is one of the few remaining sources of countervailing power”. “IMPORTANT TO UNDERSTAND” All parties in the supply chain have yet to come to terms with the fact that it is not what you know that gives you competitive advantage but how you interpret information and use it strategically to drive innovation and efficiency. “MISERY “ Tesco continues to charge their suppliers for EPOS data - primarily because the trust does not exist to the extent necessary for suppliers and retailers.
Information sharing remains limited, even with dedicated suppliers. The high degree of inter-dependency established between some suppliers and their retail customers reduces the risks associated with information sharing.
With competitive prices at the core of their respective marketing strategies, open access to cost and market data is a must.
The companies who appeared to be doing most in market research have recognized considerable benefits, therefore with the right people and right level of motivation, cost effective market research can be done in house. ORGANISATIONAL STRUCTURE AND BUSINESS CULTURE It is essentially concerned with the people factor and the degree to which suppliers comprise the sort of people with whom the retail customer (and most notably the buyer) feels happy working.
Culture is concerned with the ethos of the business and the attitude of employees (including senior management) to customer service.
Structure is concerned with the way in which suppliers choose to communicate with their customers, at all levels of the business. COMPANIES INTERVIEWED SAY Made reference to the importance of good quality staff, which most found difficult to attract and even harder to keep, given the limited career opportunities in a tight margin industry with an unattractive image for young graduates - a problem which the fresh produce industry as a whole needs to address.
All of the companies interviewed in this study had structured their businesses into account management teams , these teams were run as strategic business units - independent profit centres with a strong customer focus.
Such a structure enables suppliers to handle issues relating to
exclusivity or dedication, even with a mixed customer portfolio, and facilitates the process of cross-functional alignment between customers and suppliers,
which all those interviewed regarded as an important means of developing customer relations. There was a common perception that retailers had made little progress on their side to develop genuine category management teams, better
equipped to break out of the trading mentality.
Companies interviewed expressed skepticism over the retailers' approach to partnerships, pointing at the central role of the buyer which has changed little in recent years, and the policy of rotating buyers on a regular basis, which makes it difficult (and costly in terms of the time it takes to develop an adequate level of mutual understanding between buyer and account manager) to build long-term relationship. COST CONTROL As demands from retailers on their fresh produce suppliers become increasingly exacting, the capability to measure the cost of increasing customer service is essential for the suppliers to meet those demands at a profit.
It is also essential in the evolution of partnerships. With the pressure on suppliers to deliver ever higher levels of service, suppliers are often too quick to accept demands from their customers, only to discover later that the costs associated with a particular task exceed the revenue, an outcome which serves only to generate further tension between trading partners.
Attention to detail on costings can also reveal opportunities for obtaining competitive advantage.
For example, one company had gained considerable leverage with their suppliers by offering premiums for producing consistent quality. These premiums have been ``engineered'' through a bottom-up analysis of supply chain costs, which revealed that considerable gains could be made by reducing the volume of produce which fails, for various reasons, to meet the retailers' specifications.
INNOVATION In a highly competitive market of fresh produce, characterized by over- supply and a commodity orientation, innovation is the only long-term source of competitive advantage.
However,the lack of product innovation is a feature of commodity markets. In the fresh produce industry, it is also a result of the proliferation of entrepreneurial (often family-owned) businesses, in which the injection of creativity and an open mind-essential ingredients for innovation-is often lacking.
CONCLUSION FROM THE CASE
Consumers have a greater choice of top quality produce, all year round, and retailers have set out their stalls to make fresh produce a destination category, attracting new customers in the battle for market share and
generating handsome margins through predominantly own label product lines.
NOT MUCH IMPROVEMENTS AT THE SUPPLIER FRONT
Yet the trading environment from the suppliers' perspective does not reflect the success which retailers have had at store-level and the pressure on suppliers' margins is intense.
UK FRESH PRODUCE PROFIT PIE FUTURE OF FRESH PRODUCE INDUSTRY IN UK
The future is bound to see a steady move away from traditional commodity
trading, with its emphasis on price, towards integrated supply chain partnerships, with much greater emphasis on value added and return on investment to all members in the supply chain. At the grower/pre-packer interface, the need for further volume growth will mean further rationalization of the supply base with the largest and most professional growers being rewarded with whole-crop marketing agreements on a cost-plus basis, which in turn will lead to much greater product differentiation and market segmentation.
In the future, when the market is structured along closed/exclusive supply chains, the expectation is that suppliers will be rewarded with an indicative return on investment, with price becoming increasingly less important and suppliers making more out of the raw material (i.e. cost-plus with whole crop marketing).
Such a development implies a dramatic change in the way suppliers and retailers work together, with closer vertical co-ordination becoming an absolute necessity - firms will need to pay more than lip-service to the development of supply chain partnerships.
“Whether or not similar processes emerge in other parts of the world remains to be seen - the UK has so many unique features which make it difficult (and dangerous) to generalise beyond the national context. However, it is clear that the dominance of food retailers in food supply chains around the world is growing.”