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Supply Chain Pressures Cause for Conflict

Oct. 14, 2008
Who’s managing whom? In a year of unprecedented pressures, our exclusive joint survey finds a tug of war between food processors and their suppliers.

“It’s been a challenging year for food and beverage manufacturers,” begins our report “Supply Chain Pressures.” The result of a June survey and joint research project among Food Processing, Grant Thornton and the MPI Group, it found respondents worried not only about the escalating prices of ingredients but about their availability and safety.

Nearly all participants reported the price they paid for ingredients and other materials in the past year increased; 24 percent report startling increases of more than 20 percent.

Few factors are as important to food and beverage manufacturers’ success as the ability to obtain ingredients and other materials from suppliers when needed. Yet only 7 percent of processors responding indicated deliveries are 100 percent on time.

Forty-four percent of food processors report their primary materials or ingredients is “readily obtainable”; 49 percent say it’s “somewhat obtainable.” Six percent of respondents indicate their materials/ingredients are difficult to obtain, and one company indicates it could not obtain its primary ingredient.

The report was the result of 154 responses to our joint e-mail survey. Sixty-seven percent of respondents were responsible for purchasing ingredients, 44 percent buy equipment and 35 percent said they also procure other materials. The full report is available at www.foodprocessing.com/GTSurvey1; but following are some of the highlights.

Availability and price

Unavailability of ingredients is rare but potentially devastating. For example, in the past year many breweries found themselves unable to attain hops specific to their brands. And for brief periods, various ingredients have been unobtainable due to natural or manmade disasters.

“Several spot shortages of raw materials caused us problems because our volume demand was higher than the original forecast on seasonal raw materials,” said one executive responding to our survey. Others noted the unreliability of materials causes them to carry more inventory: “We must buy in advance because products are not readily available.”

Not surprisingly, large food and beverage manufacturers have more clout in getting the ingredients they need: More than half (54 percent) of food and beverage manufacturers with annual revenues exceeding $100 million report their primary ingredient is readily obtainable, and 46 percent say it’s somewhat obtainable; only 39 percent of smaller firms (revenues of $100 million or less) report their primary ingredient is readily obtainable.

“Complete unreliability for the small manufacturer,” says one executive about vendor dependability. “[Suppliers] will get ingredients ordered to you ‘whenever’ and ‘maybe’ or promise them over and over, but the ingredient never shows. And good luck if it shows up and is to spec.”

The same small manufacturing firm executive continues, “Special orders are shunned, even if you’re willing to pay a premium. And orders of less than 11,000 lbs. are treated with what verges on contempt, which translates to a complete unwillingness on the part of ingredient suppliers to help a small concern grow into a giant one — very shortsighted of them!”

Food sectors where ingredients were least likely to be readily available were dairy products (27 percent of dairy product manufacturers report readily available); meat, poultry and seafood (35 percent); and snacks (37 percent). The sector where ingredients were most likely to be available is confectionery products (55 percent).

While materials and ingredients are generally available, food and beverage manufacturers are finding them at dramatically higher prices, in some instances at costs that put margins in jeopardy. Ninety-four percent of participants reported the price they paid for materials/ingredients in the past year increased; and 31 percent report increases of 1-10 percent; 39 percent report increases of 11-20 percent; as we said earlier, nearly a quarter saw increases of more than 20 percent.

One food executive notes, “Ingredient costs (grains) have risen over 400 percent.” Only 5 percent of food and beverage manufacturers report that prices had decreased.

Despite a lot of dissatisfaction over price increases, few respondents placed blame on their suppliers. “The price increases are hard to handle [but] we have been fortunate that our suppliers work with us to have the highest quality at the lowest price possible.”

“Prices are determined by the market – when their costs go down, so do ours,” wrote another.

Although one did note dissatisfaction over “higher prices for [increasingly] variable quality.” Another notes: “Our product shows the different attributes of raw materials supplied.”

All food and beverage manufacturers were subject to steep price increases, but larger firms were more successful at keeping costs in check. Approximately 51 percent of food and beverage manufacturers with annual revenues of more than $100 million reported prices increased more than 10 percent, while 65 percent of smaller firms (revenues of $100 million or less) report price increases of more than 10 percent (see chart).

Not surprisingly, price increases pose the biggest problem for food and beverage manufacturers (cited by 64 percent of respondents); 30 percent indicate product availability is their biggest problem; 15 percent late/wrong deliveries, 13 percent quality, and 12 percent lack of communication/information (for some questions, respondents could select more than one answer).

Delivery and quality

Late/wrong deliveries may not be the biggest problem for food and beverage manufacturers, but it is easy to see why some companies are concerned by this poor service. Only 7 percent of food and beverage manufacturers indicate that deliveries are 100 percent on time, with the vast majority (69 percent) indicating that deliveries are 76-99 percent on time.

That still leaves one-quarter of food and beverage manufacturers that report deliveries of 75 percent on time or less. The quality of performance by suppliers is slightly better; 8 percent of food and beverage manufacturers report that quality is 100 percent to specifications, 78 percent report at the 76-99 percent range, and 14 percent at 75 percent or worse.

No issue is more prominent in the food and beverage industry than food safety. Most food and beverage manufacturers (and the public) are highly aware of this as they strive to improve internal processes and pursue a variety of practices to ensure the safety of purchased ingredients (see Table). Sixty percent conduct testing of incoming ingredients at their own site, 53 percent prequalify/precertify suppliers, and 44 percent conduct periodic on-site audits of suppliers using company staff .
What is surprising, given the broad awareness of food safety issues, is that 10 percent of food and beverage manufacturers report having “no systems in place” to ensure the safety of purchased ingredients.

Many survey participants expressed confidence in quality and safety throughout their supply chains, such as, “We have a good commercial relation with our supplier because they are our partners to increase the safety and quality in our goods” and “Certified suppliers ensure that the quality of products meet specifications before shipment to us.”

Yet some manufacturers are concerned and looking for regulatory answers: “I wish at my level there was a lot more [involvement by] the government FDA/USDA [for] safety, security and oversight. I know this sounds odd to global business corporations, but I would welcome my government to be able to protect me and my clients.”

About suppliers

Survey participants report that a median 80 percent of suppliers (average 70 percent) are located in North America (U.S., Canada and Mexico). The next highest location of suppliers is Europe, with an average of 11 percent (see Table).

Surprisingly, food and beverage manufacturers with the lowest revenues ($100 million or less) were slightly less likely to have their suppliers located in North America than large companies (more than $100 million): median 80 percent (average 67 percent) vs. median 83 percent (average 77 percent).

Most food and beverage manufacturers have not yet consolidated their supply bases. Only one-fourth indicate that 25 percent or less of their suppliers account for 80 percent of materials/ingredients (modern manufacturing theory suggests that 20 percent of suppliers should provide 80 percent of materials). Approximately 31 percent of suppliers report that 76-100 percent of suppliers account for 80 percent, indicating that most suppliers in the industry are highly specialized.

In the end, food and beverage manufacturers must resolve problems with suppliers and optimize supply chain management or face larger business issues. One small-firm executive outlined both the challenges and opportunities: “The price of my ingredients and packaging has gone through the roof! As a boutique, relatively new company, I am having a very hard time keeping it all going. All in all, the name of the game is perseverance, tenacity and good attitude.”

This was a web-based survey initiated with an e-mail invitation in June and July to subscribers of Food Processing. A diverse group of food and beverage manufacturers are represented. While a majority of companies (51 percent) have revenues of $25 million or less, 17 percent report revenue higher than $500 million. Approximately 40 percent of companies produce processed foods, the largest food group represented, followed by meat, poultry and seafood (33 percent), bakery products (29 percent) and beverages (29 percent). Analysis provided by Food Processing, MPI Group and Grant Thornton LLP -- the audit, tax and business advisory firm (www.foodprocessing.com/management) This is the first of six surveys.

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