The food and drink sector is facing a number of imposing challenges. Supermarkets continue to wage price wars, which in turn heap further cost pressure on their already stretched suppliers. As a result, some suppliers have cut corners and scandals such as “horse-gate” have erupted. Subsequent reforms aimed at improving the sector’s supply chains are likely to create further complications.
In this context, the second meeting of the Food & Drink Procurement Industry Forum, focussed on a number of challenges facing professionals in the sector.
- The potential impact of the recently published Elliott Review
- How organisations are optimising their indirect spend
- How procurement can deliver better value to customers
The initial impact of the Elliot Review
The Elliott Review into the Integrity and Assurance of Food Supply Networks (which is available to read here), was published as a response to last year’s horse meat scandal and recommends a selection of measures to address weaknesses in existing food supply networks.
Amongst the findings of the report are allegations that the behaviour of certain large supermarkets have gotten worse since the horse meat scandal. This information did not surprise members of the Food & Drink Procurement Industry Forum, several of whom said the price wars between supermarkets were heaping further pressure on suppliers. It was noted that the UK’s wholesale market was one of the cheapest in Europe, as well as one of the least sustainable.
“If you can buy four burgers for £1, then it’s quite obvious that there’s a problem.”
In this context, the Elliot Review was initially greeted by certain members of the Forum as a chance to reassess the relationship between retailers and suppliers in the industry. Several of those present had hoped the horse meat scandal would lead to shorter and more transparent food supply chains. However, others felt differently. In the words of one participant: “It’s not as if supermarkets have forgotten about their margins overnight.”
Reassessing supply chains in the food and drink sector
One of the issues mentioned, generally in relation to stricter regulations, was that although suppliers in the UK and Northern Europe are able to provide detailed information on their sourcing practices, this is not always the case in Southern Europe, for example. This issue could severely limit the impact of any new rules.
“We haven’t paid enough attention to the suppliers suppliers.”
This prompted a discussion over where responsibility should lie when it comes to sourcing products. It was agreed that the most well-known brand involved in the supply chain, typically the retailer, should shoulder the responsibility. However, it was highlighted that costs related to ensuring products adhere to legal requirements are predominantly borne by suppliers. A system which the Elliot Review said needed to be heavily altered in order to avoid a subsequent scandal.
“Everyone is for more transparent supply chains, but no one wants to pay for them.”
When it comes to relieving cost pressure on suppliers and creating more sustainable supply chains, the participants questioned who would cover the cost of this transformation. Supermarkets operate in an extremely competitive space and are likely to keep squeezing their suppliers. New regulations may go some way towards improving conditions, but the members of the Food & Drink Procurement Industry Forum identified some potential setbacks.
“There is always a risk that your product will come into some contact with something it shouldn’t.”
Several participants were concerned about just how far retailers would go when checking food products. For example, in a situation where an oven is used to prepare a variety of meat products, there is bound to be a certain level of cross-product contamination. Although it would be possible to buy a separate oven for each product, neither the retailer nor supplier is willing, or in some cases able, to cover the expense of doing so.
The real issue, suggested one participant, is the lack of trust which ranges from the supply base, through to the retailer until the end consumer.
Not just the meat sector
Regarding the long-term impact of the Review, it was pointed out that although it was initiated as a response to a scandal in the meat industry, its ramifications will affect the entirety of the food and drink sector.
The government has agreed to adopt all of the report’s main recommendations, including the creation of a food crime unit, improved coordination across Europe on food crime, and a pledge to increase food testing. During the discussion several attendees working outside of the meat industry admitted they may have underestimated the Review’s potential impact on their sectors.
Despite this, attendees working outside of the meat industry said major changes were unlikely in the near future. In the words of one participant: “People won’t be willing to pay extra for a product until it’s clear that buying it any cheaper is a health risk.”
What’s next for indirects?
The following topic discussed by the forum members focussed on the benefits to be found in concentrating on indirect spend. Early in the conversation, it was suggested that indirect spend was an area companies typically turn their attention towards when growth and savings begin to dry up elsewhere.
In this context, it was remarked that due to the current cost pressure in the food and drink sector, indirect spend is often one of the few areas where there is room to drive down costs. As one participant explained, commodity prices can be managed, but ultimately a focus on indirects is often one of the few avenues for organisations of a certain maturity to grow their margins.
One attendee gave the example of packaging. In their business a focus on cutting costs around product packaging not only led to significant savings, but also an improved final product. It was pointed out that indirect spend is an area where innovation can yield significant gains, particularly as many organisations have historically focussed their attention elsewhere.
“Everybody in your organisation is a potential indirects buyer – the scope is bigger than you think.”
Varying levels of maturity
Different businesses are consequently at different stages of maturity when it comes to managing indirect spend. Milan Panchmatia, Director at 4C Associates, gave contrasting examples of a business which had reached its third generation of outsourced indirect spend and others which were only just beginning to probe the area.
Phil Joss, Partner at 4C Associates, suggested that in a business where indirect costs had been left untouched, savings of between 15% – 20% were often achievable in the space of two or three years. However, in more mature organisations, outsourcing certain elements were likely to yield lower savings figures, but also significant gains in terms of process innovation.
Members of the Forum agreed that considerable gains could be made through better managed indirect spend, although they questioned the desire of many businesses to make the changes necessary. This tied in to the previous point about companies focussing on indirects when they have exhausted all other options. A pity, said one participant, as optimising the area now would provide a great advantage when the economic climate becomes more positive.
How can procurement deliver better value to customers?
The final topic of the evening touched upon how procurement could best contribute to satisfying external customers. Two main options were mooted: go open book, or invest in joint ventures.
“When it comes to commoditised items why not buy together? It doesn’t reduce your competitiveness.”
Many of the Forum members were in favour of joint ventures and investments with businesses operating in the same sector, however doubts were raised regarding the feasibility of such operations. A single example of two companies investing together was found. In this instance a mutual investment in an IT buying company ended in failure, although it was maintained that with a better model, significant savings could have been achieved.
With regards to taking an open book approach, one attendee suggested that this was already the case in many outsourcing agreements within the food industry. Another participant added that retailers had been known to exploit suppliers which opted for an open book approach. Many smaller suppliers, it was argued, had been bullied into unsustainable agreements due to entering into an open book approach. Issues typically occur when retailers find themselves unable to pass on their supply bases’ increased costs to their customers.
“When it comes to open book agreements, you need to know what you’re getting yourself into.”
Other attendees argued that an open book approach could deliver significant benefits to both retailers and suppliers if carried out properly. The overall principal of being open in terms of overheads and margin, can lead to collaborative and mutually beneficial cost reduction if both partners stick to the original agreement.
Of course trust remains the cornerstone of such initiatives and one of the key facilitators of any project which involves intimate collaboration. Trust is particularly important when suppliers experience a rise or decrease in costs. It is these situations, according to one participant, which make or break collaborative initiatives.
About the Food & Drink Procurement Industry Forum
On the evening of the 14October 2014, 4C Associates organised the second meeting of the Food & Drink Procurement Industry Forum. The round table took place at Vinoteca in central London. The event was attended by a group of well-known Finance and Procurement leaders from sectors including Fruits & Vegetables, Frozen Foods, Cereal and Grains, and Chilled Food.
The main discussion followed a wine tasting workshop, which focussed on English and New World wines.
The Food & Drink Procurement Industry Forum was launched by 4C Associates as a platform for leading CPOs working in the food and drink sector to share ideas, challenges and expand their personal networks. Meetings are held under Chatham House Rules.
The long-term aim of the Forum is to continue to grow and attract members whilst helping to raise the profile of procurement within the food and drink sector. For information on how to join the Food & Drink Procurement Industry Forum, please contact Henna Tirkkonen on firstname.lastname@example.org.
About 4C Associates
4C Associates is a multi award winning Cost Transformation company working closely with global and national organisations to drive cost transformation through Consultancy, Savings Delivery Programmes and Managed Service Solutions. 4C was founded in 2000 and is headquartered in London and Brussels.
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