Food supply chain in UK: An analysis

Abstract

The food industry has undergone some dramatic changes since the 1980s, with power over the food supply chain concentrated in a very small number of manufacturers and retailers, and threats of disease, terrorist attacks threatening the global community.  In response to these changes, companies need to ensure a system of effective supply chain management involving risk reduction.  This can be implemented through traceability tools and software, product identification and marking, and radio frequency identification devices (RFID) systems.  Companies now need to have a traceability system in place as required by EU legislation as of January 2005.  In addition to the legal requirement, the demands of a volatile market and the ever-increasing face of the food industry requires such safety measures in order to remain afloat and competitive in the global food economy.

INTRODUCTION

In the past, many food marketers focused most of their efforts on increasing volume.  Organisations and businesses set goals for sales growth and market share, but they did not usually set cost objectives.  When they evaluated promotions, they used an incremental volume criterion instead of profitability.  Distribution inefficiencies were not a major concern.  This all changed during the late 1980s when sales growth became more difficult, what with buyers becoming more price sensitive and new competitors emerging in the market (Larson 1997).

The food distribution complex, which is a complex web of channels designed to move food to consumers, was thus under enormous pressure to change and become more efficient.  The food processing, distribution, and retailing sectors are after all in the middle of a rapid transformation focused on productivity and profitability.  Changes in the food distribution system have veered from the retail perspective towards the consumer and back through the system to the farm gate (Larson 1997).

For a long period, no growth impulses in the food industry emanated from the demand side, with only a few product categories showing an increase in per capita consumption.   The stagnancy in domestic demand for products in many countries was not balanced out by export.  This has mainly been attributed to the continuing European integration and the introduction of the Euro a single currency which has greatly aided in facilitating international business transactions (Katsaras and Schamel 1999).

It is widely recognized that in many parts of the world that there is a population problem. The ever-increasing population comes with the problem of shortage of food supply. The natural environment has been coping to meet this increasing demand, wherein food supply chain providers were created to meet this need, thereby becoming a profit-earning institution due to its increasing demand worldwide.

One might ask what the government is doing to regulate its food supply programs, considering their global impact.   For instance, the US has the US Department of Agriculture (USDA) which is a federal agency responsible for ensuring a safe, affordable, nutritious, and accessible food supply and supports the production of agriculture.

Another example is the Total Diet Study, which is an analysis of a sampling of food items purchased throughout the US that are representative of the diets of consumers.  The Total Diet Study is used for comparison with acceptable daily intakes of pesticides and food contaminants and is administered by the Food and Drug Administration of the US Department of Health and Human Services.

When departing Health and Human Services Secretary Tommy Thompson shocked the nation with his farewell warning about potential threats to America’s food supply, few people knew that his department was preparing to issue final regulations within a week that would tighten the records-keeping requirements for all food manufacturers, processors, packers, and transporters operating in the US.

As the global food economy struggles to reconcile itself with new concerns about bioterrorism and the emerging implications of food borne illness outbreaks, its response has been to take greater control over processing and distribution channels through the traceability of ingredients and finished products.

Large retailers and restaurant chains, such as Wal-Mart Stores and McDonald’s Corporation, are demanding traceability from their suppliers, and most processors are beginning to recognize that proof of traceability will soon be a minimum standard for doing business.

Establishing security in the food chain is the goal of all these regulations, but how companies achieve that goal is largely up to them. Depending on the size of the company, the products and ingredients used and the complexity of its supply chain, different tools and tracking devices deliver different levels of security and information.

Some traceability systems are deep, tracking details for hundreds of individual ingredients from dozens of suppliers through a multi-step production process, while others simply track a few key ingredients back to one key point in the production process.

In some parts of the world, traceability is not only a value-added for the food supply chain, it’s a law. Traceability systems have been obligatory for all businesses in the food chain in the European Union (EU) since January 2005. The EU directive requires businesses to be able to identify all suppliers of food, food products and feed, as well as all businesses to which they supply food or feed. The information needs to be systematically stored in order to be made available to inspection authorities on demand.

Traceability tools fall under three categories: product identification (ID) and marking, traceability tools and software, and radio frequency identification devices (RFID) systems. In recent months, companies across the industry have released new products or updates to existing technologies designed to assist food processors, foodservice and retailers with developing systems that support track-and-trace objectives.

Product ID systems are the most common tracking tool being used and have been around the longest. They include bar coding and imprinting tools that use-tracking numbers to link finished products back to specific data relating to their production history.

For processors that use a few key, self-contained ingredients, or use only a few key sources, ID and marking techniques serve their needs nicely. In response to the growing need for more exact tracking, or additional key data associated with marking tools, companies such as Eggfusion and DayMark are adding exciting new technologies to this traditional method for tracking.

In the U.S., the Bioterrorism Act includes a similar requirement regarding the establishment of records to identify the immediate previous sources and immediate subsequent recipients of food, including its packaging, which came into effect for larger processors in December 2005. Smaller companies have until June 2006 or December 2006, depending on the company size, to comply.

Despite these existing regulations, food borne diseases never miss to accompany food supply chain. It has been the constant if not continuous problem of people who either utilize or supply food, when outbreaks of food poisoning due to unintentional food contaminations have frequented our morning and evening news. New concerns have been bothering our nations when food contamination is tint with intentional motives.

By way of concluding the introduction to this thesis, enclosed are the words of Lorice Stainer, a business ethics consultant and Visiting Fellow at Leicester University Management Centre:

“The moral issues generated by the food supply chain demand attention and analysis. There must be an ethical approach balancing profitability with the welfare of life and the conservation of the environment.”

Thus, the challenge with regard to food supply chain management then is to provide an effective response which involves a holistic approach, from field to fork, with input at strategic and operational levels from different functional areas (such as sales, marketing, manufacturing, purchasing, finance, HRM) and from multiple stakeholders from the public and private sectors (Kent Business School 2003).

REVIEW OF RELATED LITERATURE

Historical Review

A supply chain involves the supplier/manufacturer/distributor/retailer/end user channels, networks and relationships in product or services supply.  Some common examples of descriptions of some food supply chains would be the “plough to plate” or “cow to cornflakes” analogy for milk (mySupplyChain 2006).

The food industry has long been acknowledged as a powerful and extremely influential force in shaping food production, trade patterns, and food consumption (UK Food Group 2006).  However, there are also numerous challenges in the food sector such as food miles, fair trade, traceability, promotions management, store replenishment, on-shelf availability, new product development, and integration of farm-controlled business in the food chain (Kent Business School 2003).

Supply chain management involves the management of materials, information, technology, and funds from the raw material supplier to the consumer.   This process is important to an organisation’s revenue generating activities since the whole process covers growth, efficiency, and customer satisfaction.   It is also relevant as to the organisation’s financial success in terms of revenue, cost and asset productivity (Food Marketing Institute 2001).

In relation to the food industry, supply chain management is vital in building collaborative working relationships between distributors, retailers, manufacturers, sales and marketing agents.  Supply chain management is an essential tool for building an efficient food distribution system for a company involved in the food industry (Food Marketing Institute 2001).

In the last half century, the world witnessed how the power over the global food system converged and concentrated into the hands of a limited number of very powerful players.   Every step of the food supply chain — how it is grown, processed, distributed, retailed and cooked — is said to have transformed beyond recognition since World War II.  Up until World War II, the farmers were considered as the major players in the food sector.  The end of farmer power began in the middle of the 20th century (Lang 2003).

In particular, after World War II, farmers all over the world were given grants and subsidies, but these were taken as mere measures to help prevent the collapse of farming.   Furthermore, farmers were generally supported only if they agreed to be restructured in terms of adapting measures and technologies to increase efficiency and labour-saving devices in the form of agrochemicals, machinery and plant science  (Lang 2003).

Fifty years after the Second World War, even rich economies of the European Union (EU) started to steadily cut these subsidies for farmers since they could no longer support such an extravagant system.  During that period, consumers would spend about a third of their household budgets on food.  Today, they spend less than a tenth of their household budgets on food.   In other words, it is no longer those who produce the raw food that control the food supply chain (Lang 2003).

 The structure of the global food industry today is continually changing and evolving as food suppliers, manufacturers, and retailers adjust to meet the needs of consumers, which includes demand for wider variety of higher quality products.  Understanding the functioning and dynamics of the global food market doesn’t just pertain to the fundamentals of international trade alone (Commonwealth Scientific and Industrial Research Organisation 2005).

The food retail sector has been most affected by decreasing purchasing power of consumers. In current times, the power behind food supply has been concentrated at a staggering rate into the hands of a few giant companies.  These companies can generally be divided into two kinds: those companies which process the raw product, and those which are called supermarket, which make the processed food readily available to consumers.  Thus, the food supply chain now is dominated by food processing and retailing giants.  And these companies are all internationalising, if not regionally for most, even globally for some really big corporations  (Lang 2003).

The problem is that this high degree of concentration does not reduce the intensity of competition.  It actually has an opposite effect since retailers end up competing very fiercely for market shares which is something that does not necessarily benefit the consumer.  The speed of the concentration process keeps on increasing because of the elimination of trade barriers and the international ambitions leading retailers to aim at growth outsider of their own saturated domestic markets.

Food retailers have thus been adapting strategies to maintain and strengthen their position in the domestic market place.  Yet, it should be pointed out that aggressive means to reduce the intensity of competition as retailers fight for market shares can eventually eliminate competitors and thereby increase the market power of the remaining companies (Katsaras and Schamel 1999).

Primary reasons for domestic concentration in European countries are demand side pressure and increased consumer mobility.   Reduced demand has increased competitive pressure on each company, most particularly in the grocery-retailing sector.  The high costs of international rationalizations measures have also fostered the concentration process at the company level and affect the number of retail outlets (Katsaras and Schamel 1999).

In addition, the geographic dimension of markets has also been affected by the consumers’ increased willingness and ability to travel considerable distances just so they can shop.  The result is that there has been a disintegration of regional monopolies and intensified competition.  Business started focusing on the global community, if not aiming for global monopolies.   Successful companies react to the changing demand side requirements in such domestic markets by using competitive tools, strategies and instruments.  These include tools such as larger outlets, price reductions, and favourable locations to create, maintain or even extend regional monopolies (Katsaras and Schamel 1999).

Use of these tools and strategies, however, also tends to increase the capital requirements for companies.  Small companies which do not have the required or needed capital fail to face the fierce competition and end up eliminated from the regional sub-market.  As a result, the number of retailers and the choices for consumers end up declining, and the intensity of competition diminished (Katsaras and Schamel 1999).

Global food retail sales exceed US$2 trillion annually, with supermarkets/hypermarkets accounting for the largest share of sales. Additionally, supermarkets, hypermarkets, warehouse-style discount outlets, convenience stores, and combined gasoline and grocery outlets have emerged in numerous countries over the past few years to increase the demand for global food supply (Commonwealth Scientific and Industrial Research Organisation 2005).

These food processing and retailing companies stepped in to fill the gap when farmer power over the food supply chain started to decline in the late 20th century.  It has been in fact argued that it was the manufacturers who gained more than the farmers out of the post-war food settlement since government subsidies to farmers merely ensured that manufacturers had secure supplies of raw commodities (Lang 2003).

The history of IT adoption among food retailers in the US begins with Wal-Mart’s initiative to share daily sales data to reduce inventory and costs and develop inventory control strategies with key suppliers (Mohtadi 2005).

In 1992, US food retailers followed suit and developed an initiative known as Efficient Consumer Response (ECR).   ECR has been defined as a “grocery industry strategy in which retailers, wholesalers, brokers, and suppliers work more closely together to bring better value to the consumer” (Katsaras and Schamel, 1995, pp. 11).

Thus, since the relation between food retailer and food manufacturer has been typically characterised by distrust and struggle over terms of trade, the concept of ECR proposes cooperation between retailers and manufacturers.   ECR was meant to respond to the growth of competition retailers.  Supermarkets and food manufacturers recognized the need for improved logistics in order to have significant cost reductions.  Thus, food processors, wholesalers, and food retailers developed programs to improve production, distribution and marketing efficiency, such as the ECR (Larson 1997).

The definition of ECR indicates that ECR was initiated it grocery retailing, however it has also been applied to the entire consumer goods industry today and is defined more generally below:

“ECR is a company vision and strategy based on a trusting partnership and cooperation between manufacturers and retailers, focusing elaborate techniques designed to remove inefficiencies along the marketing chain, taking into account consumer needs and maximum customer satisfaction, to create mutual benefits for each party involved which otherwise cannot be achieved” (Katsaras and Schamel, 1995, pp. 11).

The two definitions above may seem vague, but they express the key elements of ECR.  According to the principle “cooperation not confrontation”, the consumer is the starting and reference point for joint activities between food manufacturers and retailers.  (Katsaras and Schamel 1995). Cooperation between manufacturers and retailers is best described by an excerpt from the legendary Coca-Cola study:

“Cooperation between industry and retailing is characterized through the exchange of sensitive internal and/or external information and data and by common processes and procedures in decision-making, clearly aiming at mutually benefiting from the resulting advantages” (Coca-Cola Retailing Research Group 1994).

Thus, ECR intends to streamline and automate the distribution system from the production line to the grocery checkout line.  The goal behind ECR is for food suppliers and retailers to work closely together to bring better value to the grocery customer, to maximize consumer satisfaction, and to minimize costs (Lang 1997).

Not only retailers face the challenge of developing complete and innovative solutions on problems within complex markets and legal structures.  Solutions should aim at potentials along the entire marketing chain and cannot be achieved at the product or company level alone (Katsaras and Schamel, 1995).

But this ECR initiative faltered for two reasons:

• the incompatibility of computer systems between retailers and suppliers; and
• retailers’ reluctance to share sales data directly with manufacturers (Mohtadi 2005).

The components and elements involved in ECR will be discussed more extensively in the next section of this research paper in Chapter 2 of Review of Related Literature on Theories.

 A later and similar initiative (1996) to the ECR, known as the Collaborative Planning, Forecasting, and Replenishment (CPFR) that involved retailers sharing sales data with the manufacturers (or wholesalers) in real time and often over the Internet (Kinsey, 2000), has helped to solve the first problem, i.e., the computer incompatibility problem, but has not resolved the second issue, in other words, the “trust” issue, arising from concern about supplier opportunism (Mohtadi 2005).

CPFR has also been referred to as continuous replenishment programs (CRP), and as mentioned, refers to another industry practice by supermarkets and manufacturers.  When food retailers and processors work together as partners, they can reduce costs by planning more efficient product delivery schedulers.  Giant Food, a large chain based in Maryland, US, worked with 20 large vendors to develop CRP.  In six months, inventories for those vendors were reduced by 25.5%, saving Giant Food nearly US$ 1 million (Purpura 1997).

Following the September 11 attacks and the outbreak of foot-and-mouth disease in the UK, the world’s food supply chain remains vulnerable to bioterrorism and naturally occurring food poisoning outbreaks.   According to James Cook, a committee member from Washington State University in the US:  “It’s not a matter of ‘if.’ It’s a matter of ‘when.  While there may be a very low probability now, what about in 20 years?” (Food Navigator 2002).

Scientists today have stated that an attack or major poisoning outbreak was unlikely to result in a famine or malnutrition but could shake public confidence in the food supply and devastate the economy – costing anywhere from millions of dollars to tens of billions of dollars (Food Navigator 2002).

A report prepared by the US National Research Council, an arm of the National Academy of Sciences, considered as one of the most comprehensive reviews of America’s plans to fight bioterrorism, indicated that scientists fear that terrorists could carry diseases past border inspectors to farms in remote areas, infecting cattle with mad cow disease, spreading anthrax or contaminating crops with bacteria.   Scientists have begun considering these possibilities around the time of the attacks and after foot-and-mouth disease infected herds of cattle, sheep and pigs in Britain. Although the disease does not harm humans, it cost Britain millions of pounds to control (Food Navigator 2002).

In the US the appearance of anthrax-laden letters last year also caused much concern.  In the report, it was further pointed out that the federal government’s plan in the US to defend against a bioterrorist attack on agriculture  was very weak. It urged US officials to improve their communication with intelligence agencies, universities and farm groups to help the public cope with food and farm security threats.   The group also suggested the US government strengthen its border inspections by adding new equipment to detect harmful bacteria and diseases (Food Navigator 2002).

Undoubtedly the report will also have repercussions in Europe, where the Food Standards Authority is currently working towards similar ends as the US Food and Drink Administration. Although the threat of bioterrorism is not generally perceived to be as great as that in the US, one of the primary objectives of the FDA will be to avoid future mass outbreaks of poisoning or cattle disease – all of which could be spread through terrorist activity (Food Navigator 2002).

The impact all of this will have on food and drinks manufacturers in both the US and Europe could well be substantial, with increased security and preventative measures leading to substantially increased investments in security procedures and equipment  (Food Navigator 2002).

THEORIES

Driven by innovation and competition from private retail brands, food manufacturers are focusing on specific product lines where they have inherent advantages, and target for developing countries for more focused approach. Expansion in foreign markets is further contributing to the growth of large multinational food manufacturers but local markets are still welcoming small-scale individual retailers to successfully find opportunities within the marketplace (Commonwealth Scientific and Industrial Research Organisation 2005).

This enables food manufacturers to become leaders in certain product lines and to better cater to consumer demand for these products in different markets. Therefore, while manufacturer concentration is not evident at the global level for total packaged food sales, firm concentration may exist in specific product lines and regional markets. Firm concentration can be specifically seen for the products in which the manufacturer’s brands are popular, such as in soup, breakfast cereal, and baby food (Commonwealth Scientific and Industrial Research Organisation 2005).

In the past five years, businesses had to face September 11, SARS, port strikes, hurricanes, and a possible pandemic.   Planning for low-probability high-impact events rank low on many organisation’s to-do list (only 32% have a plan).   In 2005, AMR Research received a call from a vice-president at Alex Lee, a large grocer and food distributor in the southeastern U.S.  The executive wanted to know what sort of research was being done in preparation of a potential pandemic if the H5N1 avian flu virus were to become human-borne (O’Marah 2006).

In response, AMR Research conducted studies and arrived at some rather startling results.  One conclusion depicts a nightmare scenario for the food-supply chain which includes contamination of product, transmission of disease between workers and customers, and accelerated infection rates.  According to the conclusions of AMR Research, sales would drop, suppliers would suffer, perishables would perish, and profits would decay.   The scenario presented by AMR Research underscores the negative aspect of the connectedness accompanying the rise of globalisation (O’Marah 2006).

            For instance, the outbreak of SARS in 2003 had a ripple effect across the globe because of  the heavy international business travel to and from Asia.  SARS affected critical component supplies for many electronics businesses.  In another case, a natural supply-and-demand imbalance at the Port of Long Beach caused major disruptions in 2004 to the inventory levels of suppliers and retailers just before holiday season started.  These are just examples of how an industry can suffer when large-scale events such as strikes, storms, or terrorism, affect the supply chain or the flow of products from the raw materials stage to the consumer (O’Marah 2006).

The underlying factor is globalisation.   There is a continuously increasing flow of materials, people and know-how around the world as a result of companies seeking to lower costs of production.  For instance, automobiles are assembled from components supplied by thousands of companies from around the world.  In 1990, supplier contribution to the total value of vehicles stood at 60% in 1990 and increased to 65% in 2000.  This figure is expected to reach 76% by 2015 (O’Marah 2006).

According to data from the UN Development Programme, high-tech manufactured products in developing countries have grown from 0% to 22% of all exports between 1990 and 2003.  On the other hand, high-income OECD nations’ high-tech exports remained flat, at 18% of all exports. In other words, globalisation has lead to an increasing interdependence among nations, such as the threats to one nation should now be considered as threats to all  (O’Marah 2006).

Globalisation has caused a greater concentration of trade and investment in the hands of many transnational corporation in the food and agriculture sector.  These corporations in recent years have merged in increasingly alarming numbers.  This has caused some alarm on the excessive power exercised by private profit-based companies over the world’s food system (UK Food Group 2006).

The issue surrounding TNC regulation is of global concern especially regarding terms of their conduct in host countries and their impact on food security, as international law provides for very few means of enforcing regulation agreements over TNCs.   The international food supply chain, after all, has impact on producers, consumers, poverty and the environment worldwide.  The importance of promoting sustainable and equitable corporate practice thus would stand to benefit the international food supply chain (UK Food Group 2006).

John Connor, a professor of industrial economics at Purdue University in Indiana, U.S., has been a long-term observer of food supply chain concentration.  In a conference of the Organisation for Economic Cooperation and Development, he reported that the market share of the top 20 US food manufacturers has doubled since 1967.   Only 100 firms today, according to Connor, accounts for 80% of all value-added (the increase in price over and above raw farm food prices) (Lang 2003).

The concentration process in food retailing has lead to a considerable reduction in the number of sales outlets which in turns has created issues in the domestic supply arena.  Consumers often complain about a reduction in supply alternatives in the local markets.  Shopping possibilities for older and even less mobile consumers are often limited and restricted.   As shopping centres are built in the suburbs, more and more domestic markets experience the demise of special shops and a loss of inner city atmosphere (Katsaras and Schamel 1999).

Whether it is in Europe or the US, the concentration of manufacturing power remains the same.  It only differs in the names or players involved.  In Europe, these key players are Nestlé and Unilever.  In the US, these big names are Kraft and General Foods (now merged and owned by Altria, the bland new name chosen by tobacco giant Philip Morris). These companies operate on a very large scale (Lang 2003).

For instance, based on figures for 2001, Nestlé, considered as the world’s biggest food manufacturer, sold more than $46.6bn worth of food in that year alone. Even Mars, which only makes 10th place on the top 10 list of manufacturers, still sold more than $15bn worth of products (Lang 2003).

The concentration of food retailing has lead to a decrease in sales outlets in domestic markets, and this in turn resulted in fewer jobs from the declining numbers of small outlets in response to the expansion of larger chains and discount stores.  Smaller stores tend to be more labour-extensive than larger stores which are generally self-service.   As a result, domestic concentration process leads to net job loss.  To date, the number of employees in food retailing continues to decline (Katsaras and Schamel 1999).

The level of manufacturing concentration is now so remarkable, regardless on whether one turns to national, regional or global corporations.  The dominance of these players is partly due to the fact that manufacturers buy out each other to get their hands on the successful brands.  Mergers and acquisitions have been rife since the 1980s on both sides of the Atlantic, as already large and powerful companies snap up their competitors (Lang 2003).

This has changed both the architecture of the food supply chain and its public face.  For instance, brands like Kit-Kat, once considered a “national” brand and once owned by former Quaker confectioner Rowntree’s of York – has been turned by Nestlé into a global brand (Lang 2003).

In the mid 1970s, the top 4 US beef packers controlled around a quarter of the American market.  Today, only 20 feedlots feed half of the cattle in the US and these are directly connected to the four processing firms that control 81% of beef processing, either by direct ownership or through formal contracts. With this type of food system the farmer becomes a contractor, providing the labour and often some capital, but never owning the product as it moves, as quickly as possible, through the food system. The farmers never make the major management decisions (Lang 2003).

The same thing happened with agrochemicals. In the late 1980s, the top 20 firms worldwide accounted for around 90% of sales for agrochemicals. By the late 1990s, 10 firms controlled this much of the market. Today this number is just down to seven. The move of agrochemical companies into biotechnology has been another motive for mergers, the emergence of companies seeing themselves as life sciences companies covering genomic from pharmaceuticals to plant breeding (Lang 2003).

These mergers and acquisitions have been a top prize for merchant banks and advisers but confusing for employees and the public. To take one European example, in the last seven years, Hoechst and Schering merged to become Agreva which then bought Plant Genetics Systems in what is considered as Germany’s largest ever corporate take-over. Then Hoechst, the parent company, merged with Rhone Poulenc to become Aventis, whose agrochemical division was then bought by Bayer to become the current Bayer Crop Protection (Lang 2003).

Domestic concentration creates regional market structures with the danger of restricted competition.  In grocery retailing, the rates of returns on sales and on equity depend on company size.  This means that medium-sized companies have a better return on sales and equity than large companies.  There is considerable threat to competition due to the high concentration resulting from mergers in the retail sector.

  Based on empirical studies of the US grocery market, there has been a positive correlation between concentration and price levels (Jammernegg 1997; Katsaras and Schamel 1999).  Thus, in countries with high level of concentration, higher rates of return can be achieved which may help to explain expansion of European discounters into other countries (Katsaras and Schamel 1999).

In terms of international concentration (as differentiated from domestic concentration earlier discussed), this phenomena of internationalisation in retailing increased dramatically in the 1990s.  By way of example, there is the case of Wal-Mart (US), and Carrefour (France) expanding to South America; Ahold (Netherlands) and Sainsbury (UK) in the US.

International concentration is said to be the combined result of push and pull factors.  Push factors are described as “sluggish demand, excess supply, and planning restrictions in the domestic markets” (Katsaras and Schamel 1999).  On the other hand, pull factors are “marketing opportunities abroad, the removal of international trade barriers, and the possibilities for cross-border mass advertising” (Katsaras and Schamel 1999).

In the international food economy, concentration takes place through elimination of competitors, branching out (internal growth), take-over of stores or entire chains (external growth), and increasing entrepreneurial performance.  There have also been far-reaching changes in the sales outlets, parallel to organisational concentration, primarily due to the introduction of self-service with larger selling areas and a rising capitalisation accompanied by reduction in staffing needs (Katsaras and Schamel 1999).

It should be noted however that even global, hugely profitable manufacturers which have become household names can no longer claim control of the food supply chain.   The other global, hugely profitable companies, also household names, which control access to the consumer, have wrestled such control from them.  This latter group of companies are of course the retailers.   Even the biggest and most successful manufacturers have to rely on the supermarkets to get their products to the consumer. And to do that they have to agree to the contracts drawn up by the retailers, whose logistics systems demand tight specifications, delivery times and margins (Lang 2003).

Here are the following reasons for the international concentration of food retailers, according to the research conducted by Katsaras and Schamel (1999):

•   “The abolition of borders, the establishment of a common market, and the introduction of a single currency facilitate the free movement of goods and capital within the European Union.
•   The opening of Eastern European markets and the improvement of the economic situation in those countries bring about opportunities and development prospects for retail trade.
•   Consumer behaviour in Europe is becoming increasingly similar.  An example is the discount market, which ‘conquered’ Europe starting from Germany and is now popular even in Italy.
•   Retailers from countries with highly competitive markets see the opportunity to relocate to less competitive markets where higher returns can be achieved.
•   Internationalisation in food retailing is a response to the international concentration process in food manufacturing.  Securing a strong position in the retail market and thus buying power with food producers has become an essential impulse for expansion.
•   Domestic expansion is limited for large food retailers because of already high market shares.  The only way to expand is to eliminate competitors.  Diversification is another option for growth, but foreign expansion seems to be a more profitable alternative.
•   Potential foreign profits of competitors could be invested at home in one’s domestic business – a threat that prompts most of the larger food retailers to become active in foreign markets” (Katsaras and Schamel 1999).

Thus, similar to the phenomenon among manufacturers, there has also been an incredible concentration of retailing power in recent years. In the UK, the top 5 supermarket chains now account for two thirds of food sales, while half of the country’s food is now sold from just 1,000 giant stores (Lang 2003).

However, the spoils of domestic dominance are proving to be insufficient, and the big retailers are looking beyond their home markets towards profits to be made by first regional expansion, then global expansion.   Wal-Mart, the US owner of Asda, has become the world’s biggest retailer, despite only expanding out of the US in the last ten years. Wal-Mart is part of an elite group of retailers who have declared global ambitions, among them Tesco, which last month declared a profit of over £1.3bn, and the French chain Carrefour (Lang 2003).

These corporations now divide the world into three segments: the rich economies of western Europe and North America; the rapidly catching-up economies such as Thailand and Hungary; and the developing world markets such as India, Brazil and China. Again, Tesco provides a good illustration of this global push since the corporations is organised into three divisions: UK and Ireland; central Europe; and the Far East (Lang 2003).

ECR: Improving the Efficiency of the Food Supply Chain

An understanding of this relationship between retailers and manufacturers would require an examination of the theories behind ECR.  The growth by competing retailers convinced many supermarkets and food manufacturers that significant cost reductions are possible through improved logistics.   Food processors, wholesalers, and retailers developed programs to improve production, distribution and marketing efficiency (Larson 1997).

The starting situation for ECR would be an analysis of the characterisation of the demand side in high developed economies, as follows:

• No or low population growth
• Less traditional household characteristics
• Increased use of fast information gathering
• Consumers want more values for less money
• Stagnant real disposable income
• Increasing average age
• Changing consumer habits
• Changed price/value relations (Witte 1997).

On the other hand, as affected by food retailers and consumers, the supply side in highly developed economies show the following characteristics:

• Excess capacities
• Glut of innovations
• Growing market expenses
• Globalisation of brands
• Increasing demands of the trading firms
• Increasing demands of the consumers
• Pressure on prices/costs/margins (Kroger 1997).

In other words, the marketing chain becomes increasingly linked and more complex due to competitive dynamics (Heinemann 19997).  According to Witte (1997), the relevant factors that lead to a more complex and linked marketing chain are as follows:

• An increasingly heterogeneous consumer market where standard marketing tools may not affect preferences and brand loyalty.  Polarization and fragmentation as well as high price sensitivity requires fast, flexible, minimum cost reactions to changing consumer needs.
• A constantly growing product variety due to consumer market heterogeneity
• Legal provision (such as packaging laws) which impose additional restrictions at strategic and operational levels.
• The fusion of retail markets which have lost their regional character.  The trend of direct deliveries has been replaced by a distribution system via central warehouses with new demands on the logistics management.
• Technological development towards automation and networking as a prerequisite for organizational and marketing concepts of the future.

In turn, the following trends also characterize highly developed economies at the retail level (Witte 1997):

• Significant or declining consumer spending
• Growing pressure on prices/costs/margins
• Growing buying power of retailers
• Significance of brand names
• Excess retail capacity
• Intense and fierce competition
• Increased presence of discounters
• More information about consumers

Given this background, ECR is then taken as a solution for both food retailers and manufacturers.  Yet it should be noted that ECR is more than simply restructuring logistics and cost-cutting for companies.  The proper way to apply ECR would be to use the cost reductions achieved to promote economic growth.  The concept calls on food retailers and manufacturers to put consumer needs in top priority and to them as efficiently as possible.  ECR means that the entire marketing and food supply chain from the suppler of raw material to the manufacturer, the retailer and finally to the consumers, is optimised in such a way that each sale, as recorded by scanners, directly results in a signal to production (Katsaras and Schamel, 1995).

In ECR, insufficient production estimates, costly administration, and intermediate storage are eliminated.  However, it should be emphasized that the optimisation of the food supply chain cannot be attained by individual action but requires an open cooperation based on partnership if the parties involved want to achieve optimal cost reductions and growth (Katsaras and Schamel, 1995).

According to the research by Katsaras and Schamel (1995), there are three essential concepts to achieve optimal application of ECR:

•  efficiency;
• consumer orientation;
• responsiveness.

Efficiency is aiming at optimal resource use for the whole food supply chain.  The performance of resource inputs is analysed and optimised.  Every activity is to be executed at minimum cost (Kroger 1997).

Consumer orientation is about raising consumer satisfaction and loyalty.  Requirements for the production process relating to costs, quality and time are established together with the customers who are considered the beneficiaries of the activities (Kroger 1997).

Responsiveness is to satisfy consumer needs on time while stressing the increasing importance of time in competition.  Performance has to be accomplished in the shorter period possible, at minimum costs, and tailored to the needs of the consumers (Kroger 1997).

ECR likewise involves consumer-oriented examination of processes to develop cooperation strategies between food manufacturers and retailers.  By such, ECR is based on four strategic areas to optimise the flow of information and goods over the entire supply.

How then is the buyer power of food retailers characterized and what makes it so powerful that even food manufacturers find themselves scrambling around to cater to the demands of their retailers?    It has been reported that the top 20 retailers in the world obtain far more than two thirds of the total turnover in the institutional grocery trade and that each of them is so big and has so much influence that no food manufacturer can disregard them (Katsaras and Schamel 1999).

As earlier mentioned, this was not always the case, since in the past food manufacturers were able to manage things as they liked.  But, once again, with the rise of discounters, hypermarkets, self-service department stores and the creation of increasingly large wholesale and retail units, the influence of food manufacturers experienced a steady decline.   The grocery market became newly divided with brand names disappearing, new brands emerging, and old ties and allegiances being discontinued (Katsaras and Schamel 1999).

The buying power of retailers can be felt in many ways.  The terms of trade have changed to the advantage of retailers who exercise pressure on prices and conditions with the threat not to sell the products of particular suppliers and manufacturers.  Food retailers may also food manufacturers in reducing their orders or excluding some or all of their products from a supplier from sale promotions (Katsaras and Schamel 1999).

Thus, food retailers and manufacturers have to negotiate terms of trade individually.  Delivery contracts result from these voluntary concessions made by suppliers, and are also largely due to the importance and negotiation skills of the food retailers.  Apart from gross price rebates, supply contracts may include cash discounts, grace periods, agreements on the distribution of transport costs and risk, as well as different side payments and other services.

These other services may include entrance and listing fees, shelf and shop window rents, advertising contributions, merchandising, and price marking as carried out by the food manufacturers.   Buying power is not only a problem for the vertical relation of manufacturers and retailers, but also a demand-led discrimination against weak competitors (Katsaras and Schamel 1999).

It has been reported that the unchecked growth of supermarkets and the ferocious competition between them is damaging the British food supply chain and creating a climate of fear amongst many suppliers, according to UK farming unions (national Farmers’ Union Online 2006).

The effect of this concentration process on the competitive situation in the food retail sector has been controversial.  The German Antitrust Commission, in 1996, took the view that there is no decline in the intensity of competition, and that attempts made by retailers to improve their market situation by taking over other organization or through more favourable supply conditions have equalized regularly and comparatively fast through competitive response (Katsaras and Schamel 1999).

However, the most important result of competition in the food retail sector is certainly a cheaper and improved consumer supply.  The German Antitrust Commission sees the growth of the major firms as “improving a company’s position in relation to their suppliers and enhancing its market significance in local markets” (Katsaras and Schamel 1999).  Yet, the increased concentration still does not necessarily improve the supply of food to consumers, and may in fact exploit food manufacturers, eliminate competitors, and increase the economic power of the remaining food retail companies (Katsaras and Schamel 1999).

In a report submitted to the Office of Fair Trading (OFT) in response to a consultation, the NFU, NFU Scotland, Ulster Farmers Union and NFU Cymru make the recommendation that the scope of the OFT retailer referral to the Competition Commission should be extended.  The NFU stated that such a review should include analysis of the impact today’s food retailers have on their suppliers (National Farmers’ Union Online 2006).

According to Richard Macdonald, director general of the NFU, “The Competition Commission has looked at the power of supermarkets before in 2000. They recommended a code of conduct which has failed to make any real difference. Since then the retailers have continued to operate unchecked and are seriously damaging the British supply chain”  (National Farmers’ Union Online 2006).

The submission recommends the OFT considers a number of areas of concern for farmers, growers and suppliers. The relationship that the major retailers have with their suppliers must be addressed. The NFU has built up a catalogue of complaints about supermarket and other retailer practice which suppliers will not talk publicly about because of an overwhelming climate of fear (National Farmers’ Union Online 2006).

According to the study by NFU (2006), individual farmers and growers have raised issues including: Retailer insists that all printed labels are sourced from list of recognised suppliers. Excellent quality labels can be sourced locally at a fraction of the costs. The change in terms of contract by retailers at short notice and sometimes retrospectively, accompanied by a ‘take it or leave it’ attitude. Suppliers asked to pay the retailer a percentage of turnover, annually, as a gesture of goodwill (National Farmers’ Union Online 2006).

In addition, the submission asks for a longer term view to be taken of supermarket price wars. At face value, supermarket price wars have the effect of driving down prices and therefore supplying customers with cheaper products. Unfortunately, real damage is being done further down the supply chain where businesses cannot cope with the continued downward pressure on prices, particularly as input costs – like energy and labour – are increasing. Ultimately, the submission warns, this will have an adverse affect on product choice, availability and continued production in the UK (National Farmers’ Union Online 2006).

According to McDonald (2006): “Many farmers and growers are in contracts which supermarkets never put in writing and the terms of which can change overnight. They are often asked to pay supermarkets for the privilege of trading. We are asking the question – how can you run a business in such a climate of fear? Such practises are stripping the suppliers of the ability to compete and grow their businesses. The farming unions are not against big business and we do not want to see efficient businesses penalised. However, we are against abuse of power and the lack of regard for the business pressures on others in the supply chain. We therefore urge the OFT to make the referral to the Competition Commission and to ensure that this is a full review with no restrictions or limitations” (National Farmers’ Union Online 2006).

A report from consultants Cap Gemini Ernst and Young showed the results on surveys which sought to understand the power and control of just a few large corporations on every aspect of our food system.  The surveys were sent to senior food executives and policy makers in 19 countries, and along with extensive market analysis, the State of the Art in Food report concluded:

“The consolidation and internationalisation of the food retail and manufacturing industry can be expected to continue. In the near future, four or five large retail organisations will operate on a worldwide scale. There will, however, also be a number of dominant regional and national retailers. A similar situation will exist among the large manufacturers. About 10 food manufacturers will operate globally, with 20 to 25 global brands, along with a number of consumer goods companies that will be dominant in particular countries or regions” (Lang 2003).

Of course, for the manufacturers, desperate to regain control of the supply chain from overweening retailers, this is not good news. The Cap Gemini report revealed the depth of discontent among the processors at the way the retailers act as gateway to the consumers (Lang 2003).

According to the report:  “Three quarters of all manufacturers surveyed indicated that they give in too much under retailers’ power and fear the consequences of the increasing strength of retailers.  A-brand manufacturers believe that large and expanding retailers force them to provide extra discounts, levying the threat of losing privileges and shelf space. Some of the executives we interviewed went so far as to call it ‘blackmail’” (Lang 2003).

However, the report also concluded that the bad feeling was obviously mutual.  The Cap Gemini report stated: “Retailers, not surprisingly, disagree with this assessment.  On the contrary, retail executives told us, manufacturers have abused their power and do not show enough respect for the important role the store plays. Retailers indicated that rather than spending millions of dollars for mass-media marketing, manufacturers should direct more money toward in-store promotion and better align their strategies with retailers’ consumer marketing initiatives” (Lang 2003).

The Cap Gemini report emphasized that, in the short term at least, this epic battle for food dominance was going to have only one winner: “The majority of the participants in our research expect retailers to rule the food chain in the coming five years” (Lang 2003).  On an positive note, the Cap Gemini report came to the optimistic conclusion that, despite the increasing power of both manufacturers and retailers, it will be consumers who drive the food supply chain in future, even though this is hard to believe given the current evidence  (Lang 2003).

In the US alone, more than 13,000 new food items are launched each year to add to the estimated 300,000. In Europe, of the 10,000 new products launched annually, 90% will fail before the year is out. Only a minority of food brands will make it through the long haul to become global, joining such big names as Nescafé, Pepsi, Coca-Cola, Kelloggs, McDonalds, Heinz, KFC, Mars and Cadbury. Of all the world’s top 50 consumer brands, food accounts for a fifth.  It costs a large amount of money for a product to reach global status (Lang 2003).

New food items cannot simply be launched with the hope that notoriously volatile consumers will buy them of their own accord.   Marion Nestle, professor of nutrition at New York University, calculates that US$30bn a year is spent by the US food industries on marketing alone. The main priorities for food manufacturers are securing shelf space for their product and launching continual advertising blitzes to persuade shoppers to buy their product and not that of a competitor’s. This is why companies like McDonalds and Coca-Cola manage to spend US$1.4bn a year on marketing worldwide, worth it for a share of the even bigger US$1.3 trillion US food market which is, in turn, 8% of US domestic spending (Lang 2003).

At the root of all these issues surrounding the food sector is the issue on the radical restructuring of the food chain which has not been matched by the strengthening of structures theoretically there to protect public interest.  Competition policy and regulation passed by numerous countries tend to be reactive rather than proactive.   The Labour government set up a competitive commission, with the EU flexing its muscles and consumer groups joining the new anti-supermarket alliance of small farmers, environmentalists, and civic campaigners to pressure the government to take on the corporations (Lang 2003).

Unfortunately, meaningful change is a vague and flimsy concept.  Even though the different sectors of the food industry are locked in battle with each other to control the supply chain, they are extremely adept at putting their differences aside when they have to wield real political influence. The food industry lobby is one of the oldest in Britain. It is very well organised and funded. The main body is the Food and Drink Federation, an alliance of all the commodity-specific alliances, from sugar and confectionery to dairy and grain (Lang 2003).

This lobbying machine, and others such as the British Retail Consortium, has mastered the art of cultivating a long list of people in both houses of parliament and in government departments. It has created a “holy triangle” which is made up of the industry, parliament and Whitehall. Between these three there is a slowly revolving door, taking people from Whitehall into the food industry, or less commonly, from the food industry into politics. The former chairman of the supermarket chain and now the man responsible for British science, Lord Sainsbury, is only the most high profile example (Lang 2003)

Over the years, this network has allowed the industry to make sure that ministers are always fully aware of its position on any given subject. The industry prides itself on its capacity to enter the doors of the key politicians. Shaping policy and steering regulations are no longer merely a national but European and global responsibilities.  It should be noted that it  has long been a characteristic of food policy that what manufacturers and retailers want, they often get.

As concentration and market dominance goes from local to global, that trend will become increasingly difficult to break. In the past, this power has only be tamed by public pressure and concerted action by public interest lobbies such as health, conservation, social and labour movements. Over the last decade or so, there have been important gains and successes over food safety, quality, unethical trading but the massive concentration now emerging is surely the real challenge (Lang 2003).

RESEARCH METHODOLOGY

PROCEDURE

The research procedure to be used for this study would be the case study approach.  Descriptive and analytical examination of relevant data from previous related literature would be used to study the issues revolving around the UK and global food supply chain, the advancements in term of product tracking and identification, cooperation within the UK food supply chain, and in order to draw up some recommendations to help address the issues surrounding food supply chain management.

MATERIALS

Materials to be used for this research would be online and book resources which are relevant to the topic.  Projects such as “Effective Cooperation within the UK Food Supply Chain” and the comprehensive article on innovations in traceability systems and product ID tools by Gale (2005), for instance, will be used as important references for this study.  Other materials are online newspapers, feature reports, and research studies on food supply chains and traceability systems.

RESULTS

Effective Cooperation within the UK Food Supply Chain

In a three-year project conducted in collaboration within the food chain in UK, at the Royal Agricultural College, researchers identified the problem statement that existing forms of business cooperation traditional to the UK farming sector are insufficient to gain adequate market power and profitability within an increasingly competitive global food and farming industry.  The Report of the Policy Commission on the Future of Farming and Food (2002) identified a need for farmers to cooperate and collaborate more effectively.  On the other hand, the Plunkett Foundation (1992) maintains that Farmers Controlled Business should adopt more imaginative approaches (Diaz-Gonzales, Newton & Alliston 2005).

Thus, the project by Diaz-Gonzales, Newton and Alliston (2005) sought to find a new form of collaboration between farmers with the need to gain significantly greater scale and flexibility in an increasingly global food chain.  The project identified the following objectives:

• To assess the effectiveness of the traditional models of cooperation;
• To analyse best practice in other commercial sectors and identify transferable elements (Diaz-Gonzales, Newton & Alliston 2005).

The research procedure used for the project was an inductive grounded theory approach and guided interview techniques.  Experts in the business collaboration sector were selected using a purposive sample approach and were interviewed by using an interactive Delphi model.  Interviewees were leading academics, government officials and managers of the most profitable and/or innovative EU based cooperatives (Diaz-Gonzales, Newton & Alliston 2005).

As such, the project came up with the following results which are relevant for this particular study as it attempts to find ways to improve food supply chain management in UK.  One such area of improvement, as covered by the Diaz-Gonzales, Newton and Alliston (2005) project is thus improving effective cooperation within the UK food supply chain.   The project respondents identified and evaluated the operational characteristics of traditional models of cooperation in the light of a global food supply chain.  They were also encouraged to identify the ideal characteristics of any replacement business frameworks.   The results are subdivided and discussed below as to:

• very important factors;
• important factors;
• relevant factors (Diaz-Gonzales, Newton & Alliston 2005).

The results from the project (2005) support two recent English reports about cooperation, by Thelwall (2004) and EFFP (2004).

The interview results identified the key issue of the limited and inconsistent perception of UK farmers of the need for change.  Both Thelwell (2004) and Waner (2003) suggest that farmers remain production driven, while Fulton and Gibbins (2000) on the other hand identify that the key driver for increased market power is the knowledge and response to consumer demands.  O’Connor provides that the problem lies in the treatment of capital as common property, whereas Cook (1995) highlights the importance of the cooperative member’s commitment to guarantee control.

The identification of these factors as barriers was not a general agreement, such as a consumer vs. production focus.  The lack of business skills among cooperative farmer-members was unanimously identified among respondent managers and experts interviewed for this project.  Similar was the findings of both O’Connor (2001) and Waner (2003) who identified that the lack of range of business skills and the need for a unified group of producers would greatly help the cause of farmers in UK today  (Diaz-Gonzales, Newton & Alliston 2005).

Addressing problems of culture and attitude among farmers in UK would take a long-term process.  The key factor though is to gain recognition of the need to fundamentally address the organisational structure.  There is a need to establish the right to trade ownership as well as a financial framework attractive to external capital.  The payment of dividends for farmers and cooperative should be a more visible benefits.  There is also a need for a more consumer-supply chain focus in order to attract the kind of leaders required (Diaz-Gonzales, Newton & Alliston 2005).

Critique of the Tracking Systems

It has been almost two years since the introduction of the EU General Food Law Regulation (178 / 2002). Billed as one of the most comprehensive pieces of legislation to affect the supply chain, it stated that companies involved in the food supply chain must be able to identify and track every ingredient and food that they handle ‘on demand’ (Carlile 2006).

The Sudan 1 food scare case in February 2005 highlighted early weaknesses of the legislation. Although the contaminated products were identified, questions remained over the length of time it took to trace the data of the contaminated products within the supply chain. The legislation did not insist manufacturers and suppliers needed to act immediately as ‘on demand’ might suggest and suppliers were not imposed a strict time frame. As a result of this ambiguity, it took the majority of supplier’s weeks to track the contaminated products (Carlile 2006).

A combination of the legislation and the Sudan 1 case asked what progress had actually been made by suppliers in improving the ability to trace food ingredients in the supply chain. Will it take another high profile case to reveal the further lack of progress in the industry? What factors are hindering manufacturers’ ability to trace ingredients? Sudan 1 highlighted the ambiguity of the ‘on demand’ element of the EU General Food Law Regulation. The legislation stipulated that food companies must be able to identify where they got their products from and who they sold them to. This is referred to as ‘one up one down’ traceability. No pressure was enforced on the time it had to take them (Carlile 2006).

While the Food Law Regulation provides a framework for companies to work with, the real changes within the industry are not being driven by legislation. Instead, suppliers and large retailers are driving this process by their own requirement to achieve higher food safety standards, plant efficiencies and maintain customer confidence. Progress is therefore still uneven across the food and beverage and industry. Organisations taking steps towards reducing the time it takes to trace and recall a product face a series of barriers. While most large UK organisations have traceability systems in place, there are many cases where they use non-UK suppliers, often from outside the European Union (Carlile 2006)

Given the nature of the food supply chain, preventing the contamination of any food stuff is a complex task. Even on a national level, there are barriers, which face UK firms in meeting the EU General Food Law Regulation. Managing processes in the supply chain is multi-faceted. For example, many manufacturers will use alternative or new suppliers on an ad hoc basis in order to meet demand or when faced with shortcomings from their existing suppliers. Given this pressure, manufacturers often struggle to make all the necessary checks as to the provenance of the products from these suppliers (Carlile 2002).

To deal with this challenge, internal traceability systems should be developed to fully control the food products entering and leaving the supply chain. Internal traceability of ingredients can reduce costs and limit damage through more targeted and quicker recalls. Most organisations using an integrated software system with traceability functionality are able to dramatically reduce the time it takes to carry out a mock recall from days or weeks to a matter of hours. Furthermore, if manufacturers link traceability and enterprise resource planning systems (ERP) to the process control systems on the factory floor, faulty products entering the supply chain can be stopped immediately, before they enter the manufacturing production process (Carlile 2006).

Equally important is access to live information. Customer and consumer confidence can be lost quickly if suppliers are not able to react instantly to food quality or safety issues and yet the food and beverage industry at large still lacks the ability to monitor and record information in real time. This makes it hard for manufacturers to have genuine control over their processes and effectively manage recalls. So, not only is it vital to have a traceability policy and a reliable system in place, this system should also allow manufacturers have real time information in addition to the recording of historic data (Carlile 2006).

In sum, a variety of systems exist to enable manufacturers to not only comply with legislation, but also to meet and exceed the demands of key retailers and to go even further in improving the speed and accuracy of traceability throughout the supply chain. The question however, remains as to whether it will take another case, similar to Sudan 1, to enforce stricter changes and to speed up the adoption of such systems. Experience suggests that it is likely that most manufacturers have implemented some kind of traceability processes already, if only to comply with legislation. The result of this low level of adoption is that many organisations will posses the basic processes to enable them to be legally compliant and no more (Carlile 2006).

Problems concerning information exchange in the food sector may be explained by the theories and analysis tackled by Hamid Mohtadi (2005) in his research.  He provides that some retailers fear that suppliers who learn of their inventory, sales, and ordering practices may somehow share this information with rivals or otherwise use it in ways that would diminish retailers’ profitability (Kinsey & Ashman 2000).

This reluctance in fact, in the food industry, according to Nakayama (2000) shows that information exchange plays a role in the power relationship between supermarkets and their suppliers, impacting their mutual trust and the adoption of information technology among firms. For instance, when the food retailer uses electronic data interchange (EDI) for inventory coordination, the supplier’s knowledge of retailer’s parameters and strategies could lead to greater monitoring of retailer’s sales and the timing of invoices and payments. This reduces the retailer’s incentive to share its point of sale (POS) data directly with his supplier(s). This is a classic application of the asset hold-up problem: the retailer’s fear of ex-post supplier opportunism reduces the retailer’s incentive to invest in specific information sharing assets (Mohtadi 2005).

The trade-off between the need to share information and the need to protect information is best illustrated in the following question that the retailer asks: “What is the minimum set of information to share with my supply chain partners without risking potential exploitation?” (Lee & Whang 2000).  Gal-Or (1985) showed how information withholding may be a Nash equilibrium outcome despite its social inefficiency.

In general, intimate knowledge of the market conditions is often buyer’s strategic asset. But because suppliers may use such information against buyers, this tempers buyers’ desire to adopt IT and risk losing competitive advantage in procurement (Whang 1993). The result is that buyers have a diminished incentive to share information due to the risk of exposure (Laffont & Tirole 1999), while still taking advantage of the strategic value of their private information (Chen 1998; Gavirneni, et al. 1999).

While the issue of information sharing horizontally, across firms, has been viewed in strategic settings for monopolistic, duopolistic, oligopolistic, and competitive structures (e.g., Gal-Or  1985; Li 1985 and 2002; Raith 1996), the retailer reluctance to share information vertically along its supply chain, as opposed to horizontally, is tied to its concerns about supplier’s potential for opportunistic behaviour.

It occurs because the food retailer’s adoption of information technologies would enable it to increase its procurement efficiency via its supply chain partners. This would, however, force it to share strategic and often valuable information (e.g., its knowledge of market forecasts) with suppliers that exposes the retailer to the suppliers’ opportunistic behaviour (Mohtadi 2005).

Mohtadi (2005) also discusses and argues against the notion of: That a large retailer facing a large number of suppliers is less concerned about opportunistic supplier behaviour, as the tendency for opportunistic behaviour is more limited due to increased supplier competition. This finding has an important implication which Mohtadi’s (2005) study examines.  It predicts that such retailers are likely to be more willing to share information and thus adopt information sharing technologies with their suppliers than independent retailers facing a single or few large suppliers.

There are two main hypotheses that Mohtadi (2005) sought to test in his research.  The  first is represented by an equation that relates the food retailer’s incentive to share

information (and therefore adopt information sharing technologies), to the retailer’s gains from information sharing. Of importance is the fact that the retailer’s profits increase with the number of suppliers the retailer faces and the scale of demand (sales). Denoting net profits under information sharing arrangements by) find that:

where, n is the number of suppliers facing the retailer, a is the scale of demand, co is the operational cost associated with the product (documentation, transportation), v is the actual (manufacturing or processing) cost of the product, b is the slope of demand and rF represents the amortized (flow) cost of the fixed investments associated with information sharing IT adoption.

Discussion

Traceability

The need for establishing security in the food chain requires traceability systems not just as value-added for the food supply chain, but are obligatory for all business in the food chain in the EU since January 2005.  The directive requires businesses to be able to identify all suppliers of food, food products and feed, as well as all businesses to which they supply food or feed. The information needs to be systematically stored in order to be made available to inspection authorities on demand.

Traceability systems cover all types of food and affect food businesses from farm suppliers to retailers. In addition to the 2005 legislation in the EU, there are other existing requirements for traceability, particularly in standards related to quality improvement and/or food safety. There is an underlying need to define the specific information elements that each sector of the food business must agree upon. This information should then be compiled and shared between the different sectors in order to achieve chain traceability (CIES – The Food Business Forum 2004).

Traceability in the food supply chain has become a legal obligation in the EU, as earlier mentioned.   Many food businesses will be or are already confronted with the need to build a traceability system. This document aims to build awareness on this issue and to provide information to food businesses, to enable them to make the right business decisions. It will describe the impact that the implementation of a traceability system may have and provide some recommendations.

It is aimed at the senior management level of food companies independent of their position in the food chain. It seeks to guide food businesses in the implementation of traceability systems, by highlighting the nuts and bolts of such a system, the pitfalls when designing and implementing such a system and above all how to ensure that systems can be aligned along the food supply chain. It focuses on food and not on product safety in general (CIES – The Food Business Forum 2004).

Traceability systems cover all types of food and related products in the entire food chain and affect food businesses from farm suppliers to retailers. Feedstuffs and other farm supplies needed to produce food, are included, as well as food contact materials such as packaging. As requirements for traceability systems are present in the US, Europe and Japan the implications of this document have a global reach (CIES – The Food Business Forum 2004).

As mentioned, traceability systems will be obligatory for all businesses in the food chain in the EU from 1st January 2005. This means a business must be able to identify all its suppliers of food, food products and feed and all businesses it has supplied food or feed to. The information needs to be systematically stored, in order to be made available to inspection authorities on demand.  In the EU, traceability is related to labelling in specific cases only. For some sectors in Europe, the requirement for traceability runs ahead of the general requirement, i.e. for the labelling of beef and some beef products, fish, and for the labelling of (non) GMO’s (CIES – The Food Business Forum 2004).

The requirement for a traceability system is in essence quite simple, but implementing an effective system that is also beneficial to the business may be difficult to put into place for some businesses to a greater or lesser extent. There are no legal requirements for in-company traceability (from door to door), to set up a complete food chain traceability system, nor to give any information to the consumer.

The choice on how to set up an in-company traceability system remains with each individual company.  For some organisations, traceability appears to be a magic word, the ultimate solution to all food safety problems and a means to create consumer confidence. In reality, it is an important tool, which assists in the management of food safety and security issues. There are many other reasons why operators should implement traceability systems (CIES – The Food Business Forum 2004).

In addition to the legislation described above, other requirements for traceability exist, particularly in standards related to quality improvement and/or food safety. The use of such standards may help to reduce the chances of a food safety crisis and subsequent product withdrawal or recall. Despite best efforts at prevention however, there will always be some degree of risk of product contamination or tampering at any point in the supply chain.

Traceability is mentioned in ISO 9001:2000 as one of the aspects that should be considered in a quality management system. Many businesses are therefore interested to have traceability systems, whether it’s a legal requirement or not. Many customers already ask for traceability systems to be in place through the requirement of certification based on the ISO 9001 series or food safety standards. Besides the legal necessity to implement traceability systems, there often is a commercial need to do so (CIES – The Food Business Forum 2004).

The implementation of traceability systems will be increasingly a part of the usual commercial negotiations and product specifications. This will decide in how far implemented systems will be compatible (CIES – The Food Business Forum 2004).

These traceability systems fall under three categories: product identification (ID) and marking, traceability tools and software, and radio frequency identification devices (RFID) systems.

Product Identification (ID) and Marking

Product ID systems are the most common tracking tool being used and have been around the longest. They include bar coding and imprinting tools that use tracking numbers to link finished products back to specific data relating to their production history.  To respond to the increasing need for very exact tracking, or additional key data associated with marking tools, companies such as Eggfusion and DayMark are adding exciting new technologies to this traditional method for tracking (Gale 2005).

The new laser etching technology developed by Eggfusion (Deerfield, IL) enables permanent, tamper-proof etching of a date and traceability code onto individual shell eggs that can be used to look-up additional data points regarding the egg’s origin and distribution. Unlike labels on cartons, the laser etching allows processors to track each individual egg with etching for freshness dating and traceability codes that are integrated with technology platforms, assuring accuracy in the information associated with the origin and distribution of the egg (Gale 2005).

On the other hand, DayMark Safety Systems (Bowling Green, OH) recently introduced new Timestrip freshness indicator labels.  These labels adhere to fresh or frozen food packaging for automatic monitoring of product shelf life. They are activated by peeling off the backing, squeezing a bubble on the back of the strip, DayMark TimeStrips are applied directly to the food package or container. After activation, a purple mark appears that gradually moves along a white horizontal bar to the left of the label strip, indicating the time that has lapsed as the food approaches its expiration date. When the bar is completely purple, the food has reached its expiration date and should be discarded (Gale 2005).

According to studies, the indicators allow processors and distributors to track food freshness in transit and in storage, saving the expense and potential health hazards caused by spoiled or wasted food, and are especially useful for food items at high risk for bacterial growth, such as seafood, poultry, meat and dairy (Gale 2005).

Traceability Tools and Software

Traceability software systems help food companies manage data for product safety, quality and security throughout the food manufacturing and distribution supply chain. Food companies build traceability systems not merely to meet legal requirements or customer standards but to raise productivity through enhanced data management.

If a traceability system is robust enough, it can offer improved supply-side management, increased safety and quality control, and the ability to market foods with credence attributes that are difficult for consumers to detect, such as whether a food was produced through genetic engineering. Along with creating a safer food chain, these features are designed to result in lower-cost distribution systems, reduced recall expenses and expanded sales of high-value products, which all translate into greater profitability (Gale 2005).

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