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Food supply chain in UK: An analysis

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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.

CHAPTER 1

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).

ORGANIZATION OF THE THESIS

The thesis presents an abstract to provide for a general view of the topic and its conclusions.  Chapter 1 covers an introduction to the topic and the organization of the research study, outlining the sections covered per chapter.  Chapter 2 includes the review of related literature, showing a historical review on food supply chains, and the theories associated therewith.  Chapter 3 presents the research methodology used for this study, specifically the procedure and materials used.  Chapter 4 discusses the results of the study, examining in particular effective cooperation with the UK food supply chain and a critique of the tracking systems.  Chapter 5 provides for an extensive discussion on four main topics: traceability, understanding the impact of information sharing, supply chain risk management, and predictions for the future market.  Under the section covering traceability in this chapter, the four tracking systems will be discussed thoroughly: product identification (ID) and marking, traceability tools and software, and radio frequency identification devices systems.  Chapter 6 will provide for the conclusion of the research, and Chapter 7 wraps up a summary of the thesis.

CHAPTER 2

REVIEW OF RELATED LITERATURE

A)        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:

1)      the incompatibility of computer systems between retailers and suppliers; and

2)      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).

B)        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).

TABLE 1.

Top 10 Global Food Manufacturers
Total food sales in US$, 2001-2002

1
Nestlé
46.6bn
2
Philip Morris (Kraft)
38.1bn
3
ConAgra
27.6bn
4
Unilever
26.7bn
5
PepsiCo
25.1bn
6
ADM (corn milling)
23.5bn
7
Tyson (meat processing)
23.4bn
8
Cargill
21.5bn
9
Coca-Cola
20.1bn
10
Mars
15.3bn
(Source: Global Food Markets Leatherhead Good International)

            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).

TABLE 2.

European Food Retail Market Shares (2001-2002)

C1%
C3%
C4%
C5%
Austria
31
74
83
87
Belgium
25
63
72
81
France
22
48
57
66
Germany
26
58
69
78
Ireland
32
68
81
90
Italy
19
53
65
73
Netherlands
41
71
76
80
Portugal
26
56
67
77
Spain
31
56
66
74
UK
24
53
63
68
Average
28
60
70
77
(Source: Thelwall, 2004)

            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:  1) efficiency; 2) consumer orientation; 3) 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.  This will be more extensively discussed in Chapter 5 (a) of this research paper.

TABLE 3.

Top 6 UK Food Retailers

Grocery market share, 12 weeks to March 30, 2003

1
Tesco
25.5%
2
Sainsbury’s
17.4%
3
Asda
15.8%
4
Safeway
10.4%
5=
Morrisons
5.7%
5=
Somerfield
5.7%
(Source: Taylor Nelson Sofres)

TABLE 4.

Top 10 Global Food Retailers

Global sales in Euros, 2002

1
Wal-Mart
US
199bn
2
Carrefour
Europe
86bn
3
Ahold
Europe
53bn
4
Kroger
US
51bn
5
Metro
Europe
47bn
6
Albertsson’s
US
39bn
7
Keart
US
39bn
8
Rewe
Europe
36bn
9
Tesco
Europe
34bn
10
Aldi
Europe
33bn
(Source: Cap Gemini Ernst & Young)

            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).

CHAPTER 3

RESEARCH METHODOLOGY

A)                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.

inductive grounded theory

B)                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.

CHAPTER 4

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: 1) To assess the effectiveness of the traditional models of cooperation; and 2) 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: 1) very important factors; 2) important factors; and 3) relevant factors (Diaz-Gonzales, Newton & Alliston 2005).

Very important factors:

Culture of “farm focus”, lack of “global” understanding

Barriers                                                                      Ideal characteristics

Domestic vision (production focus, independency)
Supply chain focus, consumer focus
Lack of business vision (lack of professional management)
Understanding of the business environment (business run by professionals)

Important factors:

Intrinsic limitations of the traditional model

Barriers                                                                      Ideal characteristics

No clear sense of ownership
Tangible assets and benefits
Lack of commitment and dedication
100% commitment and professionalism
Inadequate structure and inflexible rules
Lean structure and flexible rules

Relevant factors:

Personal characteristics and skills of the members

Barriers                                                                      Ideal characteristics

Lack of good leadership
Leaders with the right vision and attitude
No clear division of roles
Professionalism of roles
Not enough training and education
Education, training and support

            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.

            It is clear that,

The first result obtains because a large number of suppliers works to the advantage of the retailer by reducing supplier’s ability to act opportunistically based on information it gathers from the retailer’s market demand. Hence, large retailers facing numerous suppliers are more willing to adopt technologies and strategies that allow them to share information with their suppliers. Notice that this is separate from the question of supplier size, a, which also exerts a positive influence on Ã1. Thus, Mohtadi (2005) presents his first hypothesis:

Hypothesis 1: Retailers with large sales and those facing a large number of suppliers are more willing to share sensitive market data along the supply chain with their suppliers.

The second insight addresses the reverse question by exploring the retailer incentive in withholding information. The disincentive to share information arises from concern for supplier opportunism despite obvious efficiency loss, such as reduced coordination of retailer-supplier orders and deliveries, that information withholding entails (Mohtadi 2005). Denoting such information withholding gains by 2 , it is found that 2 depends on a number of firm and market

characteristics. In particular,

Here, according to Mohtadi (2005), in addition to the variables defined earlier, s is the storage cost. The terms involving various subscripts indicate the extent of unexpected supply and demand shocks that lead either to overstocks or stock-outs. Specifically, 0 u represents “mean supply driven overstock” (hence the reason for being multiplied by s), while 0 u and s0 d represent the mean value of supply and demand driven stock-outs. As in equation 1, rF’ represents the amortized (flow) cost of the fixed investments associated with IT adoption, but in this case IT is associated with 2 1 technologies that enable the retail firm to exploit its information advantage over the supplier rather than to share information with the supplier (Mohtadi 2005).

Examples might include the forecasting of demand or category management. As a result, the demand driven component of stock-out is eliminated (in theory entirely so) to the retailer, but not to the supplier. Thus, as was mentioned earlier, large demand variability can actually benefit a retailer who is able to forecast its demand but would be otherwise vulnerable to supplier opportunism (Mohtadi 2005).

Thus, Mohtadi (2005) shows us  from equation (2) that the gains form withholding information, 2 , rise with stock-outs, s0 d , holding the number of suppliers (n) constant. But a rise in n reduces the incentive to withhold information (by reducing 2 ) via the term involving stock-outs, s0 d . This is the information withholding effect and shows that information withholding pays less when the retailer has market power vis-à-vis many suppliers. Why is this? Mohtadi (2005) tells us that withholding information from a supplier is aimed at preventing supplier opportunism, but a rise in the number of suppliers reduces supplier opportunism.

Thus, gains from withholding information diminish. In fact, we can verify that,

According to Mohtadi (2005), a larger number of stock-outs represent great demand uncertainty. But such an uncertainty provides value to a retailer who can forecast the demand with some accuracy. When such a retailer is relatively small, the cost of supplier opportunism from sharing market demand data with a much larger supplier dominates the efficiency gains from such information sharing

Higher stock-outs imply higher value of demand prediction making it less likely that a small firm would adopt IT technologies that would lead to easier supplier opportunism. Examples of such supplier opportunism that are tied to the suppliers’ knowledge of the retailers sales data might include suppliers offering excessively large “forward buys” to the retailers on the latter’s “high demand” products that would help suppliers shed inventories, or refusing to pay promotion dollars for “fast moving” items since they would sell anyway, etc. As the firm faces an increasingly number of suppliers, concern for supplier opportunism is reduced due to increasing competition among suppliers (Mohtadi 2005).

This leads to Mohtadi’s (2005) second proposition or hypothesis:

Hypothesis 2. Large food chains that face many suppliers are less likely to withhold key market and stock-out data with their suppliers while small and independent retailers facing few large suppliers are more likely to withhold stock-out data.

In the next sub-section we make operational the above hypotheses by presenting them in a testable empirical framework.

Following, Mohtadi’s(2005) empirical model, thus:

Let, q be a binary variable such that,

(4a) q =1 if an information sharing IT is adopted.

(4b) q =0 if an information sharing IT is not adopted

Then from equation (1) the decision to adopt occurs if the profit 1 exceeds some threshold profit level, *1 . Expressing this in terms of the probabilities (denoted by Prob.)

Where e is an error term and f is increasing in the arguments, n and a and X is a vector of control variables. Then from the theoretical results (1a) Mohtadi (2005) shows us that hypothesis 1 would hold if the following two inequalities hold:

 Equation (2) yields results that are consistent with the above hypothesis. But as we see from (2a) this equation also yields an interesting result based on the interaction of the stock-out effect. To operationalise this equation, we note that the probability of withholding information, given the knowledge of the stock-out variable, can be expressed as:

Where *2 is some threshold profit level, ‘ e is an error term and Y is a vector of control variables. Given the result from equation (2a), we see that the interaction of the stock-out effect and the number of firms is such that g’<0 or that,

But note that this probability is inversely related to the probability of sharing information or that

From this, Mohtadi (2005) presents an operational version of Hypothesis 2, as follows:

In testing the two hypotheses, Mohtadi (2005) used logistic regression because the

choice of specific technology is a binary variable. The regressions are aimed at determining factors that influence the probability that a food retailer uses certain types of technologies that are likely to be associated with information sharing up the supply chain. The data Mohtadi (2005) used was based on a subset of the 2003 survey of US supermarkets, consisting of 391 stores3. A list of the categories of both the dependent and the independent variables is given in Appendix 1 (Mohtadi 2005).

            As can be seen from the right hand side column in Appendix 1, several of the variables are converted from categorical to binary variables. The reasons for doing this are different for different variables. In the case of the IT variables, the clear issue is whether a technology is adopted or not. However, unlike the approach taken by Dooley, Maud, and King (2004) in which a single IT variable was created by adding up all the binary variables, the special focus of this paper on IT adoption suggests that a better approach in this case would be to keep the binary variables distinct and separate in order to maintain the specificity of each (Mohtadi 2005).

In the case of variable Q11 (relation of store to warehouse or supplier) the categorical variable is converted to two binary variables representing either membership in a self-distributing chain or having the warehouse as independent wholesale supplier. The interest in this dichotomous choice follows from a generally maintain hypothesis that self-distributing stores are more likely to share information vertically since in this case, the supply chain, or at least a segment of it in this case, is internal to the firm. The stock-out variables in Q14 play an especially significant role in our empirical analysis based on the theoretical findings of the previous section (Mohtadi 2005).

Here, an average stock-out level was calculated based on the simple average of the reported stock out variable in the three categories of cereal, poultry, and yoghurt. Finally, horizontal market competition is thought to have an impact on a firm decision to share or not to share information with its suppliers (Gal-Or 1985; Li 1985 and 1999; Raith 1996). These variables are captured by sales or price leadership status of the store (Q27-SL=1 and Q29_PL=1) and by distance from the main competitor (Q25). Distance from one’s competitor signals more insulation from the competitor making it more likely to allow the retailer to share it information with the supplier.

The results of Mohtadi’s (2005) Maximum  Likelihood Estimation (MLE) of the logistic regression are presented in this section. Rather than using a broadly defined measure of supply chain technologies, he focuses on three key technologies that form a critical role in information sharing processes: 1) the Electronic Transmission of Movement Data to headquarters or key suppliers (ETMD); 2) Scanning Data for Automatic Inventory Refills (SDAIR); and 3) Vendor Managed Inventory(VMI) consisting of vendor generated non-DSD (non-direct store delivery) orders via store movement data.

Of these technologies, the first ETMD is a reflection of the retail firm’s initiative and its intention in committing itself to share sensitive market or inventory information with its suppliers. On the other hand, the two other technologies, SDAIR and VMI entail a reduced level of retailer involvement and initiative: SDAIR involves automatic inventory refills and is therefore an automatic and reutilised process; VMI involves vendor management of the retailer’s data and therefore demands more initiative from the supplier than from the retailer (Mohtadi 2005).

Of the independent variables, three are key variables that are associated with Hypotheses 1 and 2.  These are store size by sales area, the number of stores in the supply chain, and the extent of average stock-out that a store experiences. The two variables, “store size by sales area” and “number of stores in the supply chain” require some explanation. The variable “store size by sales area” is used as a proxy for the scale of demand denoted by “a” in the theory section (Mohtadi 2005).

Although a variable known as “average weekly sales” by stores is also available from the Panel data, that variable is subject to a number of problems. Foremost among them is the fact that the time period over which the average is calculated is inconsistent across observations; varying from different months in 2002 to the year 2003. By contrast, store size by sales area is a more stable variable, even if measured in different months. It is therefore more likely to produce a consistent measure of sales, representing the scale of demand “a” more accurately (Mohtadi 2005).

The variable, “number of stores in the supply chain,” indicates the size of the supply chain. In the absence of direct data on the number of suppliers which is needed to test Hypotheses 1 and 2, we shall use the variable, “number of stores in the supply chain,” as a proxy for the number of suppliers. This is a plausible assumption as larger chains are able to exert market power over numerous small suppliers. Finally, a number of control variables are introduced that examine the importance of horizontal competition as well as the question of whether the store is part of a self-distributing chain or is served by a separate warehouse-wholesaler (Mohtadi 2005).

Testing Hypothesis 1

Appendices 2-4 focus on the effects of store size and number of stores on the

probability of adopting an information-sharing platform, as per Hypothesis 1, while Appendices 5 – 6 focus on the effects of stock-out on that same probability as per Hypothesis 2, pursuant to Mohtadi’s (2005) study. Other variables introduced in these tables play the role of various controls.

            The structure of Appendices 2 – 4 which report these direct effects is as follows: Appendix 2 and 2a are associated with the ETMD technology. Appendix 2 reports the results for the pooled sample of all stores. In this table whether a store is part of a self-distributing chain or is an independent store, is captured by the dummy variable, “self-distributing” (Mohtadi 2005).

Although the sample also included a third category where the respondents “did not know” the store’s status (see Table 1), the total number of such observations was only 3. Given this small size, it is safe to equate the base value of “self-distributing=0” to the case of independent stores. By contrast to Appendix 2, Appendix 2a reports the results of separate logistic regressions for two stratified sub-samples of self distributing stores and independent stores. Similar structure is repeated in Appendix 3 and 3a for the case of the SDAIR technology and Appendix 4 and 4a for the case of VMI technology (Mohtadi 2005).

In Appendix  2, 3, and 4, the first four columns represent four different logistic estimates, but focus only on the role of store size and vertical structure (i.e. self-distributing versus independent) as independent regressors. With respect to store size, both variables, sales area and total size, were highly correlated. Thus only one variable, in this case sales area, was chosen to be used in most of the regressions (except the first two), primarily because sales area is a closer index of the scale of demand (see equation 1) than is total store size (Mohtadi 2005).

The last two columns specify logistic regression runs that also add horizontal competition/market structure variables as control variables to the previous set. The difference between the two columns is that column E excludes the “self-distribution” dummy variable while column F includes that variable (Mohtadi 2005).

Appendix 2 focuses on ETMD technology. This is the first of three supply chain technologies that is directly related to information sharing. From the table, store size by sales area is positively and significantly associated with the probability of adopting ETMD technology. However, the number of stores in the supply chain has a positive effect only when self-distribution is not controlled for and disappears in the presence of the self-distribution variable. In turn, self-distribution plays a strong and significant role in the technology adoption decision. But this would suggest that what appears to be as a confirmation of Hypothesis 1 from Appendix 2, may be simply a reflection of the dominance of the self-distribution effect (Mohtadi 2005).

Mohtadi (2005) addresses this issue by stratifying the sample into self-distributing and independent stores. The results are reported in Appendix 2a. Interestingly, both the number-of-stores variable and the size variable (n and a in the theory section) are now significant for the independent store, but not for the self distributing stores. Thus, it appears that both the number of stores and the size of store influence the probability of adopting EDTM technology ; quite distinct from the self-distribution effect (Mohtadi 2005).

In so far as EDTM technology is concerned, Mohtadi (2005) therefore finds strong empirical support for Hypothesis 1, where both the number of stores [as a proxy for the number of suppliers, (n) per earlier discussion] and the sort size (a) exert positive influence on the probability of adopting information sharing technologies.

The second technology that is directly involved in information sharing strategies is called Scanning Data for Automatic Inventory Refills (SDAIR). The results for this technology are reported in Table 3. These results are interesting in that in the pooled sample (Appendix 3) both size and the number of stores are significant whether or not the self-distribution variable is present. However, in the stratified sample (Appendix 3a) the size variable and the number-of-stores variable both lose significance for independent stores while only the size variable remains significant for self-distributing chains (Mohtadi 2005).

According to Mohtadi (2005), econometrically, this outcome can occur if, in the pooled sample, the residuals are correlated with the dummy variable “self-distribution” (e.g., a systematically higher or systematically lower residual for the self-distributing chains). In that case, the stratified sample resolves this problem by running separate logistic regressions on each of the two sub-samples. Thus, on the whole, the results of Appendix 3a are to be trusted more. Here, the coefficients of size are significant only in two instances and those of the “number of stores variables” are only border-line significant (Mohtadi 2005).

            Mohtadi (2005) then focuses on a third type of information sharing technology, namely, Vendor Managed Inventory (VMI) consisting of vendor generated non-DSD orders via store movement data. A comparison of Appendix 4 and 4a shows a rather similar pattern as the one for the SDAIR technology, where the significance of the number-of-stores in Appendix 4 in the pooled sample disappears in the stratified sample and where the size variable loses significance in the stratified sample (Mohtadi 2005).

In short, Mohtadi (2005) observed weak support for Hypothesis 1 in the case of SDAIR and VMI technologies and strong support for that hypothesis in case of ETMD technology. All of Mohtadi’s (2005) three findings above, the strong support of Hypothesis 1 for the ETDM technology and the weak support for that hypothesis for SDAIR and VMI technologies are entirely consistent with the fact that ETDM involves the retailer’s active participation while the other two technologies are those in which the initiative is with the supplier and not the retailer.

Testing Hypothesis 2:

Mohtadi’s (2005) Hypothesis 2 was tested by considering the role that stock-outs play in influencing the stores decision to adopt information sharing technologies with their suppliers. Equation (9) indicated that the likelihood of adopting information sharing technologies by a retailer increases with the product “n.”, where n is the number of suppliers and is the mean value of stock-outs (Mohtadi 2005).

            Again, using the variable “number of stores in the chain,” as a proxy for the number of suppliers under Hypothesis 2, results of testing for this hypothesis are reported in Appendix 5 and 5a.  Accordingly, the critical variable to look for is the interaction variable, “Average_stockout X number of stores.” On this variable, Appendix 5 shows the indicated positive and significant sign, but only for the VMI technology. However, since “self-distribution” does not enter in this table as a dummy variable, it is hard to gauge whether this positive effect is associated with self distributing stores or independent retailers (Mohtadi 2005).

Appendix 5a is therefore presented in which the various runs of Appendix 5 are repeated for the stratified samples of self-distributing stores and independent stores. For the case of VMI technology, the results from Appendix 5a reiterate the significant and

positive sign of the key interaction variable, “Average stockout X number of stores,” that was found in Appendix  5. Thus results for the VMI technology support Hypothesis 2, but are found only among the self-distributing stores. In addition, Appendix 5a reveals a new pattern that was not observed in the pooled sample of Appendix 5: the key interaction variable is found to be significant and positive for the case of the ETDM technology among independent food retailers (Mohtadi 2005).

Thus, according to Mohtadi (2005), results for the ETMD technology support Hypothesis 2, but only for independent food retailers.  What makes these results interesting is the fact that different technologies appear to be associated with information sharing under different market structures. The explanation for this lies in understanding the meaning of the interaction variable when combined with the characteristics of the technologies  (Mohtadi 2005).

Mohtadi’s (2005) hypotheses show stock-outs trigger a need to share technologies to minimize their level and their adverse effects on profits. But at the same time, retailers are also concerned about the potential for exploitation of their information by the suppliers. The more numerous are the suppliers (empirically approximated the size of the retail chain), the less is the retailer distrust of the supplier and the more likely are retailers to adopt information sharing technologies with their suppliers (Mohtadi 2005).

What ties Mohtadi’s (2005) hypothesis to the technology platform is the question of how much of a choice does the retailer exercise in its technology adoption decision. The ETDM technology involves, by its definition, the transmission of data by the retailer and thus much involves retailer initiative and choice. Such a decision requires much autonomy and independence. This is the characteristic of independent retailers, rather than retailers that are a part of self-distributing chains where critical decisions are taken at corporate headquarters. By contrast, the VMI technology involves vendor management of information and is likely to involve a great deal of supplier initiative. Thus, it is more likely to be initiated at a company-wide level and at headquarters and is therefore more likely to be associated with self distributing stores (Mohtadi 2005).

In short, according to the results of Mohtadi’s (2005) research,  the nature of information sharing technology platforms in the food industry is highly influenced by the specific market structure of the firms involved.

Finally, Appendix 5a indicates  that store size is also important in technology adoption decisions. It is an important determinant for independent stores for the ETMD and VMI technologies and for self-distributing stores for SDAIR and VMI technologies.

Chapter 5 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).

Tracking tools and software.

(Source: Ross Systems Inc.)

            According the 2004 US Department of Agriculture Economic Research Service (USDA ARS) report, Traceability in the US Food Supply: Economic Theory and Industry Studies, by Elise Golan, Barry Krissoff, Fred Kuchler, Linda Calvin, Kenneth Nelson and Gregory Price, traceability systems in U.S. companies tend to be motivated by economic incentives, not by government traceability regulations, and the more robust the system the greater the impact it has on the business. Cost/performance improvement benefits are driving the widespread development of robust tracking across the US food supply chain (Gale 2005).

One particularly important government regulation in the US is becoming a factor in the drive toward increased traceability program implementation in the food supply chain affecting other countries around the world. In September 2005, the U.S. Food and Drug Administration (FDA) issued its final guidance to the food and beverage industry pertaining to the mandates of the Public Health Security and Bioterrorism Preparedness and Response Act (Bioterrorism Act).

Section 306 of the act mandates strict record keeping requirements for those who manufacture, process, pack, transport, distribute, receive, hold or import food in the U.S. In short, food companies with traceability programs in place are well positioned to comply with the regulation, which requires companies to be able to collect and keep data that enables the control of all materials and products throughout the entire lifecycle of their food products, from original supplier to consumer (Gale 2005).

However, traceability alone cannot accomplish these goals. Merely knowing where a product is in the supply chain does not improve supply management unless the traceability system is paired with a real-time delivery system or some other data collection and management system. To make traceability more than a tracking and recovery tool, many traceability systems include tools such as environmental monitors and product scanners that link information back to sophisticated data storage systems, which gather and organize product data so that it can be easily retrieved for safety, security and quality assurance reviews or recall situations (Gale 2005).

The information gathered with these traceability tools is limited only to the need and imagination of processors, and often include temperature and storage data, product testing, personnel handling, farm of origin, shipping, and time and date stamping data. There are several new and improved computerized systems and software on the market that are making data collection and management easier for food processors (Gale 2005).

The following are examples of traceability systems (Gale 2005):

Ross Systems’ (Atlanta, GA) iRennaissance integrated business system automates traceability, enabling processors such as Berner Foods, Michael Angelos Gourmet Foods, Litehouse Foods, Gordon Fine Foods and others to monitor quality and product attributes for each batch or lot they manufacture. The software suite is a combination of business applications that manage financials, manufacturing operations, inventory control, and interactions with customers and suppliers, and can track raw ingredients throughout the production and distribution of finished products for quick containment in the face of a recall.   According to Ross Systems, iRennaissance customers have reduced lot trace times from several days to several minutes using its tracking features.

One customer, Upper Marlboro, MD-based Murry’s, Inc., a manufacturer of more than 150 frozen food products, including its famous Quarter Pound Hamburgers and the top-selling Original French Toast Sticks, lacked an enterprise-wide solution to easily manage and maintain data throughout each step of the manufacturing process. In addition to the company’s internal audits, USDA required manufacturers to perform mock product recalls two to three times per year. Without the ability to quickly and efficiently recall product data and raw material information during these audits, the company had to use time-consuming and intensive-intensive means to determine the movement of the audited products. With the help of iRenaissance, Murry’s reported that it could more effectively track and trace products from raw material delivery, throughout the manufacturing process and on to the supermarket shelves. In the event a product recall should occur, Murry’s can bi-directionally trace each product, allowing the company to track its products in the event of a recall threat in less than four hours, which previously took an entire day.

TUV America (Danvers, MA) has the QuaTIS system that enables security of quality control throughout the food production chain through a self-contained consumer information system that delivers key traceability information via the Internet. QuaTIS links existing company resource planning (product management), laboratory systems, other monitoring systems and external service provider information into one system. Its capabilities range from simple checks of appraisals of sample tests, to full quality control and traceability within the area of crop and livestock food production.

Invensys Wonderware’s (Lake Forest, CA) eCompliance Solutions is designed to enable food processors to quickly and affordably meet the Bioterrorism Act’s requirements under which the FDA must ensure that all food processing facilities in the US and those that import products into the US keep current, accurate records of every ingredient or other component that goes into its products. In addition to facilitating compliance with the new food bioterrorism regulations, the Wonderware eCompliance modular software package provides traceability for incoming materials, enables work-in-process changes and facilitates the shipment of finished goods. For large food manufacturers, eCompliance Solutions can also incorporate barcode technology, RFID and document exchange/business system integration in addition to recipe and inventory management.

AssurX’s (Morgan Hill, CA) CATSWeb is an enterprise-wide, FDA compliant, Web-based quality and compliance system that empowers organizations to identify production problems, avoid adverse events, trace-and-track quality and security data, and complete audits faster and more effectively than they can with paper-based systems. The CATSWeb system is used at FDA-regulated and ISO/QS 9000 certified companies around the world. CATSWeb is a zero client application that can be accessed from any computer, running any operating system, with any Web browser, anywhere and anytime that an Internet or intranet connection is available—which is useful for multi-plant and multinational food companies operating under differing regulatory or standards environments.

John Deere’s Agri Services (Hoffman Estates, IL) provides a series of tracking and traceability solutions that assist in the identification and isolation of food products and their ingredients throughout the agri-food chain. JDAS’s in-market solutions include in-field sensors and monitoring systems; RFID solutions to track field-level performance for produce and grains; and, tracking, tracing and decision support systems for producers, processors and manufacturers.

Companies will need tracking systems as governments implement new regulations requiring them to track food products through the supply chain.

            Radio Frequency Identification Devices (RFID) Systems

Radio Frequency Identification (RFID) is an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags or transponders. An RFID tag is an object that can be attached to or incorporated into a product, animal, or person for the purpose of identification using radio waves. Chip-based RFID tags contain silicon chips and antennas. Passive tags require no internal power source, whereas active tags require a power source (Wikipedia 2006).

RFID employs radio frequency communications to exchange data between a portable memory device or smart label and a host computer. A smart label is a pressure-sensitive label with an RFID transponder (or inlay) embedded between the label face stock and its release liner. This RFID tag can be encoded with large amounts of variable information that can be gathered by an RFID reader. Unlike bar codes, RFID data can be accessed without the visibility of the tag itself, and multiple RFID smart labels can be read at the same time (Gale 2005).

            RFID technology, which uses miniature antennas and tiny computer chips to track items at a distance using radio waves, is increasing coming to the fore as the best means of tracking goods throughout the supply chain. Many suppliers have been obliged to install RFID technology because of regulatory pressure and retail requirements from big retailers such as Wal-Mart (Food Navigator 2005), which will be discussed more extensively later on in this section.

            RFID technology is especially useful for inventory systems.  An advanced automatic identification technology such as the Auto-ID system based on the RFID technology has two values for inventory systems:  1) The visibility provided by the technology allows for accurate knowledge on the inventory level by eliminating discrepancies between inventory record and physical record; 2) The RFID technology can prevent or reduce the sources of errors.  Benefits of using RFID include reduction of labour costs, simplification of business processes, and the reduction of inventory inaccuracies (Wikipedia 2006).

            In Canada, the Canadian Cattle Identification Agency began using RFID tags for product tracking.  These RFID tags were used as replacement for barcode tags.  The tags in this case are required to identify a bovine’s her of origin and this is used for trace-back when a packing plant condemns a carcass.   Currently, CCIA tags are used in Wisconsin and by US farmers on a voluntary basis.  The USDA is currently developing its own program (Wikipedia 2006).

            There has been a lot of talk about radio frequency identification device technology and its role in improving traceability in the industrial manufacturing and distribution supply chain. RFID smart labelling is a means of product identification that has been adopted by retailers and governmental agencies to track the movement of products throughout the supply chain (Gale 2005).

            Until 2003, the retail sector, even including its suppliers and supply chains, was a tiny part of the RFID business. This is rapidly changing. According to Cambridge-UK-based IDTechEx, a research and conference organizer that specializes in RFID trends and technologies, the technology has become the hottest development in food supply chain traceability around the world. In the US, the Department of Defense and Wal-Mart have published that their vendors place RFID tags on all shipments to improve supply chain management.

Due to the size and influence of these two organizations, their RFID mandates impact thousands of companies worldwide.  The deadlines have been extended several times because many vendors face significant difficulties implementing RFID systems.  The study by IDTechEx also notes that the RFID industry includes market pull, with MacDonald’s the world’s largest outlet for cooked meat recently mandating full traceability from its suppliers and Wal-Mart, the world’s largest retailer, mandating RFID on all incoming pallets and cases as a prelude to tagging everything. Since January of 2005, Wal-Mart has required its top 100 suppliers to apply RFID labels to all shipments.

As a result, major food companies, such as 7-11 Stores, Del Monte Fresh Produce, Albertson’s and Kraft Foods, among others, are now implementing RFID technologies. In order to meet this requirement, vendors use RFID printer/encoders to label cases and pallets that require EPC tags for Wal-Mart.  These smart labels are produced by embedding RFID inlays inside the label material, and then printing bar code and other visible information on the surface of the label  Actually, in practice, successful read rates currently run only 80% because of radio wave attenuation caused by the products and packaging.  Eventually though, it is expected that even small organizations will be able to place RFID tags on their own outbound shipments (Wikipedia 2006; Gale 2005).

            The technology also has legal push with the 2005 EU legislation demanding “one up one down” traceability and the U.S. Bioterrorism Act requiring unprecedented levels of traceability. China and Japan are also in the lead, says IDTechEx, and they have their own concerns. For example, Japan is convicting criminals that pass off inferior foreign fish as coming from Japanese waters (Gale 2005).

            According to its most recent market research report on trends in RFID use, IDTechEx predicts that in 2006 almost three times the volume of RFID tags will be sold than over the previous 60 years since the technology’s invention. The authors of the report also predict that the market for RFID, including tags, systems and services, will grow from US$1.94 billion in 2005 to US$24.50 billion in 2015. The IDTechEx experts believe that 900 billion packaged and perishable food items could be RFID tagged in 2015 (Gale 2005).

            RFID technology is also being proposed as being useful to monitor bird flu.  The technology can be used to conduct surveillance of poultry movements, which could in turn enhance efforts for control a bird flue outbreak among poultry.  This of course would greatly reduce human exposure to infected poultry.   Several Asian countries have been considering the adoption of RFID technology for its poultry identification program in connection with the bird flu outbreak due to its promising capability in livestock tracking (Wikipedia 2006).

            Some examples of the RFID technology are enumerated and discussed below (Gale 2005):

Laudis Systems’ (Edison, NJ). SequorShare brings together state-of-the-art RFID sensor technology and a scalable RFID network and portal service that can be deployed to meet various business improvement objectives. It features the capability to integrate with existing and/or new security and enterprise software systems.  The company also manufactures SequorID, which can, trace and protect perishable foods through the supply chain; and SequorLocate and SequorAssure modules, which are designed to enable continuous monitoring and locating for more effective planning and proactive response.

Weber Labelling and Coding Solutions (Arlington Heights, IL), which has long had a presence in the label industry, has added RFID smart labels to its line of pressure-sensitive label products and consulting services. It manufactures the RFID smart labels using fully tested RFID inlays, and helps clients choose the best face stock, RFID inlay and adhesive combinations for their applications. Weber has the capability to supply RFID smart labels that will meet both established and emerging standards.

Syscan (St-Laurent, Quebec) is a supply chain solution provider delivering integrated real-time tracking and tracing systems that improve business efficiency through RFID. Through its i4cIT product, RFID tags are placed on perishables or temperature-sensitive products, on pallets and cases, and in trailers or containers, to monitor and communicate product temperature and security in real time as products move from source to destination. The tool is applicable for perishable and temperature-sensitive goods including, produce, dairy, meat, and poultry.

Omron (Schaumburg, IL) offers RFID systems that act as portable databases, which allow information to be accessed and modified at any point on the production line. According to the company, its RFID systems are built to withstand a wide range of operating conditions, including harsh environments where the use of bar coding is not practical. RFID tags, RFID antennas and RFID controllers are all industrially hardened to withstand wet, oily and other adverse conditions.

Checkpoint Systems (Thorofare, NJ) has introduced the METO branded mi-4210 RFID printer that allows the use of smart labels to combine both product-specific barcode information and radio frequency data in a single thermal label by incorporating a radio frequency circuit into the printed label. The METO mi-4210 RFID printer comes in two versions: fully enabled to encode all available RFID protocols, or an upgradeable version offering barcode printing only with ability to add RFID encoding at a later date. This allows customers to purchase a thermal printer today and adapt as needed with minimal investment.

Brady Corp. (Milwaukee, WI) offers an assortment of label technology aimed at providing security, authenticity and information that is both electronic and visual. The security technologies can be both overt and covert, and include holograms, and ultraviolet or infrared taggants embedded in the label material that can only be seen when illuminated by devices emitting specific wavelengths.  The company also offers RFID technology that can confirm the pedigree or chain of custody of the food from the processor through distribution and to the end retailer. In addition to the RFID data Brady has a growing line of “smart” materials to visually indicate that the package and label has experienced time, temperature or humidity abuse.

One last  example of such a system is the one launched by ScoringSystem. ScoringSystem launched an Internet-based record keeping system and database to allow companies to track their food products throughout the supply chain using radio frequency identification (RFID) and a new way of determining the exact location of each handler.  The record keeping system and database, calling ScoringAg.com, has been specifically designed to provide tracing information on agricultural products worldwide, from the “field-to-fork”, the company said this week. (Food Navigator 2005)

This system provides RFID traceback in real time through a secure online databank that pinpoints the location of each handler in the food chain. It can also work with barcodes. Companies will have unique accounts through which they will be able to access their product specific data (Food Navigator 2005).

In the ScorginAg system, location is identified through a unique Premises Identification Code (PIDC), a mapping technology developed by ScoringSystem. PIDC records activities and actions performed on the animals, fish, or crops at each location – even in the middle of a packing plant, or on board a factory ship, or in the middle of a farmer’s field, and all the way to the retailer and consumer (Food Navigator 2005).

The system’s PIDC traceability system uses the ISO standard for location and property identification. However ScoringSystem has developed a more comprehensive system to define all land and sea locations globally, including those areas that are not recognised or covered by the ISO standard, the UN and other international organisations.  In a press release, Scoring System stated: “In today’s global marketplace, any true traceability system must include all agricultural products to provide a true chain of custody with traceback and traceup throughout. This includes fish from lakes, rivers, and oceans around the world, poultry and hydroponics crops that may be raised in multi-story structures above ground and wild mushrooms, truffles, and root vegetables that may be collected or harvested below ground” (Food Navigator 2005).

ScoringSystem’s traceback system also provides online tracking through the food chain, including transport operators, vehicles, inspection stations, stockyards and all processors and food handlers to prove source verification.  The company stated in a press release: “Without efficient, effective data collection system and a Web-based data management system, tagging livestock and other agriculture items cannot provide true animal traceback and traceup – even when a local, resident software system and database is used.  A Web-based system makes it possible for records to move with the individual product, which cuts the time required for source verification to just seconds” (Food Navigator 2005).

The use of RFID technology however has been surrounded with much controversy and even product boycotts by consumer privacy advocates such as Katherine Albrecht and Liz McIntyre for CASPIAN who refer to RFID tags as “spychips.”  There are four main privacy concerns regarding RFID:

  • The purchaser of an item will not necessarily be aware of the presence of the tag or be able to remove it;
  • The tag can be read at a distance without the knowledge of the individual;
  • If a tagged item is paid for by credit card or in conjunction with use of a loyalty card, then it would be possible to tie the unique ID of that item to the identity of the purchaser; and
  • The EPCglobal system of tags create, or are proposed to create, globally unique serial numbers for all products, even though this creates privacy problems and is completely unnecessary for most applications (Wikipedia 2006).

Many of these debates revolve around the fact that RFID tags affixed to products remain functional even after the products have been purchased and taken home, and thus can be used for surveillance and other nefarious purposes unrelated to their supply chain inventory functions. Such unattended RFID tags also pose environmental risks (Wikipedia 2006).

Although RFID tags are only officially intended for short-distance use, they can be interrogated from greater distances by anyone with a high-gain antenna, potentially allowing the contents of a house to be scanned at a distance. Even short range scanning is a concern if all the items detected are logged in a database every time a person passes a reader, or if it is done for nefarious reasons such as, for instance, by a mugger using a hand-held scanner to obtain an instant assessment of the wealth of potential victims). With permanent RFID serial numbers, an item leaks unexpected information about a person even after disposal; for example, items that are resold or given away can enable mapping of a person’s social network (Wikipedia 2006).

The potential for privacy violations with RFID was demonstrated by its use in a pilot program by the Gillette Company, which conducted a “smart shelf” test at a Tesco in Cambridge, England. They automatically photographed shoppers taking RFID-tagged safety razors off the shelf, to see if the technology could be used to deter shoplifting. This trial resulted in consumer boycott against Gillette and Tesco (Wikipedia 2006).

In another incident, reported by the Chicago Sun-Times, shelves in a Wal-Mart in Broken Arrow, Oklahoma, were equipped with readers to track the Max Factor Lipfinity lipstick containers stacked on them. Webcam images of the shelves were viewed 750 miles (1200 km) away by Procter & Gamble researchers in Cincinnati, Ohio, who could tell when lipsticks were removed from the shelves and observe the shoppers in action (Wikipedia 2006).

However, RFID is not expected to replace the UPC bar code technology in the near future.  For one, RFID tags still cost more than  UPC labels, and also different data are captured and tracking technologies offer different capabilities. Many businesses will likely combine RFID with existing technologies such as barcode readers or digital cameras to achieve expanded data capture and tracking capabilities that meet their specific business needs (Gale 2005).

Understanding the Impact of Information Sharing

How do supermarkets, grocers, and other food outlets decide on the adoption of electronic commerce as a vehicle to share information with their supply chain partners and increase efficiency and predictability? What role does firm size and the structure of the supply chain play in this decision? (Mohtadi 2005)

Understanding the nature of the changes and their impact on firm behaviour and industry structure is crucial for public policy and corporate strategy. This issue is particularly important for the food industry: first, the food industry has been a leader in the IT initiatives for more than 30 years beginning with the initiative to design the scannable bar code. Secondly, the industry’s thin profit margins could render cost-savings from the adoption of electronic commerce significant at the margin. Thirdly, the ever-evolving structure of this industry, with ongoing mergers and acquisitions, can be better understood in light of cost and market advantages made possible through the adoption of IT (Mohtadi 2005).

            The discussions as to issues concerning information sharing, and the trends among companies in relation thereto, are discussed extensively in Chapter 4 on Results, wherein the study conducted by Mohtadi (2005) concluded that: the nature of information sharing technology platforms in the food industry is highly influenced by the specific market structure of the firms involved.

            As discussed in Chapter 2 on Review of Related Literature, ECR  involves a consumer-oriented examination of processes with the view of developing cooperation strategies between food manufacturers and retailers.  ECR is based on four strategic areas optimising the flow of information and goods over the entire supply chain.   Necessary information is made available in a precise way and on time to ensure a regular and smooth flow of goods suiting the needs of the market.  Electronic Data Interchange (EDI), which is an information network and continuous data exchange, promotes up-to-date preparation of production and management processes in order to avoid supply gaps and to reduce administration costs to a minimum level (Katsaras and Schamel 1997).

            The use of information technology appropriate for the process of information exchange is used in order to be efficient.  Extensive standardization and networking of information allows for exhaustion of performance potential for the physical flow of goods (Katsaras and Schamel 1997).   The ECR initiative is often divided in different ways.  The first approach highlights three core areas.   The first area deals with merchandising and marketing.  Through restructuring promotional deals, ECR proponents hope to reduce the forward buying of inventory and the diverting of products, through building in low-priced areas, and transporting and reselling in high-priced markets.  Improved management of shelf space and variety could reduce warehouse and store costs.  Better account management, customized promotions, account profitability analyses, and multi-functional selling teams may also improve system efficiency (Larson 1997).

            The second core area of ECR covers replenishment, logistics, and product flow The intent behind these approaches is to coordinate and integrate the approaches used by food manufacturers and retailers in order to speed up delivery, decrease unnecessary handling, and lowering costs.  Recommended industry changes include joint inventory management to minimize warehouse costs, cross-docking operations (referring to moving cases between  food manufacturer and store trucks without stopping  in a warehouse) to eliminate unnecessary storage locations, and packaging enhancements to reduce product damage (Larson 1997).

            The last core area of ECR includes changes in administration and technology.  Standardized bar coding of cartons and pallets would help improve efficiency.  A new system of bar codes for variable-weight and data-coded products called UCC/EAN-128 has been developed.  Use of electronic data interchange (EDI), electronic fund transfer (EFT), and computer-assisted ordering (COA) may help reduce order errors and billing costs (Larson 1997).

As such, the four strategies for ECR to optimise the flow of information and goods over the entire food supply chain will be discussed as follows (Katsaras and Schamel 1997).

            Strategic Elements of ECR

            Efficient replenishment (ER).  ER refers to the cooperation in operational logistics and information technology to make the right product available in the right quantity at the right time and place (Katsaras and Schamel 1997).  It has also been described as providing the “right product, to the right place, at the right time, in the right quantity, and in the most efficient manner possible” (Kurt Salmon Associate, 1993, p. 45).  Since one goal of the ECR initiative is to reduce dry grocery inventories by 41% and from 140 days of supply to 61 days (Larson 1997).

            Actual point of sale (POS) data are gathered through checkout scanners and then subsequently analysed.  Then orders are automatically transmitted to the food manufacturer and executed.  Flow of information and goods is thus maximized, and there is elimination of unnecessary storage, such as when you use cross-docking (arrival of delivery trucks in a central warehouse almost at the same time, avoiding intermediate storage).           In other words, the logistics system is regulated by the final consumer pull.  Important benefits of ER are fewer out-of-stock situations, lower inventory requirements, more efficient use of shipping trucks, improved storage operation, a reduction in unsold goods, and fewer consumer returns and complaints (Katsaras and Schamel 1997).

            A key challenge to obtain optimised ER results usually comes from uncertain demand conditions.  Inventory, for one, is an expensive form of insurance against these uncertain demand conditions.  The “bullwhip effect” is a significant phenomenon in this circumstance: fluctuations in demand increase from the retailer to the wholesaler, the producer and the supplier of raw materials, without fundamental fluctuations in the final consumer demand.  It is caused by obsolete demand forecasts, fluctuating product prizes, and too-large order sizes, such as when partners in the supply chain do not see the bigger picture.  Thus, the bullwhip effect can be fought by the joint planning of price, transport and storage (Jammernegg 1996).

            It is also possible to reduce fixed order costs using EDI.  Outsourcing to a logistics service provider serving several companies en route saves fixed transport costs.  However, the prerequisite is that current point-of-sales data are available to every partner in the food supply chain (Katsaras and Schamel 1997).

            With improved ordering, through computer-assisted ordering (COA), and EDI, order validation, better item/price/promotion maintenance, and enhanced logistics/receiving/backroom, an estimated 2.8% industry costs could be saved, with financial savings of 1.3% (Larson 1997).

            Efficient assortment.  This aims to optimise the assortment in a store which is affected by conflicting interests between food retailers and food manufacturers (Katsaras and Schamel 1997).  This strategy addresses the use of shelf space and is designed to improve store space utilization (Larson 1997).

            Retailers want the highest possible return on their whole assortment, while on the other hand, manufacturers want to place their own products in an optimal way.  Successful category management is important to achieve efficient assortment.  From a consumer point of view, then all products are divided into different categories which are managed as independent business units or also called as profit centres.  Key tasks for category managers include efficient product development, introduction, and promotion.  They need information about all factors influencing the assortment.  Assortment categories are examined and positioned in the market while geared toward regional purchasing patterns and different customer structures.  By using point-of-sales data, the available shelf space is thus optimised.  The effect is increased customer satisfaction and higher turnover for the retailers and manufacturers alike (Katsaras and Schamel 1997).

            Experts suggested that if supermarkets made store-specific categories and item space allocations, made timely adjustments, and considered profit margins when making the allocations, then sales would increase by an estimated 8-10% (Larson 1997).

            Efficient promotion.  This element aims to increase the efficiency of sales promotion.  Point-of-sales data are used to determine the consumers’ reaction to promotion measures.  The conclusions reached help to choose the optimal products for price reductions as well as their optimal markup (Katsaras and Schamel 1997).   By simplifying trade promotion deals, offering alternative deals to meet distributor needs, managing consumer and store advertising,  improving in-store promotions, keeping accurate dead files, and reducing the costs to distribute and handle discount coupons, an estimated 4.3% of industry costs could be saved (Larson 1997).

            One strategy would be every-day-low-pricing (EDLP).  EDLP refers when all promotion activities and quantity discounts on the manufacturer and retail side are eliminated.  It leads to cost reductions in logistics, ordering, and in the sales department, which can be passed on to the final consumer.  Thus, ECR may lead to a replacement of special offers with every-day-low prices (Tietz 1995).

            Efficient production introduction.  This refers to the process of new product introductions.  It is also called efficient product development.   The flood of new products has added large costs to the distribution system.  In 1996, about 19,572 new grocery (food and non-food) products were brought to market, more than three times the number in 1983, according to research by the Food Institute Report (1997).  Although introductions in 1996 were down 13% from 1995, introductions during the first half of 1997 were 5% ahead of 1996 (Food Institute Report 1997).  Research conducted before the ECR initiative found that supermarket buyers rejected nearly 60% of the new products presented to them (Gerlich, Walters and Heil 1994; McLaughlin and Fredericks 1994).

            Even when stores accepted products, their odds for success among the consumers were not guaranteed.  Research in Kroger stores found that only 33% of new products (such as classically innovative, equity transfer, or line extension items) had year two sales rates at least 80% has high has high in year one (Efficient New Product Introduction 1997).  Product failure hurt the bottom lines of both food manufacturers and retailers, so better information on consumer preferences and on product attributes could be used to improve the new product success rate (Larson 1997).

            This element is based on the exchange of point-of-sales data, market research findings, and information on consumers’ preferences and habit to develop promising designs, to test the new product, to determine the optimal price, to develop an appropriate promotion strategy, to identify a suitable place on the shelf, and to implement necessary adaptations in logistics.  Close cooperation between food retailers and manufacturers reduces the cost and raises the quality and acceptance of new products for consumer (Katsaras and Schamel 1997).

            ECR Europe

            On a larger scale, ECR Europe involves linking information systems and the exchange of sensitive information is a culturally complicated issue that applies in particular to food retailers and manufacturers.  Mutual distrust between prospective ECR partners has also become more widespread.  The result is that constant suspicion is involved when a cooperative offer is made.  To approach situations without prejudice, the organisation called ECR Europe was created to provide equal representation for food retailers and manufacturers.  The objective of ECR Europe is mainly to foster dialog between the two parties and to promote feasible solutions (Katsaras and Schamel 1997).

            Members of ECR Europe, as to the food manufacturers are: Coca-Cola, Johnson & Johnson, Kraft Jacobs Suchard, Mars, Nestlé, Procter & Gamble, Sardus and Unilever.  As to the food retailer-members, these are: Albert Heijn, Auchan, ICA, Metro, Promodès, Rewe, Tesco, La Rinascente, and Safeway (Katsaras and Schamel 1997).

            Partnerships in the marketing and supply chain have enormous potential.  In the US, the cost reduction potential is about 10.8% of turnover in consumer prices.  In Europe, the cost reduction potential is about 2.3-2.4% of turnover in consumer prices, of which logistics account for 1.5-2.5% and marketing for 0.8%-0.9%.   According to ECR Europe, the operational costs in the food supply chain of the grocery sector could be reduced by about US$ 27 billion per year and that inventories could be reduced by over 40%.  This, together, would amount to a cost reduction potential of 5.7% or US$ 33 billion.  ECR also estimates that the cost of the logistics chain could be lowered to a level of about 7.5% of turnover.  It would be appropriate thus for the food industry to cooperate and exhaust cost reduction potentials (Katsaras and Schamel 1997).

            There will be distributive battles over the gains from ECR no matter how much organizations emphasize cooperation.  The results will always depend on the relative strength of the ECR partners.  ECR Europe estimated that between 50-70% of the gains will go to food retailers.  However, based on the industry survey in the US, as opposed to ECR Europe’s estimate, 36% of those asked acknowledged benefits not for food retailers but for food manufacturers, with only 24% of the benefits going to the retailers, and only 8% see benefits for consumers.  To this date, comprehensive ECR structures have not been implemented in continental Europe.  In short, it is too early to determine how actual gains will be achieved or distributed (Katsaras and Schamel 1997).

            Risk and Barriers

            It is also important to stress that ECR involves dependency risks.  Dependence on particular food suppliers or on the performance of category managers is due to structural changes implied by ECR.  Since there is a lack of buffer stocks involved, this also increases the risk in the event of a strike.  Orientation and adaptation of category management to a particular food supplier can also lead to incompatibilities with other food suppliers.  In addition, ECR may also provoke negative reactions on the consumer side since there is more transparency.  Category management also requires that sales data combined with credit or debit card information should be made available.    This is not always to the advantage of many consumers and may lead to legal challenges (Katsaras and Schamel 1997).

            Implementation problems related to retail trade may also be involved, such as dissent on the distribution of cost reductions, previous conflicts, organizational structure, lack of trust, and misuse of data.  From the food manufacturer’s end, these implementation problems may include lack of know-how, management support, information technology and other resources.  Technological barriers may also be obstacles as the flow of paper records must be substituted by electronic data interchange (EDI) (Katsaras and Schamel 1997).

            Yet the main barrier is the change need in the way of thinking, more than the adaptation of information systems and reorganization for food retailers and manufacturers to information exchange in the food supply chain more efficient.  As such, the following basic prerequisites for a successful ECR cooperation between food retailers and manufacturers are recommended:

Personal commitment and involvement of the top management
Launching of training programs for the employees
Launching of pilot schemes with partners
Multifunctional action teams (Katsaras and Schamel 1997).

            It is only when food retailers and manufacturers start a step-by-step partnership that cost reductions and growth will result as a consequence.  Potential costs reductions of 5-6% and growth prospects of 5% should encourage the parties involved, from both the food retail and manufacturing sides, to become more proactive on ECR (Katsaras and Schamel 1997).

            From a retailers’ point of view, according to the study by Katsaras and Schamel (1997), there are five prerequisites or conditions for the success of ECR:

  1. ECR is firm specific since it promotes price discounting as a way to attain market leadership.  Concepts that stress on improving markups and include additional services (such as depth of product range or shopping atmosphere) in their price calculations will not be very successful with ECR.
  2. The distribution of cost reductions through ECR remains a question of power since only equal positions of power between food retailers and manufacturers will secure win-win situations.
  3. ECR can only be applied to demand-oriented assortments and assumes a permanent flow of items with synchronous production.  A seasonal flow, such as Christmas items for example, would inevidently result in supply bottlenecks since ECR allows for no demand buffers.
  4. ECR can also be applied selectively to declining food and growing non-food assortments since ECR measures should be examined for each supplier and each assortment.
  5. ECR must also be examined against the background of specific company strategies and always leads to a restructuring process.  ECR requires standardized and centralized trading concepts.  A critical examination of ECR is necessary if differentiated and decentralized structures exist (Katsaras and Schamel 1997).

            These conditions and arguments indicate that ECR is not always necessarily successful.  Still, every trading firm involved in the food industry should consider ECR.  For instance, the situation with Wal-Mart shows that it holds enormous possibilities for trade.  Yet ECR should not be used as an end in itself or a matter of prestige.  It can be an advantage to food retailers and manufacturers when applied selectively (Katsaras and Schamel 1997).

            The cost savings from ECR would affect all distribution channels in the food supply chain.  There have been reservations among companies since many of the programs will initially reduce profit margins.  Most of the ECR costs are immediate while most of the benefits are long-term and less certain.  Others companies are concerned about inequities between those who bear the costs and those who reap the benefits.  One consulting firm suggested that food manufacturers and retailers would almost equally divide 76% of the operating cost reductions (Mathews 1994).

            Changes by suppliers and brokers would be needed to make the initiative succeed, but their cost reductions may be smaller.  If the implementation of ECR proposals is widespread, the eventual efficiency gains would affect food processors, wholesalers, retailers and consumers  (Larson 1997).

            In sum, with regard to ECR, it is based on a particular philosophy or attitude.  With fierce competition present in the food industry, ECR can provide a selection of measures to achieve  more efficiency and customer focus for food retailers and manufacturers.  However, implementation problems are enormous, and developing a culture of cooperation between food retailers and manufacturers is difficult and loaded with risks and barriers.  Conflicting goals, lack of truck, high investment costs, and unilateral initiatives make ideal win-win situations, but these may be difficult to solve in practice (Katsaras and Schamel 1997).

            At present, ECR is often a line-up of individual activities instead of an integrated overall plan.  Yet no company involved in the food business can afford to ignore ECR in the long run.  In the food manufacturing sector, only those companies that react flexibly to changing markets and trends, and place innovative products in expanding market segments are likely to be successful in implementing ECR.  Determining factors for the future development of the food manufacturing sector in Europe are (Breitenacher 1996):

Bleak domestic growth prospects as many regional markets become saturated.  Growth potentials only for high-quality, or trend products  (reflecting dietary, health, and environmental concerns).
Confrontation with problems of pollution control and health protection.
Geographical proximity to the East European food industry, with low-cost labour, that could soon turn into serious competition.
Increasingly global competition and more concentration in the food retail sector will further increase the intensity of competition.
New prospects for exports and more competition from abroad, primarily affecting medium-sized companies competing with global players, due to GATT agreements (Breitenacher 1996).
Food manufacturers should follow the following recommendations on adaptation requirements in order to remain sufficiently competitive (Geyer 1997):

Focus on high-quality products and foreign markets that promise growth.
Achieve more brand loyalty in the domestic market through communication campaigns in order to prompt powerful retailers to sell their products.
Pursue systematic and strict cost management to all company levels.  For Europe in particular, this can be done by concentrating the manufacturing of particular products at a few Eastern European locations, transferring logistics and sales activities to trading firms or specialized service providers, mergers or amalgamations of production facilities in particular product categories to increase productivity (Geyer 1997).

            With regard to the food retail sector, a study by A.C. Nielsen (1997) forecasted that the number of stores will continue to go down while sales growth rates stay at relatively low levels.  In 2005, an estimated 60,000 stores in Germany achieved a turnover of US$ 147 billion.  From 1998-2005, the annual sales growth ranged between 1-2% which is expected to further increase concentration in the food retail sector.   With respect to outlet types, discounters have been gaining strength in their position.  The small grocery shop in the neighbourhood, according to the A.C. Nielsen study (1997),  with 200 to 400 square meters (that’s 2,150-4,300 square feet) of selling area will continue to exist only because of the personal commitment of the shopkeepers who are more often than not the owners themselves (Katsaras and Schamel 1997).

            Retail groups like Rewe or Edeka present their offers on the Internet, with customers clicking and ordering goods online which are then delivered to their doorstep.  Subsidiary  branches of chain stores with limited staff suffer losses as they cannot finance an order and delivery service.  A supermarket with 400 to 1,000 square meters (or 4,300-10,750 square feet) of selling area and a dedicated shopkeeper can survive with a good parking situation.  Consumer markets with 1,000 to 2,000 square meters (or 10,750-21,500 square feet) of  selling area suffer losses due to their lack of proximity to customers and their limited product assortment.  Order supermarkets have been established where goods can be collected or delivered directly to the customers.  Discounters do not benefit from online shopping.  When orders are processed via data network and additional order picking staff is required, their low prices cannot be maintained (Katsaras and Schamel 1997).

            As of 2005, the food retail sector dominated by large-space stores and discounters including Aldi, commanded over 75% of total turnover.  The share of supermarkets and supermarkets are less than 24%, as compared to 1995 when it was still hovering at 30%.  Thus, with regard to large-space stores and discounters, the concentration in the grocery retailing sector continues.  This has also been due to changes in store opening hours (Katsaras and Schamel 1997).

Supply Chain Risk Management

            In addition to providing measures for traceability, organisations should also apply supply chain risk management to protect themselves from 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).

Despite the growing evidence that supply-chain risk is a glaring business problem, only few organizations around the world actually have systematic risk-management strategies in place.   (O’Marah 2006)

There are several areas where companies can make the necessary preparations. One is supply-risk planning, or identifying threats to supply flow and making contingency plans in case those threats are realized. In this area, 22% of the companies in our survey say they have prepared. Companies need to look for backup supply sources and have ways of accessing those supplies in the event of an emergency  (O’Marah 2006).

            Cross-training

            Companies can also put systems and processes in place to support customers and employees who may need to work from the safety of their own homes. Even if disaster never hits, such planning can accommodate mundane localized needs like cutting commuting times and accommodating remote customers. Companies capable of self-service allowing customers and employees to help themselves, will also find themselves ahead, with or without a disaster (O’Marah 2006).

Workers should also be trained in multiple jobs, as is the case in the military. This gives companies many options should an employee be disabled. Such cross-training not only helps in case of crisis, but it also helps stem the ongoing brain-drain problem so many companies are having to deal with as skilled workers retire or leave for other jobs (O’Marah 2006).

            Finally, it’s a good idea to evaluate scenarios for corporation-wide financial risk—for the present, the near term, and the future. Companies should look into strategies for  fuel, metals, or semiconductor capacity or scenario modelling to limit dependence on any high-risk part, or node, of the supply network (O’Marah 2006).

            New Tools

            Directly after a disaster, awareness is high and focus is intense. But dealing with the daily grind often means pushing complex analysis of what could go wrong off the agenda. The use of a variety of technology tools will help organisations stay ahead.  For instance, the computer-maker Dell used tools to reroute supply-chain activities in the days leading up to Hurricane Katrina (O’Marah 2006).

Others are looking to a new class of technology that helps sales, marketing, and operations coordinate efforts. This includes sales and operations planning software, made by such vendors as Steelwedge, i2 Technologies, and TXT e-Solutions, that lets the user conduct what-if analysis and scenario planning to best align customer demands with supply realities. The ability to define supply-chain risk management practices and policies was in fact the deciding factor that won one firm a major supply contract for Boeing’s 787 program (O’Marah 2006).

Business intelligence software is an increasingly vital part to nearly every aspect of a company’s business, most notably in risk management. For instance, where the ability to track supply is vital, such as in container transport across oceans, business-intelligence tools are being used to identify suppliers, routes, carriers, and ports that threaten business continuity. (O’Marah 2006).

            Risk Reduction

            Whatever measures are taken in advance, being able to respond quickly matters most to companies looking to deal with major supply-chain disruptions. In a case study explored by Dr. Yossi Sheffi in his book The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, cell phone giant Nokia took a rapid and intensive response to a fire in one of its suppliers’ chip plants to seize a market share advantage over rival Ericsson.  Nokia was able to secure needed backup supplies very quickly. Meanwhile, Ericsson’s slow reaction to the lost capacity at its supplier’s factory cost it critical component supply. This meant a big shortfall in sales volumes and market share losses for Ericsson (O’Marah 2006).

Procter & Gamble similarly pulled its complete supply-chain resource pool together in the run-up to and aftermath of Hurricane Katrina to solve problems ranging from the lack of clean water and housing for employees to airlifting engineers and equipment into its New Orleans Folgers plant. The plant accounts for more than 50% of P&G’s US coffee production, so getting the plant running again was vital. The plant was the first major industrial facility in the region to come back on line and had restored 85% of capacity within three weeks of the storm. Folgers has since rebounded to a higher U.S. market share than before Katrina hit (O’Marah 2006).

            Whether a risk is cataclysmic or mundane, businesses today are far more likely to be hurt compared with 30 or 40 years ago, when business was much more local and market reaction less instantaneous. Supply-chain risk is now a matter of utmost importance to business. Preparedness, visibility, and rapid response are all enhanced by the same technology revolution that raised the stakes in the first place. Business needs to master these tools and disciplines to analyse scenarios, plan responses, and hedge against fate (O’Marah 2006).

Predictions for the Future Market

According to an article by McPoland (2006), there are four major predictions for the future market.

The first is with regard to food industry globalisation and consolidation.  Retailers, Manufacturers and Supply Chain Logistics Providers are all consolidating in order to achieve sufficient scale to become global players. In order to compete with the largest organizations in their market space the survivor food companies must all look to grow globally through merger while also looking to reduce investment in hard assets and focusing their resources on those areas where they have a core competency (McPoland 2006).

In logistics and supply chain technology many food companies are looking to outsource to asset owners like ProLogis distribution facilities and logistics providers like GATX and USCO their hard assets, such as trucks and warehouses, as well as the provision of supply chain technologies where many of the food companies do not have core competencies (McPoland 2006).

Thus, the prediction is that a few major global players will become supply chain managers and channel captains for an entire supply chain. These outsource provider’s will then dictate the logistics management of a supply chain through use of their technology (McPoland 2006).

The second is with regard to trading partner collaboration.  All the leading food manufacturers and retailers are devoting considerable effort to integrating information systems with their trading partners using both EDI, and more recently web based internet systems or e-market hubs/exchanges. They recognize that improved information sharing provides greater visibility and with visibility more opportunity for exception event management or supply chain monitoring. Despite spending more than $200 million on Web-based demand planning and forecasting tools last year, companies are still struggling to come up with accurate data to manage their inventories. But without that data, the effectiveness of other supply chain applications is severely limited, experts say (McPoland 2006)

As part of VICS, an industry standards group, various trading partner pilots for collaborative planning, forecasting and replenishment (CPFR) are underway. These pilots have demonstrated that through collaboration and sharing of information trading partners can significantly increase sales, improve inventory turns, out of stock, and customer satisfaction while at the same time reducing inventory and cycle times. They have however not yet demonstrated that the pilots will scale and that a company can utilize the concept across multiple supply chains with competing trading partners (McPoland 2006).

VICS and several web based logistics organization like Transpace, Nistevo and logisitics.com have also devoted considerable effort to championing collaborative efforts in transportation getting companies to share shipping requirements, etc in order to achieve better utilization of the trucking resource through less-than-truckload to truckload consolidation, less empty backhaul and more continuous move transportation (McPoland 2006)

            Thus, the prediction is that as more and more supply chains implement collaboration across all of their product lines, the ability to optimise one supply chain among a supply web of supply chains will become increasingly difficult. Companies will begin to focus on synchronization of their execution supply chains rather than optimisation of a particular product forecasting/planning plan and will move to sub-optimise in the supply chain in order to create the greatest benefit/profit for their internal organization (McPoland 2006).

            The third prediction refers to supply chain execution management (SCEM).  SCEM effectively addresses unplanned events such as shipment delays, parts shortages, production delays, demand swings.  These often derail optimised production and fulfilment plans, as earlier discussed in this paper. Such plans, implemented through traditional optimisation applications, give rise to rigid, linear value environments. These ‘chains’ must give way to ‘dynamic supply networks’ and the collaborative and synchronous technology that drives them. Termed “adaptive planning” by Forrester and “Supply Chain Event Management” by AMR, the leading SCEM uses an active-router technology that provides the much needed ‘key’ to flexible and extensible solutions for the real-time management and swift resolution of exception events (McPoland 2006).

            This technology allows for the processing of high volumes of distributed transactions between members of a supply chain in a fast and low cost manner. With a focus on inventory and orders these execution management systems allow for the tracking of an order or inventory stock-keeping unit (SKU) using the unique numbering system (PO,SO, BOL, etc.) of the individual trading partner as well as providing a single consolidated view of all trading partner inventory in a supply chain by SKU). This ability to provide total supply chain visibility at a single point (public or private hub) gives the trading partners the ability to proactively manage their portion of the chain (McPoland 2006)

            Thus, the prediction is the supply chain execution systems will become the primary means of managing a supply chain across multiple trading partners with the synchronization of inventory and orders in real time replacing less effective planning and forecasting optimisation technologies (McPoland 2006).

            Fourth and last, one must consider the marriage of logistics planning and execution.   As SCEM systems become better at providing the real time information necessary to manage a supply chain, they will also become better at predicting the future. Eventually, the real time execution system will have the capabilities to incorporate long range forecasts, plans and schedules into the real time execution systems and reduce the need for advanced planning/forecasting systems as used today. Based on the truth of Moores’ Law: “The capacity of a microprocessor doubles every 18 months”, Guilder’s Law: “Bandwidth will triple every 12 months”, and Metcalfe’s Law: “The potential value of a network is exponentially proportional to the number of machines connected to it” we will continue to see a rapid change in internet based technology impacting both planning and execution supply chain technologies (McPoland 2006)

            Similar to what we see in the airline industry, as SCEM systems become better at providing the real time information necessary to manage a supply chain they will also become better at predicting the future. Eventually the real time execution systems from companies like i2, Vizional Technologies and Microsoft will have the capabilities to incorporate long range forecasts, plans and schedules into the real time execution systems and reduce the need for advanced planning/forecasting systems as used today (McPoland 2006).

            Thus, the prediction is that advanced planning and forecasting systems will be merged into supply chain execution management systems with inventory and orders being synchronized between trading partners using these advanced SCEM real time systems (McPoland 2006).

Conclusion

            Establishing security in the food chain is the goal of all these regulations regarding traceability in the food supply chain, but how companies achieve that goal is largely up to them.   The global food industry must constantly arm itself against new issues regarding bioterrorism and the emerging implications of food borne illness outbreaks.  The 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.

            Traceability is multi-disciplinary, as many departments of a company will be involved in its development and its implementation. Besides the quality (or food safety) department, at least logistics and IT should be involved. Marketing and Auditing departments could also benefit from a traceability system. A fundamental decision to take in the beginning of this process is to define who has internal responsibility.

A traceability system may serve many purposes. Essentially, it functions as a tool for communication, making information available along the food supply chain. This information can be used for a wide variety of purposes. In food safety, the information can be used to trace back to find what the source and the cause of a problem is, to stop the problem or prevent it from happening again. The system may also be used to find products that have already been forwarded in case of a necessary withdrawal or recall (CIES – The Food Business Forum 2004).

           As the implementation of a traceability system requires upfront investments, companies are advised to take all benefits into consideration when implementing a traceability system. These benefits should be analysed as well as the risks that are managed with the system. This will also include a cost/benefit analysis (CIES – The Food Business Forum 2004).

Depending on the degree of implementation and the infrastructure selected by a company, product traceability processes may require significant investment. The benefits and savings are not immediately obvious. The expenditure involved should be considered as a long-term strategic investment because it is linked to consumer’s perception, the image of the company and the trust that consumers display when buying a product (CIES – The Food Business Forum 2004).

Traceability is not just a value added for the food supply chain but is now also a law as of January 2005 in the EU. 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.

Vertical information sharing has posed a sensitive strategic challenge among retail firms who, by their location at the end of the supply chain, possess the most valuable segment of the information real estate and one that is valuable to all members of the supply chain. The challenge is this: on the one hand information sharing increases the efficiency of the retailers by better coordinating supplies and orders, and on the other hand, it may compromise the bargaining power of the retailers, opening them to opportunistic behaviour on the part of suppliers (Mohtadi 2005).

            Nowhere is this dilemma more apparent than in the food sector. As based on the research study by Mohtadi (2005), discussed extensively in Chapter 4 on Results in this paper, empirical results  generally support the theory, but point to a dichotomy: firms that are part of larger chains are more likely to adopt technologies leading to vertical sharing of information, but firms that belong to smaller chains are less likely to do so (Mohtadi 2005).

The fundamental explanation for this finding does not seem to be the cost and the affordability of the technology. Such effects are already controlled for by variables such as store size and yet, significant residual effects remain. The opportunistic behaviour on the part of the agents – the suppliers in this case – is responsible for this result and the empirical findings here seem to point to that direction (Mohtadi 2005).

In other words, there appears to be a “digital divide in information sharing” between the two types of market structures. This divide, however, is distinct from the issue of cost of IT adoption and the question of its affordability by smaller stores and stems from issues related to incomplete markets. There is a related divide between large and small firms in terms of the types of procurement technology that they adopt. The findings in this paper also shed light on how different market structures adopt different types of technologies (Mohtadi 2005).

An independent regulator and a tougher code of practice are needed to address the current imbalance in the grocery market which is leading to vast profits for supermarkets while farmers and small business struggle to survive.  There have been much particularly with the supermarkets’ abuse of their buying power and the code of conduct which leaves suppliers’ unable to report any unfair practices for fear of being de-listed by supermarkets.

Mr. Ruskell MSP, the Scottish Greens Party speaker on the Environment, was on the Environment & Rural Development Committee (ERDC) when the food supply chain inquiry took place this year.  He said:

“Many farmers are increasingly desperate in their battle for fair trade. That’s why they end up picketing milk processing depots and why a lot of the inquiry evidence was taken in private. Though farmers may protest en masse, individuals remain fearful of reprisals from supermarkets and processors. The system is clearly neither transparent nor fair.  A fairer code of conduct that applies throughout the supply chain is urgently needed if we are to create a more level playing field so that producers – and small high street businesses – no longer suffer as the supermarkets abuse their power. Also, there should be an independent ombudsman proactively spot checking the relationships in the food supply chain to tackle exploitation.  Effective regulation and a levelling of the playing field must take place and Environment Minister Ross Finnie must act in a much more determined and direct way to achieve this. His LibDem colleagues in Westminster have been more vocal in backing calls for better regulation – it’s time we saw more action from Mr Finnie in order to achieve trade justice for Scottish farmers”   (Scottish Green Party 2006a).

With regard to traceability, the application of EAN.UCC standards is a prerequisite for the alignment of traceability systems. Companies that implement collaborative best practices and EAN*UCC standards should encourage their partners to do the same thing. Depending on the degree of implementation and the infrastructure selected by a company, product traceability processes may require significant investment. The benefits and savings are not obvious at first glance. The expenditure should be considered as a long-term strategic investment because it is linked to consumer’s perception, the image of the company and the trust that consumers display when buying a product (CIES – The Food Business Forum 2004).

In terms of legislative progress, the simple fact is that new legislation is more often than not, reactive – in other words, national and European laws tend to be passed in response to events or driven by demand rather than in anticipation of future events or future demand. As a result, stricter regulation is unlikely to be passed unless there is consensus amongst the industry that it is required or another public crisis occurs within the supply chain. For companies who have not made significant progress, it is crucial that they continue to work towards establishing four key objectives (Carlile 2006).

The first involves minimising product safety risks by reducing manufacturing variability. Achieving a consistent number of reliable suppliers is a key challenge for the industry given its nature, but if food manufacturers can work towards establishing a key number of consistent suppliers this will create significant progress in reducing food contamination cases (Carlile 2006).

The second involves improving traceability throughout the supply chain. This will entail linking the ERP system and establishing it as an operational system of record for the whole enterprise. Companies can take steps towards reducing recall liabilities with lot tracing. A complete ERP system that maps front and back office process can achieve this. For example, one of Ross’ customer’s traceability times was reduced from a day to 15 minutes. This involved an ERP implementation to encompass the manufacturing and financial process, bar code data collection, and a front-end customer relationship management system (Carlile 2006).

The third route must establish and implement an executive led, cross-functional management programme. Businesses still lack strategic planning capabilities. Getting this right is a key priority. If a company decides to move forward, it must involve the whole board and a strategic plan must be put in place. This involves understanding key business processes, putting a project plan in place, its implementation and successful roll out. The fourth route for suppliers must involve collaborating with customers, partners and regional agencies. Manual tracking and records still exist in the supply chain. This gives limited visibility affecting quality, inventory and cost control as well as the key elements of profitability and customer service (Carlile 2006).

Companies involved in the food supply chain have to move towards a business model where they can produce records immediately ‘on demand’. If they do not, the company will not stay in business, irrespective of the law. Routes are being taken but it is still progressive. It is therefore important to understand individual business pressures, and work towards achieving a watertight traceability system. Only then will we achieve a full industry standard of identifying and tracking every ingredient on demand (Carlile 2006).

            Lastly, it is to be noted that for many industries in this era, the food industry included, the keys to survival are mergers, acquisitions, and other ways to expand.  Restaurant companies which own two or more chains are becoming more and more prominent.  McDonald’s Corporation, the largest restaurant corporation, has almost all of its sales coming from the McDonald’s chain.  Tricon Global is second.  With control of several operations, these companies are able to cut costs by having centralized product and development operations and volume purchasing.  Public investment in the restaurant business finances most of the expansion of large chains.  Private investors tend to stay clear of this market because profit margins are typically small and start-up costs are expensive.  Barriers to entry are high for those who seek financing in the restaurant industry, so those who hope to enter must present a viable opportunity to potential investors (Friddle, Mangaraj & Kinsey 2001).

With the US boasting about 25 percent of the world’s foodservice market, there is still 75 percent left into which manufacturers can place their products outside the US.  Fast food is rapidly globalising its business. For companies like McDonald’s, the international market makes up almost half of its sales.  Thirty percent of sales for the top 100 US based restaurant chains (up from only 8 percent in 1980) will come from business done outside of the US.  This is definitely an expanding scene for market opportunities, however strict regulations and challenges come into play for manufacturers who enter into the market on the international scene.  Suppliers exporting products to international locations must be aware of all of the labelling requirements, restricted ingredients, cultural “catches” such as word translations and numerous other factors that are often routing or not applicable to domestic products.  Processors must know their foreign consumers just as well as their domestic ones in order to be invaluable to the international foodservice industry (Friddle, Mangaraj & Kinsey 2001).

Summary

            A supply chain involves the supplier/manufacturer/distributor/retailer/end user channels, networks and relationships in product or services supply.  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).

            Since the late 1980s, a rapid transformation occurred in the food industry sector as buyers became more price sensitive and new competitors emerged in the market.  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 remain in the middle of a rapid transformation focused on productivity and profitability (Larson 1997).

This transformation is inevitable what with the emergence of globalisation in the international community.   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.  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).

And as the global food economy struggles to deal with problems regarding 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.

To date, 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).

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.  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.

This has changed both the architecture of the food supply chain and its public face.  Similar to the phenomenon among manufacturers, there has also been an incredible concentration of retailing power in recent years. 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).

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).

The primary 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).

However, 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.

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. 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).

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.  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 (CIES – The Food Business Forum 2004).

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 providing measures for traceability, organisations should also apply supply chain risk management to protect themselves from 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).

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Cite this Food supply chain in UK: An analysis

Food supply chain in UK: An analysis. (2016, Sep 02). Retrieved from https://graduateway.com/food-supply-chain-in-uk-an-analysis/

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