An Introduction
This introductory chapter provides an overview of the scale and structure of the food and drinks supply chain. This is followed by a discussion of the key trends affecting the industry, such as globalisation, price volatility, economic recession, product diversifi cation, sustainability and corporate social responsibility. Six key challenges associated with managing food and drinks supply chains are introduced: managing relationships, aligning supply and demand, managing processes effi ciently and effectively, maintaining quality and safety, leveraging technology and managing responsibly. Each of these challenges forms a section of the book and each section comprises three to fi ve chapters. In this chapter we provide a roadmap for the book introducing the reader to the key challenges and discussing the contribution of each topic to supply chain performance.
1.1 The changing nature of the food supply chain
The earliest human settlements were located in the region between Mesopotamia and lower Egypt known as the fertile crescent. This region had the right conditions to support a stable food supply, such as access to water for agriculture and opportunities for hunting and fi shing. Compared to nomadic tribes, these fi rst settlers faced a different set of challenges: trying to balance supply and demand and making decisions about how much food to produce, store, transport and trade. They could be called the first supply chain managers, although the term was not in vogue at the time!
The term ‘supply chain’, emerged in the 1980s to describe ‘a system whose constituent parts include material suppliers, production facilities, distribution services and customers linked together via a feed-forward flow of materials and a feedback flow of information’ (Stevens, 1989). Initially the study of supply chains focused on industries that involve complex assembled products, like automotive, electronics and aerospace. However, food supply chains are different to those in these industries and blindly importing their concepts and tools without recognising the differences would be risky. Some of the main differences are:
• Seasonality: many industries are subject to seasonality, but food chains have seasonality of both demand and supply, and organisations need to structure their supply chains around these cycles.
• Health, nutrition and safety: food has an impact on the health of the consumers. As a result, issues of quality, traceability, safety and risk management are critical success factors.
• Short shelf life and volatile demand: products often have short shelf life and demand is sensitive to many factors such as weather changes, promotions and special events. Since holding stock to cover against unexpected demand is not an option, responsiveness and speed are more important.
• Impact on the environment: all industries have an impact on the environment; however, food has a disproportionate effect because of the extensive use of resources like water, energy and land, and the unintended outputs such as carbon dioxide (CO2) emissions, pollution and waste. Food supply chains have evolved over the years, influenced by an array of economic, social, environmental and technological factors.
Early supply chains were short, local and relatively simple in terms of the number of activities, inputs and outputs. Modern chains, on the other hand, are global and complex, offering a vast array of products to cater for the ever-changing needs of consumers.
Changes in the food system have brought many benefits for the consumer: economies of scale have helped to keep costs down; quality and hygiene standards ensure food is safe to eat; convenience foods have made cooking easier and quicker; food preservation methods have reduced the need for frequent purchases and allowed the consumption of out-of-season foods; and online shopping has allowed customers to buy food from the convenience of their home (or office). Furthermore, the range of products on offer has expanded greatly, catering for diverse tastes, trends and health requirements. However, these changes have also brought with them new challenges for the industry. Issues such as sustainability, health, nutrition and corporate social responsibly are high on the agenda of most food producers and retailers.
The evolution of food supply chains has taken place at different rates in different parts of the world, depending on factors such as income levels, degree of urbanisation, natural resources, infrastructure and trade policies. However, trends appear to show convergence in food consumption and delivery systems, with developing nations following a similar pattern to that of developed ones (Frazão et al., 2008). This book will take the perspective of food supply chains in developed countries, assuming that chains in other parts of the world are likely to follow a similar path.
In this initial chapter we will provide a top-level view of the global food supply chain, setting the context for the entire book. We will refer to the global food chain as being the complex network of individuals and organisations involved in producing, distributing and trading food and beverages across the world. First we will discuss the scale and structure of the food system, outlining the key players in the industry. We continue with a discussion of the trends and challenges that are shaping food supply chains and establish a structure for the book considering these challenges. Finally, we conclude with a section focusing on the key factors for delivering performance in food supply chains.
1.2 Scale and structure of the global food chain
The global food chain is extremely fragmented, with millions of participating organisations around the world, and this makes it difficult to assess its structure and scale. Figure 1.1 depicts the general structure of the food supply chain; at one end of the chain we have fishing and agriculture (including agricultural input such as seeds and fertilisers), in the middle there are processors, packaging suppliers, distributors, wholesalers, retailers and caterers, and finally there are the consumers. This is a supply chain in which everybody has a stake. Estimates for global food retail spending for 2008 range between US$ 3.6 and 4 trillion – up by almost 20% from 2004 figures (USDA, 2008a; Datamonitor, 2009). This trend is expected to continue over the next five years and it has been estimated that by 2013, global sales of food will reach US$ 4,602 billion. Furthermore, the World Bank estimates that by 2030, worldwide demand for food will increase by 50% from 2009 (Evans, 2009).
The economic and social role that the food industry plays varies from country to country, but its impact is substantial even in the most developed countries. It has been estimated that the entire food industry is responsible for around 10% of the USA economy (USDA, 2008b) and around 7% in the case of the UK (McDiarmid et al., 2008). Similarly, estimates indicate that in the USA, the food industry employs around 16.5 million people (10.6% of total employment) (USDA, 2008b) and around 3.7 million people in the UK (14% of total) (McDiarmid et al., 2008). In developing countries, figures tend to be considerably higher and it is estimated that around 40% of the world’s labour force is employed in agriculture alone (CIA, 2009). These figures highlight the significance of the industry both economically and socially.
The value of global agricultural output has been growing at an average rate of 2.3% per year since 1961, outpacing the average population growth during the same period which was 1.7% per year (FAO, 2007). This is attributable to substantial increases in developing countries, but also to a shift towards higher value commodities such as livestock and horticulture. This reflects consumer trends which indicate an increasing demand for items such as meat, fruit and vegetables, particularly in developing countries which have experienced substantial increases in income in recent years.
A study estimates that between 2000 and 2025 consumption of meat in India will increase by 176% and by 70% in the case of milk and vegetables, but only 26% for grains (von Braun, 2007). Similar trends can be seen in other large, developing countries such as China, Brazil and Nigeria (FAO, 2007). As a result of these changes, the per capita consumption of food around the world has increased by more than 20% in five decades, from an average of 2280 kcal/person/day in the early 1960s to 2800 kcal/person/day (FAO, 2007).
1.3 Trends affecting the food supply chain
1.3.1 Globalisation
Food supply chains have been globalising for centuries; however, the pace of change has accelerated in recent years. According to figures from the WTO, global exports of food products have increased from US$ 224,000 million in 1980 to US$ 913,000 million in 2007 (WTO, 2009). However, although the agricultural exports have increased tenfold since the 1960s, the share of agricultural trade compared to merchandise trade has fallen from around 25% to less than 10% (FAO, 2007).
According to the most recent agricultural outlook prepared jointly by the Organisation for Economic Cooperation and Development (OECD) and the Food and Agriculture Organisation of the United Nations (FAO) (OECD – FAO, 2008), growth is expected to continue, at least until 2016 and it is expected to be particularly strong for products such as beef, pork and vegetable oils.
Figure 1.3 shows the top 20 food trading countries. As expected, the largest and most developed economies tend to be the largest traders of food, with the USA being both the leading importer and exporter of food. However, some medium-sized countries, for example the Netherlands and Belgium, appear as some of the leading food exporters in the world. From the perspective of management of a supply chain, globalisation has significant implications because it involves longer and more fragmented chains, which tend to be more difficult to manage. Longer chains require more transport, which has an impact on costs and lead times as well as having environmental repercussions. Moreover, globalisation creates a more interconnected food system which is more sensitive to disruptions.
1.3.2 Economic trends
Over the last couple of years we have experienced substantial volatility in food prices. Figure 1.4 presents the FAO’s food price index, which consists of a weighted average of six commodity groups including, meat, dairy, sugar, cereals, oils and fats. The chart shows that food prices started to rise in late 2006 and reached a peak in mid-2008. The situation was so severe that a food crisis was declared and protests took place in many countries as people struggled to pay for staple foods. The index has decreased substantially over the last year, from 213.5 in June 2008 to 152.1 in May 2009, although current figures are still higher than pre-2007 data. The FAO has recently declared that ‘international prices of most agricultural commodities have fallen in 2009 from their 2008 heights, an indication that many markets are slowly returning into balance’ (FAO, 2009).
The causes of the food crisis in 2008 include a growing demand for food from Asian countries, higher energy costs, certain policies such as support for the use of biofuels, and temporary factors such as droughts leading to poor harvests (Cabinet Office, 2008). Since many of these factors are likely to continue affecting food supply and demand in the future, organisations and governments need to be ready to respond to future food crises.
The demand for food products has also been affected by other economic factors such as the credit crisis, a reduction in consumer confidence and a general economic slowdown. The food industry is less sensitive than other industries to variations in income and the share of food in total spending tends to increase during times of economic slowdown. However, it is possible that consumers will trade down to cheaper alternatives. This has been popularised by the ‘Aldi effect’, referring to the German discount retailer which has seen a substantial increase in sales, whilst other retailers have reacted by expanding their range of own brand products (Lyons, 2008). Another possible consequence of the economic downturn is that customers try to throw less food away and shop more smartly by avoiding unnecessary purchases.
1.3.3 Shifting power structures
Another significant trend in the structure of food supply chains is the growing size and power of large corporations, particularly in retail.
In supply chain relationships, the term ‘power’ often has a negative connotation, but organisations can choose to use power in different ways. A dominant firm can choose to follow a cooperative approach, acting as a channel captain, helping to improve communication, coordination and performance across the chain. Similarly, they can choose to take an adversarial position, dictating terms and conditions, and using power to exploit their supply chain partners. The balance of power and the way in which companies choose to exercise that power have substantial implications for the structure and management of the chain.
1.3.4 Product diversification
Product diversification has also been dramatic in recent years; the average number of products on offer in USA supermarkets increased from 14,145 in 1980 to 49,225 in 1999 (Richards and Hamilton, 2006). These changes have been made possible by developments in food processing, storage, distribution and retailing.
Diversification is generally positive for the consumer, but from a supply chain management perspective it presents many challenges. First, it involves introducing new products, which are notoriously difficult to forecast. Poor forecasts can in turn produce overstocking and its associated costs, or under-stocking, leading to poor customer service, and could even cause demand amplification upstream of the supply chain, a phenomenon known as the bullwhip effect (Lee et al., 1997; Geary et al., 2006). Furthermore, increased product diversification can lead to increasingly complex warehousing and distribution operations.
1.3.5 Sustainability and corporate social responsibly (CSR)
In recent years companies in the food industry, particularly major retailers and manufacturers, have appeared to be more concerned with issues of corporate social responsibly and sustainability. Arguably, this reflects changing consumer attitudes such as the emergence of the so-called ‘ethical consumer’, concerned with issues such as fair trade, animal welfare, support for local farmers and impact on the environment including climate change, waste, pollution, pesticides and food miles (Cabinet Office, 2008).
Another consumer trend which is affecting the food supply chain is obesity and the increasing attention given to healthy eating. In many countries, consumers are becoming more health conscious, increasing the demand for products with lower fat, calories or salt, as well organic produce. In the UK this has been reflected in the increasing demand for fruit and vegetables (Cabinet Office, 2008). This trend affects the entire supply chain and companies have to address these issues in order to remain competitive.
1.4 Concluding remarks
In this chapter we have introduced the concept of food and drink supply chains as complex and continually changing systems which, at their core, involve farmers, processors/manufacturers, retailers and consumers. Around these core groups there are many other participants such as hauliers, wholesalers, packaging providers, government agencies and non-governmental organisations, all with different roles and different needs which have to be satisfied. To succeed in using a system with multiple stakeholders, organisations need to tick many boxes:
• They need to take a supply chain perspective and work together with other organisations to satisfy the needs of the consumers.
• They need to understand the needs and concerns of their customers and consumers and align their supply chains to satisfy these needs.
• They need to design and manage their processes to be efficient and effective in order to avoid wasting resources while maintaining responsiveness.
• They need to ensure quality and safety of the products across the chain.
• They need to use technology appropriately to leverage their capabilities and improve performance.
• They need to make their businesses environmentally, socially and economically sustainable.
These are the challenges managers in the food industry are facing and we will provide different perspectives on how to deal with these challenges. There is no silver bullet in dealing with them, in some cases there is not even a clear path to resolving them. However, it is by understanding different approaches and exploring alternatives that we can continue developing solutions to these challenges. We hope this book can serve as a stepping stone in this process of exploration. Ultimately we are all participants in the food and drink supply chain.
We want this supply chain to deliver quality products to our table in a safe and efficient way, but we also need to recognise that these chains are a result of our individual decisions, the products we buy, where, when and how often we buy them. We all play a role in shaping the food supply chains of the future.
By C. Mena and G. Stevens (Cranfield University, UK) in the book 'Delivering Performance in Food Supply Chains' Edited by Carlos Mena and Graham Stevens, Woodhead Publishing Series in Food Science, Technology and Nutrition: Number 185, Woodhead Publishing Limited,Cambridge UK,2010, p.30-38. Adapted to be posted by Leopoldo Costa.
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