Dealing with supply chain pressures

Recession in Europe has put pressure on retailers to keep prices low at the same time as prices have risen – European Union beef prices have surged by one third since the end of 2010, to around €4,000/tonne, four to five times the price of horse meat. The simple truth is that food prices are high – and attempts to make it not so mean something has to give. “The relentless pursuit of the lowest short-term price for inputs was at the heart of the horse meat scandal,” says Rabobank FAR analyst Justin Sherrard.

Pursuit of the lowest costs created long and complex supply chains that spanned different countries and regulatory regimes, and that were clearly not under the control of the retailers and food brands that have been hardest hit by the scandal. “The horse meat scandal demonstrates that this is a risky strategy if insights are absent and checks and balances for assuring product safety and integrity are not in place and upheld consistently along the chain,” Sherrard points out. “The result of chasing price is a weak supply chain, characterised by a lack of transparency to the downstream buyer, with inconsistent and unpredictable supply and uncertain quality.”

The fallout from the scandal has been significant – millions of processed meat products have been taken from retail shelves and food service counters, supply contracts have been terminated and new chains hastily set up in their place, with consumers left asking how this could happen. The loss of trust – in meat products, in retailers and in the food industry as a whole – will be one of the most lasting legacies of the whole affair.

 

The supply chain

Many companies have seen brands that they have invested a lot of resources in nurturing take a severe hit to their reputation – although few have felt they had to go as far as Tesco of the UK, which promised a “root and branch review of supply chain operation and management” and published full-page apologies to its customers in national newspapers. CEO Philip Clarke wrote on the company’s website: “We will set a new benchmark for the testing of products, to give you confidence that if it isn’t on the label, it isn’t in the product. And that will be backed up by an industry-leading commitment to enable you to find out much more about what’s in the food we sell and how it’s produced.”

Meanwhile, those that established robust supply chains in which they have confidence, such as for meat supply McDonald’s, Morrisons and Sainsbury’s, have seen their efforts vindicated. McDonald’s, for example, has been able to say with confidence that its burgers are 100 percent beef and that it knows where they came from.

Those worst affected by the scandal need to move beyond immediate crisis management and address the causes of the problem not just the symptoms. They must develop supply chains that can ensure product safety and integrity and they need an integrated approach to tracking and tracing. There must be clarity on who is responsible for ensuring high standards in the supply chain and a clear alignment of incentives for supply chain partners to work together. Dedicated supply chain models may be one way to address this. However, they also need to be aware that this will take time and money.

The horsemeat scandal has highlighted a number of weaknesses in supply chain performance and its aftermath offers an opportunity to improve four key aspects – increasing access to supply, increasing standards of product safety and integrity assurance, managing ongoing pressure on pricing, and measuring up to increased scrutiny by branded food companies, consumers and regulators.

“This scandal should open the eyes of all companies in the supply chain. The current ‘race to the bottom’ approach, with its fixation on the lowest possible price, is coming to an end,” says Sherrard. “Forward-thinking F&A companies have now recognised that the key to success in supply chain organisation and management is a focus on adding value rather than chasing price.”