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Managing Business Risk in the Food and Beverage Industry
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Prepared exclusively for Sage Software by Industry Directions, Inc.
Table of Contents
- One Stop Solutions for Category Leadership
- Delivering Consistent Product Quality and Reliability
- Securing Regulatory Compliance & Food Safety
- Risk Management in an Expanding Industry
- About Industry Directions
- About Sage Software
Times have changed considerably for food and beverage companies selling whole or minimally
processed products. Most started out as one-person or family operations years ago and have grown
into sophisticated vertically integrated enterprises offering one-stop niche brands, solutions, and
services. Some are cooperatives representing hundreds or thousands of small members who harvest
fruits, vegetables, nuts, grains, coffee, tea, water, meats, or fish. Others are successful producers,
processors, or distributors that have grown into sizable businesses in their own right.
Cooperatives ' along with larger processor and wholesaler businesses ' have taken on the role of
overseeing the processing, storing, and distributing of goods as well as the marketing and customer
relationships. They are responsible for long-term strategies, marketing contracts, operational
improvements, regulatory compliance, capital expenditures, acquisitions, and pricing strategies.
As companies expand into new markets, they must meet additional regulations and serve more
demanding customers. This puts their ability to maintain profitability (and increase pay prices in the
case of co-ops) at risk.
The greatest risks to this industry are:
- Innovating new products, packaging, and application solutions to reach new markets without &8226;
taking on more than they can effectively manage
- Reliably, efficiently, and profitably delivering the freshest and highest quality products on a &8226;
consistent basis to a multinational customer base
- Achieving and maintaining full compliance of government and industry regulations for food, &8226;
environment, and worker safety in the US and abroad
This industry has relied on a mix of manual, industry-developed, and financial systems to run their
operations. However, they have since evolved into vertically integrated supply chains, multinational
import and export channels, and complex businesses providing food solutions. Without a cohesive
enterprise-wide system that integrates and oversees all aspects of their operations, these companies
will struggle to quickly identify and resolve problems impacting customer service, sales performance,
mandated compliance, or their financial positions.
One Stop Solutions for Category Leadership
The business of selling whole or minimally processed foods and beverages is no longer just about the product.
It"s now about how to leverage flagship products into full-service niche leadership. To be a category market
leader today, companies are competing on brand innovation, customer solutions, and multinational reach.
Leadership growth hasn"t been limited to new products or product variations. Many companies have
moved quickly into new markets and are building direct relationships with consumers on the Internet
and strategic partnerships with star chefs, food service chains, mass merchants, top vending suppliers
and leading retailers, restaurants, and hotels. They are looking at ways to offer solutions at a time when
consumers and food preparers want greater convenience, ease of preparation, and higher quality results.
The challenge is adding more variety, channels, and applications into a supply chain designed for high
volumes, low mix, and fixed continuous processes. As they chase opportunities and expand in multiple
directions (see Figure 1), they risk losing control of costs and customer satisfaction as well as spreading
themselves too thin.
To compete, mid-size companies across the industry have stepped up R&D to improve on and leverage
existing brands and product lines for new applications, markets, and regions. The way people eat and
what they eat around the globe continually changes and this is driving co-ops and processors to research
and develop new types of packaging, a wider variety of flavors, partially prepared options, and facilities
dedicated to organic, allergy free, or kosher foods. To support these shifts, companies are building or
expanding facilities with state-of-the-art technologies and systems for development, testing, processing,
Their sizable investments may not deliver a healthy return for companies that miscalculate consumer trends,
product mix demand, or the high cost of marketing. Leaders in the industry recognize this threat and are
beefing up their information systems to gain greater insight into channel and market trends and improve
communication between sales, marketing, R&D, and fulfillment logistics.
They are also closely analyzing sales, brand, and promotion performance (as noted in Figure 2) for specific
customers and channels to improve mix profitability and control runaway product proliferation. Uncontrolled
proliferation, from continually introducing new product variations, puts food and beverage companies at risk
of excessive costs across the organization and inventory write offs of slow moving consumable product.
Food and beverage companies are catering to a broader spectrum of customers than in the past, when
they sold primarily to wholesalers, grocers, food service providers, and food manufacturers. Today they
are also selling to end consumers, restaurants, hotels, institutions, vending suppliers, mass merchants,
and other types of retailers. Leaders in the industry are expanding their technology and service
capabilities to fully address and solve the distinct packaging, product, marketing, and logistics needs of
these markets. By doing so, they are shifting their vision from selling agricultural products to providing
full-service partially processed food and beverage solutions in specific markets and helping customers
promote their products successfully. Although services and turn-key solutions have the allure of higher
profit margins, they also carry risks. For example:
- Companies take on more projects than they are equipped to handle
- Unique customer requests disrupt and distract primary businesses
- Employees underestimate effort to meet contract terms
- Management diverts the operational focus away from core strengths
- The high cost of hiring top guns to staff projects hurts margins
- Failing to live up to customer expectations results in financial losses
The industry is moving into uncharted territory, and those that will thrive as market leaders are investing
in advanced business systems. These systems give them a continuing pulse of their operating
performance in alignment with corporate goals, alert them to project delays or cost overruns, analyze
their sales and service profitability by type, and integrate all members of the organization into a cohesive
and collaborative body. Market leaders are also strengthening system functionality for R&D, costing,
sales, marketing, and customer connectivity to ensure greater accuracy, cost control, customer
satisfaction, and profitability (see Figure 2).
Mid-sized food and beverage processors and distributors have seized growth opportunities and
located processing plants and warehousing distribution centers in the US and abroad to expand their
operations. They are using the latest technologies and systems to support new product lines, markets,
and regions. Most also import or export products to enhance their business reach. As companies in
this industry grow, they have greater opportunity to secure strategic relationships with major customers
in their target markets who look for growth, modernization, and logistics sophistication.
To minimize the risk of over-expansion and idle operations, prudent companies have taken measures to
ensure that growth is coupled with improvements in process efficiencies, asset productivity, operational
flexibility, and highly accurate information. They are investing in automated systems and information
management infrastructures to share data electronically, seamlessly integrate vertical operations, and
support regional and global customers.
Delivering Consistent Product Quality and Reliability
End consumers expect whole and partially processed foods and beverages to be safe, fresh, and
continually available regardless of how distant the originating source or what must be done to ensure
quality. Food and beverage companies therefore compete on their ability to provide a consistently high
yield of blemish-free perishable goods along with superior on-time delivery performance at the lowest
cost. Customers may want innovation and full service solutions, but their business will first go to those
that have a track record of reliably meeting product and delivery requirements as promised with the
highest quality, minimal returns, and greatest accuracy.
Maintaining and exceeding optimal product quality and delivery while expanding options, markets,
and volumes puts many food and beverage companies at risk of stretching the capabilities of their
procurement, processing, and logistics operations. Many companies in this industry continually produce
and handle millions of pounds of product a week and store hundreds of thousands of cases or cartons
that average 100-200 inventory turns per year. They operate large facilities for inbound storage,
processing, packing, packaging, and outbound refrigerated warehousing. When these business units
perform inefficiently or ineffectively, they risk lowered margins and profits from product waste, higher
operating costs, cross-contamination, or unsafe handling.
The more savvy operations recognize that quality oversight is integral to their operations, and they
continually assess their processes and facilities for potential risks. Producers breed, plant, and
harvest select lines under optimal conditions to get maximum growth, minimal waste, and highest
predictability. Processors and distributors implement the latest temperature, humidity, and process
control technologies to ensure product safety and stability. They also monitor and report on raw
material ingredients, processing operations, inventory shelf lives, storage facilities, and anything else
that puts food quality, reliability, or safety at risk. They employ current Good Manufacturing Practices
(cGMP), Standard Sanitary Operating Procedures (SSOP) and extensive quality assurance systems that
include Hazard Analysis and Critical Control Points (HACCP) for food safety. Leaders in this industry
continually invest in advanced technologies and information systems to improve their line speeds,
quality yields, and operating efficiencies (see Figure 3).
Reliability is just as critical, yet data inaccuracies and poor inventory visibility are common in food and
beverage companies even though many are vertically integrated. Sheer volume and multiple moves
between operations spread across regions ' and increasingly across continents ' create opportunities
for product loss, information errors, and transit delays. To minimize the risk of supply chain disruptions
and customer dissatisfaction, a growing number of companies are turning to enterprise systems that
integrate automated process controls with supply chain, warehousing, and fulfillment distribution
functions designed for the food and beverage industry, as shown in Figure 4.
Securing Regulatory Compliance & Food Safety
Food and beverage processors and distributors have long been subject to the regulations of
the Food & Drug Administration (FDA), United States Department of Agriculture (USDA), and
the Environmental Protection Agency (EPA). But that only represents a fraction of the regulatory
guidelines most companies are required to uphold to ensure environment, product, and worker safety,
as shown in Figure 5. There are dozens of federal, state, and industry agencies that oversee additional
regulations and standards compliance for each sub-sector of the industry. These agencies continue to
add more regulations.
Since 9/11, HACCP and the 2002 Bioterrorism Act have received considerable attention and caused
a series of product recalls, driving most companies to adopt new practices for food safety and
security compliance across their supply chains ' from food origin to final destination. Companies
have also responded to the 2004 tracking and labeling requirements under the Food Allergen
Labeling and Consumer Protection Act (FALCPA) to reduce consumer exposure to harmful bacteria
and allergic reactions.
However, many in the industry are at risk for failing to comply with the many regulations, and every
month dozens of companies are cited for misconduct and fined for their failure to comply. They risk
a massive product recall and corporate loss in market value for their negligence along with stiff fines.
Those that take compliance seriously have established corporate-wide standardized processes and
controls, instituted training programs, beefed up security, and enhanced their systems for full lot and
handling tracability, comprehensive recordkeeping, enhanced labeling, document management, and
internal audits (see Figure 6).
Many are also integrating Good Agricultural Practices (GAP), cGMP, SSOP, HACCP, and Title 21 Code
of Federal Regulations (21 CFR part 11 ' for electronic signatures) into a comprehensive internal food
safety and intervention program as part of their enterprise business system.
Risk Management in an Expanding Industry
Mid-size food and beverage companies are striving to be more things to more markets while ensuring
consistent customer satisfaction and regulatory compliance. This isn"t easy under the best of
circumstances and demands exacting performance to a carefully orchestrated vision. Companies that
move too fast, stretch their operations too far or fail to focus on critical success factors risk loss of
market share, write offs, and publicized penalties.
This industry is experiencing unprecedented opportunities on a global basis at a time when reliability,
quality, and safety are a growing concern. Customers and end consumers want more options and
solutions, and this is driving considerable change in the way products are processed and marketed.
Yet the roots of the industry remain unchanged and too many companies are ill equipped to oversee
all facets of their operations with the scrutiny necessary to mitigate the risks.
SThe delicate balance between growth and risk avoidance is attained by those that have a solid game
plan supported by a comprehensive and flexible enterprisewide system that executes with specified
precision. Leaders in the industry have turned to business systems that tightly integrate their vertical
operations down to the process controls, extend electronic connectivity to partners, adhere to
industry requirements, and adapt to changing business conditions. In doing so they have achieved a
competitive advantage that ensures long term success.
About Industry Directions
Industry Directions is an independent market research firm that delivers expertise on business
processes and IT solutions. Its expertise enables companies to optimize their participation in
manufacturing-supported value networks and gain strategic advantage. To learn more, visit:
About Sage Software
Sage Software supports the needs, challenges, and dreams of more than 2.7 million small and
midsized business customers in North America through easy-to-use, scalable, and customizable
software and services. Our products help manage a complete range of business functions including:
accounting, operations, customer relationship management, human resources, time tracking,
merchant services and the specialized needs of the Food and Beverage Industry.