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Outsource magazine: thought-leadership and outsourcing strategy | August 23, 2017

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Using SRM to manage risk in the food and drink industry

Using SRM to manage risk in the food and drink industry
Outsource Magazine

When it comes to balancing risk management with supply chain efficiency, few industries can boast the level of complexity that surrounds the food and drink sector.

The industry combines common supply chain issues such as logistics, cost pressure and supplier reliability, with more specific challenges such as seasonal availability and limited shelf life. Add to this a cocktail of weather related complications and crop failures and it becomes clear that any business looking to consistently deliver high-quality goods is in for a challenge.

On top of this, the food and drink sector provides consumers with products they use on a daily basis. If something goes wrong the ramifications are huge.

This was the case last year, when horse meat found its way into the supply chain. In addition to the numerous investigations at both national and EU level and the destruction of much meat stock, Tesco’s value, for example, dropped by an estimated £300m. The resulting media attention and public outcry heaped further pressure on the food and drink sector.

The recent publication of the Elliot Review, an independent report into food and drink supply chains, looks set to add yet more challenges for those in the industry. The Review criticises the unsustainable relationship between retailers and suppliers and calls for the creation of a new unit to regulate the sector, as well as more frequent audits.

The Review condemns the tactics employed by many large retailers and suggests that supermarket price wars have led to the development of unsustainable food supply chains. The research also states that current practices and price pressure mean it is only a matter of time before another scandal erupts. It is worth noting that although the Elliot Review was sparked by the horse meat scandal, businesses outside of the meat sector will also be affected by its recommendations.

Unsustainable supply chains and cost-pressure

When it comes to outsourcing one of the key benefits is cost reduction. Another is taking advantage of a specific skill set or resource not available within one’s business. These two basic principles have been pushed to the limit in parts of the food and drink sector. Particularly in terms of the relationship between supermarkets and their suppliers, where incredibly complex supply chains mean situations such as “horse-gate” are increasingly likely.

In that particular case, some suppliers resorted to illegal practices in order to deliver beef products at low prices. This may well have been avoided through solid Supplier Relationship Management (SRM) programmes; however, not enough were in place. Suppliers were simply told to deliver at a given price, or they would lose their contracts.

Many buyers responded to the scandal by enforcing more stringent T&Cs on their suppliers. This approach fails to tackle the cost pressure issues facing suppliers and does not favour the development of sustainable supply chains. At a recent roundtable, members of the Food & Drink Procurement Industry Forum voiced their concerns regarding the direction the industry is heading in.

For buyers in the food and drink sector the additional T&Cs being imposed on suppliers are making it very difficult for them to do business. A company which grows fruit in South Africa, for instance, has very little incentive to comply with these new terms when the latter are not mirrored by Chinese or Russian buyers. The implementation of reinforced audits as part of the Elliot Review’s recommendations may well further complicate matters. As a result supermarkets may well have to raise their prices or risk ending up with empty shelves.

So how can buyers in the food and drink sector keep both themselves and their suppliers in business? Put simply the industry needs to change. This does not mean that the days of negotiating and asking suppliers to cut their costs by a given percentage are gone. There are still plenty of situations where the latter are valid strategies, however, the focus needs to turn towards innovation and SRM.

Avoiding horse-gate 2.0

One of the principal issues with the current price-driven strategy employed by many buyers in the food and drink industry is its short-term focus. By not investing in building sustainable relationships with suppliers, retailers are essentially wearing blinkers. A short-term focus on cost means they are unaware of the problems facing their suppliers. Problems which may well be passed on.

This state of affairs is unlikely to prove fruitful for either buyers or suppliers. Identifying the cost-drivers for each party is a key element to making SRM work. By doing so buyers are able to foster mutually beneficial practices. This could be as simple as providing the right vegetable at the right time, or devising long-term fixed or capped price contracts to ensure security of supply.

Of course the benefits of a well-implemented SRM programme go beyond cost-cutting exercises. Stronger relationships often result in better quality products as well as higher levels of staff satisfaction and retention.  Not to mention collaborations aimed at ensuring that all products are sourced in line with the Elliot Review’s recommendations.

A glimpse of the future

Unilever has taken the practice one step further with its ‘Partner to Win’ programme. Launched three years ago, this innovative scheme is focussed on improving Unilever’s relationship with 200 key suppliers across a variety of product lines. According to Vice President of Procurement Biswaranjan Sen, since launch, 70% of all innovations were contributed by suppliers. This has led to significant cost reductions and process improvements.

However, this year Unilever is taking the programme in a slightly different direction and encouraging suppliers to collaborate amongst each other. This approach means Unilever will no longer be the sole centre of innovation, a change which will dramatically expand the number of opportunities for improvement. This new plan could prove a valuable step towards creating a more integrated and sustainable business model.

A recent survey carried out by 4C Associates found that for many suppliers SRM represents one of the most effective means to drive innovation and company growth. In this context, the cross-industry knowledge which can be brought to the table by an outsourcing provider can prove invaluable. Many of the techniques implemented in other industries are just as valid in the food and drink sector and can lead to significant growth.

The food and drink industry has undoubtedly learnt lessons from past scandals, but there remains much to change in terms of how buyers and suppliers work together. The most important element remains striking a balance between keeping costs low and maintaining sustainable relationships with suppliers. SRM is an essential element of attaining this balance and forward-looking programmes such the ‘Partner to Win’ scheme provide a window on the future of the industry.

About the Author

Milan Panchmatia 150Milan Panchmatia is a Director at 4C Associates.

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