global food supply chain

7/29/2019 Global Food supply Chain

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14 MARCH 2012 FOO D L OGI STIC S www.foodlogistics.com

C O V E R S T O R Y

Notwithstanding the increased movement by con-

sumers and grocers alike to buy local, the

food chain is becoming progressively more

globalized for most countries around the

world. This globalization has created a

range of opportunities and risks.

On the positive side, U.S. companies are

aggressively eyeing new markets with millions of

potential consumers. Conversely, a far reaching

and more complex supply chain is prone to

risks brought about by regulatory and non-

tariff barriers, disruptions due to natural

disaster, political upheaval and economic

instability, rising oil prices and its effect

on food production and transporta-

tion, and the dynamic and unre-

lenting variations in consumer

demands and desires.

New market opportunities mean big business, and big risk. B y L A R A L . S O W I N S K I

The Global FoodSupply Chain

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Painting the big pictureIn their recent sector report, Food Industry: still solid but price volatility

will bear watching, global credit-insurer Coface outlines some of the larger

trends that are impacting food supply chains.

Naturally, food prices are a reflection of various inputs, starting with

raw materials. In June 2010, raw material prices headed higher again, aftereasing from their previous spike in 2007/2008. Grain, sugar, meat, diary,

soybeans, and cocoa are some of the commodities that have experienced

significant price hikes, particularly in emerging economies.

As for 2012, its likely that food prices in the U.S. will settle into their

more historic trajectory, which means price increases in the neighborhood

of two and a half to three and a half percent, says Kenneth Moyle, senior

vice president, Coface North America.

However, there are some wild cards in the current mix that could upset

this forecast, he cautions. Energy prices and natural disasters are the big-

gest ones, while grain prices, too, could start to fluctuate sharply due to

changes in the tax code.

Specifically, tax incentives targeting ethanol in the EU, and biodiesel

in the U.S., could alter global grain productiona classic example of the

integrated relationship between tax codes, energy prices, and agriculture

production.

Indeed, Moyle cites another example of the integrated nature of foodsupply chains, one of which became apparent during the global recession.

A lot of the large seafood producers were financed by Icelandic banks,

and when Iceland had their crisis, they had trouble borrowing. Some pro-

ducers either had to stall production or cut back, although now most of

them have access to capital again for their production facilities, he says.

In a further illustration of how risk can unleash a ripple effect through-

out a global supply chain, Moyle notes: Of all the commodities in world

trade, food becomes the most political. Thats because you have farm

subsidies in many countries, you have arguments over genetically modified

foods, and so on. And, a lot of the revolutions that started last year were

started over food shortages. Dictators stay in power when everyones beingfed, but people take to the streets when they get hungry.

In an interview with PBS NewsHour last September, Rami Zurayk,

an agronomy professor at the American University of Beirut explained, I

think that the prices of food mobilized people, he said, referring to the

political uprising in the Middle East and North Africa.

If you look at Tunisia, for example, you see that the Tunisian uprising

started in the rural area, where many small farmers live and are just look-

ing for a means to support themselves and their families, he said. It was

a young, college educated, but unemployed Tunisian named Mohamed

Bouazizi who was selling fruit and vegetables in the street without a

license and that set himself on fire after he was confronted by authorities,

which many consider the genesis of the Arab Spring.

Trade policy and non-tariff barriersTrade policy, both in the U.S. and abroad, is another key component of

the global food supply chain. The seemingly capricious imposition of non-tariff trade barriers, such as antidumping and countervailing duties, quo-

tas, certain regulatory requirements, and sanitary and phytosanitary mea-

sures, amount to one more area thats prone to fluctuation when it comes

to imports and exports of food and beverages throughout the world.

According to Kam Quarles, director for legislative affairs at McDermott

Will & Emery LLP (and a member ofFood Logistic seditorial advisory

board), says that while the World Trade Organization (WTO) and various

free trade agreements (FTAs) have addressed tariff barriers, a lot of the

future impediments (to global trade) may transition to phytosanitary bar-

riers. He remarks, We spend a great deal of time working on pest and

disease issues.

And, while the U.S. vigorously adheres to international protocols sur-

rounding sanitary and phytosanitary measures, which must be based in

sound science, there is a lot of variation from country to country, says

Quarles. One countrys definition of sound science, especially if they

have a very active political constituency, may differ widely from the U.S.

For the moment, Quarles is keeping a close watch on a new raft ofrules that will be released shortly by the U.S. Food and Drug Administra-

tion, which promise to affect foreign suppliers seeking access to the U.S.

market, as well as the U.S producers themselves.

He also is hearing a lot of concern from food clients over the recent

announcement by the White House to consolidate several trade agencies

under one entity.

For agriculture exporters, in particular, it caused some concern simply

because weve got some very good people at the USTR (U.S. Trade Repre-

sentatives Office) who know agriculture inside and out. The USTR is also

a very nimble agency. Along with their counterparts at the U.S. Depart-

ment of Agriculture and the Foreign Agriculture Service, they work very

efficiently to deal with trade related issues. Some of them are large scale

issues like the implementation of a free trade agreement or the WTOs

Doha Round, and some of them are smaller, like a shipper who has 10

containers of agricultural products that have gotten hung up in a port

somewhere and needs help getting them released.

Transparency as a competitive weaponIts been said many times that every business threat is an opportunity.

When it comes to the proliferation of rules and regulations pertaining to

Apple exports account for approximately 27 percent of the

annual volume of U.S. fresh apple production and as much as

40 percent of the total crop value.

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the food supply chain, this truism is spot on.

Of course, while technology tools that boost visibility and transparency

are the first step in keeping regulators off your back, acknowledges Sean

Robinson, global industry manager, food and beverage, for GE Intelligent

Platforms, the more evolved companies also view transparency as a com-

petitive weapon.

Although a host of Chinese companies have been implicated in recentyears for infractions that have hurt the credibility of their products in

foreign markets, the mindset of that countrys government and food com-

panies has begun to change, Robinson says.

Simply put, Theyre trying to be a better trading partner, he explains.

It makes more sense to offer a clearer path to ingredients, packaging, and

other critical information of interest to foreign buyers, while at the same

time avoiding inspectors tromping through their factories on a regular

basis.

Robinson describes GE Intelligent Platforms solutions as the back-

bone for data in the factory.

The solutions make it possible to tie in lots of different categories of

information, he says, all of which contribute to very robust traceability,

capability, and risk management. But, it also delivers the kinds of analytics

that allow companies to look for process inefficiencies, equipment ineffi-

ciencies, or other breakdowns that are causing excessive losses of materials.

For example, A quality manager can quickly see the ingredients thatwent into a product and immediately see whether a critical process like

cooking temperatures or mix rates were where they should have been.

Whereas a continuous improvement manager, using the same backbone,

is going to be provided with the data surrounding what happened inside

that oven, that are going to be what he needs to know in order to tune

the oven so that the right amount of natural gas is getting burned and the

oven is operating more efficiently.

Robinson adds, Weve also got very particular pieces that make it pos-sible to integrate both inbound data from a supplier, as well as push data

up to an enterprise system or to an external system. That way, a major

candy manufacturer can take inbound supplier data from its chocolate

or peanut providers, for instance, and tweak the way they run their own

factories so that they know the best way to re-melt that chocolate to get

a properly tempered coat or the best way to re-blanch or roast peanuts

to ensure theyre not carrying any salmonella further down the supply

network.

Bob Gates, GE Intelligent Platforms global technical manager, empha-

sizes the risk mitigation aspect of implementing these types of technology

tools.

During the 1970s, when the auto industry had a recall, it meant half a

million cars had to be recalled. Now, theyre able to send you an email and

let you know that your car is one of 80,000. When it comes to the food

business, theyve started to do the same thing, and its all being driven

by risk mitigation. Sure, customer satisfaction gets a boost and quality isimproved too, but the really big part is risk mitigation.

Avoiding a recall obviously saves a company a lot of money, but it also

goes a long way in protecting a brand. If you get your brand out there

for the wrong reasons, then youve just done more damage to your brand

than you could have possibly done in 10 years trying to build it, due to

one unfortunate incident, says Gates.

Turning the discussion back to China, and the countrys ability to

attract foreign manufacturers based solely on the countrys abundance of

cheap labor, Robinson offers a different perspective.

Sure it can make economic sense to catch shrimp off the coast of

Oregon or Newfoundland and have it packed and frozen by somebody in

China or Taiwan, but what weve seen lately is that companies are starting

realize the cost advantages arent as great as they thought for a bunch of

reasons, he says.

For starters, Companies havent done all they can internally to make

the best use of operational and continuous improvement tools that they

have, and then combine them with some of the data that may have beensiloed in a quality or risk management system. Companies are using our

solutions to break down walls between their systems. Theyre realizing that

if they repurpose some of their quality or food safety data that teaches

them about significant losses of material, significant losses of capacity, and

they address those losses, they discover that China may not be that great.

In other words, they can bring operations back home [to the U.S.] and

they can avoid having to outsource a certain class or category of ingredi-

ents or packaging material.

We have a customer in the diversified food business whos told us

that theyve been able to reduce their material loss by 4 to 6 percent and

improve their first-pass quality by 15 percentthose are the kinds of

numbers that change your cost equation and make it possible for you to

keep decent paying jobs in developed economies instead of always chasing

the cheapest labor, Robinson says.

U.S. food sector getting up to speedAccording to David Mader, principal solutions consultant at Manhat-

tan Associates, while the food sector has generally been behind other

verticals like electronics and apparel in some aspects of supply chain man-

agement, the sector is quickly getting up to speed.

The U.S. ranks as

the worlds largest

exporter of wheat.

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Not surprisingly, the Food Safety Modernization Act

(FSMA) is a major driver.

Were seeing more grocers, foodservice companies, and

wholesalers really start to look at how theyre getting prod-

uct and the data that theyre getting with it, says Mader.

Companies are looking for more visibility throughout

their supply chain and they want information as quickly aspossible, all the way down to the case level. And, if theres a

recall, they want to know where they need to go in the sup-

ply chain to correct that issue.

In addition, more companies in the food sector are

adopting product flow models that allow them to pull time

and cost out of the supply chain, he says.

Grocers have really never done that before, Mader

explains. There are only a handful of them that are mov-

ing towards more of a flow model. But, those that are can

cut days out of the process by circumventing the traditional

steps of receiving inventory, stocking it, pulling it back

down and putting it on a truck for delivery.

The flow model works in tandem with Manhattan

Associates Total Cost to Serve application, which takes

into consideration inbound landed costs, DC costs, out-

bound shipping costs, and inventory carrying costs, whichcan literally provide companies with the total cost to

serve a single box of strawberries to the end consumer,

explains Mader.

Keeping the supply chain fresh is definitely a growing

trend, notes Kristin Wall, retail industry strategy manager

at Manhattan Associates. She also sees more interest in the

industry for local produce and organic produce. Not only is

locally sourced produce attractive to consumers, but sourc-

ing grapes from California or South Florida rather than

Chile, for instance, equates to fresher produce on the shelves

for a longer period of time, and quicker and cheaper trans-

portation costs, too.

Meanwhile, mass retailers continue to expand their pres-

ence in the food sector, says Wall. Target is redesigning

their stores, pulling in more fresh produce and grocery

items. Walmart has been doing the same thing. Theyre both

really starting to hone in on the grocery market.And for Walmart, the concept isnt contained to the U.S.

alone. Since the companys first international forayto Mex-

ico in 1991Walmart has expanded into 25 more countries.

Currently, the companys international division is one of the

fastest growing parts of their overall operations.

Worldwide Food Production at Risk

A

report from the United Nations

Food and Agriculture Organization

(FAO), released in late November,

warns that a reduction of

viable land and water resources is putting

worldwide food production at risk.

According to the FAO, Widespread

degradation and deepening scarcity of land

and water resources have placed a number

of key food production systems around the globe at risk, posing a profound challenge to the

task of feeding a world population expected to reach 9 billion people by 2050.

The report, entitled State of the Worlds Land and Water Resources for Food and

Agriculture(SOLAW), states that although the past 50 years have been marked with

a notable increase in food production, in too many places, achievements have been

associated with management practices that have degraded the land and water systems upon

which food production depends.

Currently, a number of those systems face the risk of progressive breakdown of

their productive capacity under a combination of excessive demographic pressure and

unsustainable agriculture use and practices, the report states. And, this is happening in

every region around the world.As one would expect, competition for viable land and water resources will become

pervasive, pitting urban and industrial users against one another as well as within the

agricultural sector between livestock, staple crops, non-food crop, and biofuel production.

Developing countries are most threatened, the report says, because quality land, soil

nutrients, and water are least abundant.

At the same time, Water scarcity is growing and salinization and pollution of groundwater

and degradation of water bodies and water-related ecosystems are rising, the report says.

Large inland water bodies are under pressure from a combination of reduced inflows and

higher nutrient loading the excessive build up of nutrients like nitrogen and phosphorus.

Many rivers do not reach their natural end points and wetlands are disappearing.

Furthermore, In key cereal producing areas around the world, intensive groundwater

withdrawals are drawing down aquifer storage and removing the accessible groundwater

buffers that rural communities have come to rely on. Because of the dependence of many

key food production systems on groundwater, declining aquifer levels and continued

abstraction of non-renewable groundwater present a growing risk to local and global food

production.As for the recommendations, the report emphasizes that, Improving the efficiency of

water use by agriculture will be key. Most irrigation systems across the world perform below

their capacity. A combination of improved irrigation scheme management, investment in

local knowledge and modern t echnology, knowledge development and training can increase

water-use efficiency.

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