MHI Solutions Improving Supply Chain Performance
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The food and beverage industry is a complex one. In the words of Bobby J. Martens, associate professor of economics at Iowa State University, “Food is both global and uniquely local and personal.” It also carries with it distinctive demands that are fast evolving in a rapidly changing world, and the supply chain is at the center of those developments.
“As the world grows, we are challenged with using global agricultural systems to produce ingredients and ultimately food, beverages and fuel to meet local and personal preferences,” Martens said. “To do this, supply chains need to be reimagined. We should not give up the amazingly efficient agricultural systems we have today in order to meet these fragmented markets. Instead, we should meet the needs of the fragmented markets by evolving our supply chains to be responsive, flexible, agile and efficient.”
A Global Industry Swayed by Consumer Choices
Martens noted that three regions of the world produce a “massive amount of the agricultural output that feeds and fields the world—directly or indirectly.” Those areas are the Midwest United States, Brazil/Argentina and Russia/Ukraine.
“Most of the world’s growing population lives relatively far from these three areas. So, logistics systems (both storage and transportation) are critically important to move the agricultural outputs from where they are grown to where they are needed for consumption, when they are needed and in the form they are needed (for example, proteins vs. grains),” Martens said. “This is even more important as we seem to be moving from a world of free trade to a bifurcated or divided world.”
Martens said that mass commoditization describes much of the food production sector, but he sees opportunities surfacing to de-commoditize.
“First, consumers are willing and able to make choices about what they eat, and these choices can create opportunities to serve in new and unique ways,” Martens said. “Verification and/or certainty will be important in these supply chains, as consumers will need to trust that they are getting what they want. Consumer choices will likely continue to change agriculture and the food industry.”
In addition to consumer choice, policy is a constant source of change for agriculture—and therefore the food and beverage sectors, Martens said. The focus on carbon in public policy today is an example.
“Carbon reduction has the potential to create value to farmers, food manufacturers and from a public good perspective. But, as with consumer choice and preference changes, we will need supply chains capable of efficiently and effectively moving physical products and also capturing information flows associated with product characteristics that are not physically testable—for example, the carbon intensity of raising soybeans in Iowa.”
Ultimately, a portion of the agricultural supply chains seem poised to be de-commoditized because of consumer preferences and public policy, Martens said.
“These ‘new’ supply chains will create new opportunities and challenges,” Martens said. “However, the new opportunities will need to be large enough physically to re-commoditize (remain efficient). Supply chain flexibility and agility will be critical.”
Packaging and Workforce
Food and beverage are linked closely, but Jason Denmon, vice president of sales for MHI member Symbotic, said they do have different characteristics from a supply chain standpoint, and both have distinctive challenges on a granular level, such as in the area of packaging.
“Food has so much more variability in packaging,” Denmon said. “As you move into the beverage side, there’s more consistency in that area—whether you’re in nonalcoholic or you’re talking about wine, spirits and others, there’s a lot more consistency on the packaging on the beverage side. However, in beverages, everything’s liquid and everything’s heavy.”
As a whole, the food and beverage sector has many products that require transportation and storage in temperature-controlled environments, creating ongoing demands, while Denmon noted that distribution center labor costs have “skyrocketed” in recent years, spurred upward by the pandemic and then remaining elevated as conditions have improved.
“I think wage pressure in the warehouse was substantially higher than the overall inflation numbers that we all see reported, and that’s put a big cost on the suppliers and the supply chain,” Denmon said. “It’s just a very physically demanding job, and it’s difficult to staff these roles.”
Denmon said automation has matured in the past five years, helping provide better tools for food and beverage material handling operations. He said consolidation on both the retailer and wholesaler sides is having an impact on the food and beverage sector—and on their approach to automation.
“As we continue to see that consolidation, I think it will continue to drive some of the decisions we see being made in the marketplace, and with those larger players, it will drive the opportunity to invest in more automation to achieve higher density and better efficiency in terms of the throughput,” Denmon said. “Those economies of scale come from that natural consolidation across many sectors in this business.”
Views on SKUs
Denmon said the food and beverage industry has seen a “SKU proliferation” as brand owners and merchants give the consumer more and more choices.
“That proliferation of SKUs is very difficult in most conventional warehouses today, and it’s a real driver of challenges for the supply chains to be able to continue to provide that increasing opportunity for consumers to have more options,” Denmon said.
Denmon said SKU proliferation is most pronounced in the fresh produce or refrigerated sections of businesses, and the cost of building refrigerated and frozen facilities is “much higher.” That compounds the challenge, he said.
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