Drive Them Back Up with Improved Supply Chain Planning
Over the last several months, food & beverage manufacturers in the United States have experienced lower profits due to higher shipping costs that have been driven due to higher trucking costs. One of the primary reasons for this issue in the United States is an increase in federal regulations monitoring driver hours. However, transportation costs have been increasing globally as well. This has impacted large, mid-size and small manufacturers. Trucking accounts for a majority of food & beverage shipments thus accounting for a majority of the costs associated with supply chain management.
What specific factors have caused costs to rise?
- Increase in the demand of fresh and frozen foods
- Smaller shipments of more products to accommodate next day deliveries
- Shortage of skilled drivers
- Shortage of trucks, particularly trucks with refrigeration and freezing capabilities
- Reduction in the use of preservatives, reducing shelf lives of shelf stable foods
These issues are causing additional costs and additional challenges for manufacturers. Manufacturer’s customers (retailers, food service companies) often fine them for delivering product late. The customer does not care about the reason for a late delivery. If it is late, it is late and a fee is charged. In many situations, this is part of the initial supplier to buyer agreement in addition to stocking fees that manufacturers pay to retailers. In addition products are not making it to the retail shelves on time – impacting revenues, not just costs. For most manufacturers, a by-product issue arises, depletion in shelf life. Another challenge that has occurred is that the transportation issues are not just impacting the delivery of finished goods to retailers. In many cases, the same trucking companies and same vehicles are used for the transport of raw materials into the manufacturer. This has increased costs upstream.
The question now is how a food & beverage manufacturer deals with these issues? The knee jerk reaction or short term solution has been to raise prices. However, this can put the manufacturer into a competitive disadvantage against generic, private label and store brands. Pricing wars in not a strategic solution especially if higher costs and competition for transportation resources and time are a long term issue.
A different approach needs to be taken by food & beverage manufacturers
Higher transportation costs are a fact. To deliver products to customers, transportation is needed. There is no way around that issue. These new challenges can be a catalyst for manufacturers to take a step back and analyze their entire business process.
It starts with what is being shipped. And that starts with a question. Are we shipping the right products at the right time to the right places? In today’s market, especially in this industry, it is essential that the forecasting process take into account item level forecasting. Pyramid level forecasting that includes categories, brands and families are a necessity for the various levels of strategic and tactical planning. However, for an industry that has limited product shelf lives, it is critical to have the right product at the right place to minimize re-deployment of finished goods inventories. Re-deployment of inventory that originally goes to the wrong location causes manufacturers millions of dollars each year in extra transportation costs, fines and product spoilage. This problem causes a ripple effect throughout the supply chain as production runs need to be changed to produce product that now has to be shipped to the correct location. Because of this, manufacturing costs increase further depleting profits.
Accurate forecasting starts the process of synchronizing the supply chain. Implementing integrated business planning processes like a Sales and Operations process allows manufacturers to align all areas of the business on the same plan. Aligning all stages of the supply chain minimizes costs and improves profits.
Synchronizing the supply chain will help take a great deal of the “sting” out of increased transportation costs because those can be made up elsewhere and help manufacturers avoid raising prices and make them less competitive. Synchronizing the supply chain can have many positive benefits:
- Improved item location forecasting
- Accurate distribution planning
- Better procurement planning
- Improved production planning
- Sales and Operations Planning
Transportation costs are a necessary part of doing business. If they rise globally and consistently throughout the industry then manufacturers need to consider other options to minimize the effects on profits. 50 – 70% of a company’s profits are consumed by supply chain costs. Synchronizing all other areas of supply chain planning will help minimize the associated costs with producing products. This will provide new opportunities and give manufacturers an edge on competition and a starting point to becoming the agile effective enterprise.