1111 2 3 411 Food Supply Chain 5 6 7 Management 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 This Page Intentionally Left Blank 1111 2 3 41 Food Supply Chain 5 6 7 8 Management 9 1011 1 2 Issues for the hospitality and retail sectors 3111 4 5 6 7 8 9 20111 Edited by 1 2 Jane F. Eastham, Liz Sharples and 3 4 Stephen D. Ball 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 OXFORD AUCKLAND BOSTON JOHANNESBURG MELBOURNE NEW DELHI 1111 Butterworth-Heinemann 2 Linacre House, Jordan Hill, Oxford OX2 8DP 3 225 Wildwood Avenue, Woburn, MA 01801-2041 4 A division of Reed Educational and Professional Publishing Ltd 5 6 A member of the Reed Elsevier plc group 7 8 First published 2001 9 1011 © Reed Educational and Professional Publishing Ltd 2001 1 2 All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by 3111 electronic means and whether or not transiently or incidentally to some 4 other use of this publication) without the written permission of the 5 copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the 6 Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, 7 England W1P 0LP. Applications for the copyright holder’s written 8 permission to reproduce any part of this publication should be addressed to the publishers 9 20111 British Library Cataloguing in Publication Data 1 Food supply chain management: issues for the hospitality and 2 retail sectors 3 1. Business logistics 2. Food industry and trade 4 I. Eastham, Jane F. II. Sharples, Liz III. Ball, Stephen D. 5 664'.0687 6 7 ISBN 0 7506 4762 0 8 9 30111 For information on all Butterworth-Heinemann 1 publications visit our website at www.bh.com 2 3 4 5 6 7 8 9 40111 1 2 Typeset by Florence Production, Stoodleigh, Devon 3 Printed and bound in Great Britain 4 5 6 7 8 49111 1111 2 3 4 5 6 7 8 Contents 9 1011 1 2 3111 4 5 6 List of contributors ix 7 Foreword by Richard Lamming xv 8 Preface xvii 9 20111 Part 1 The Supply Chain 1 Chapter 1 The catering and food retail industries: 2 a contextual insight 3 3 Jane F. Eastham, Stephen D. Ball, Liz Sharples 4 5 Chapter 2 Food and society 21 6 Sean Beer 7 Chapter 3 The scope and structure of the food supply 8 chain 37 9 Kathryn Webster 30111 1 Chapter 4 Concepts of collaboration: supply chain 2 management in a global food industry 55 3 Andrew Fearne, David Hughes, Rachel Duffy 4 Chapter 5 Current practice: inter-firm relationships in 5 the food and drinks supply chain 90 6 Colin Bamford 7 8 Chapter 6 Stakeholders, ethics and social responsibility 9 in the food supply chain 111 40111 Jennifer A. Wade 1 2 Part 2 The Management of the Supply Chain 3 Chapter 7 Strategic supply and the management of 4 relationships 127 5 Paul D. Cousins 6 7 8 49111

●●● v Contents

1111 Chapter 8 Logistics and information management 149 2 Denis Towill 3 Chapter 9 Relationship marketing 166 4 Terry Robinson 5 6 Chapter 10 Human resource management in the 7 extended organization 187 8 Lynette Harris 9 Chapter 11 Supply chains: issues in management 1011 accounting 204 1 Anthony J. Berry, John Cullen and William Seal 2 3111 Part 3 Supply Chain Perspectives 4 5 Internationalization of the Supply Chain 6 Perspective 1 Internationalization of the hospitality 7 industry 227 8 Kevin Nield 9 20111 Perspective 2 Internationalization of food retailing 234 1 Nicholas Alexander 2 3 Contemporary Issues 243 4 Perspective 3 The case of GM food 245 5 David Barling 6 7 Perspective 4 European trends in food safety: 8 implications for the hotel sector 257 9 Tim Knowles 30111 Perspective 5 European developments in Efficient 1 Consumer Response 268 2 Herbert Kotzab 3 4 Perspective 6 The marketing of seafood in New South 5 Wales, Australia: the impact of 6 deregulation 281 7 Rayka Presbury 8 Perspective 7 Supply chain restructuring in economies 9 in transition: a case study of the 40111 Hungarian dairy sector 286 1 Matthew Gorton and Ferenc Z. Guba 2 3 The Future of the Supply Chain 295 4 5 Perspective 8 Future issues in European supply 6 chain management 297 7 Michael A. Bourlakis 8 49111

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1111 Perspective 9 The future of the food supply chain: 2 a perspective looking up the chain 304 3 Sean Beer 4 Perspective 10 E-shopping: the Peapod grocery 5 experience 310 6 Denis Towill 7 8 Perspective 11 Changes in supply chain structure: the 9 impact of expanding consumer choice 314 1011 Stephen Allen 1 2 Glossary 324 3111 Index 332 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● vii This Page Intentionally Left Blank 1111 2 3 4 5 6 7 8 Contributors 9 1011 1 2 3111 4 5 6 Stephen Allen is a management consultant currently working 7 in the food sector. His career to date spans 15 years in the 8 strategic consultancy role but has included international CEO 9 roles in different sectors (Pharmaceuticals and Construction, 20111 Heavy Equipment), in the USA, South East Asia and Central 1 and Western Europe. A move into the food sector some three 2 years ago involved looking at the issues facing the fresh produce 3 sector and the wholesale markets. His work has particularly 4 focused on facilitating business change on the basis of supply 5 chain principles. 6 7 Nicholas Alexander is Professor of Service Management in the 8 School of Retail and Financial Services at the University of Ulster. 9 Previously he was Professor of Retail Management at Bourne- 30111 mouth University and Coca-Cola Lecturer in Retailing at the 1 University of Edinburgh. His main research interests are inter- 2 national retailing and retail financial services. He has published 3 numerous books and articles on retail management. He is editor 4 of The Service Industrial Journal. 5 6 Stephen D. Ball is Reader in Hospitality Management at 7 Sheffield Hallam University and visiting Research Fellow at 8 Manchester Metropolitan University. He has considerable oper- 9 ational, management, consultancy and lecturing experience 40111 within the hospitality industry and has tutored on management 1 development programmes for national and international organ- 2 izations. He was editor and chief contributor to the Jordans 3 Survey, Britain’s Fast Food Industry, and he recently collated 4 and compiled information for the British Hospitality Associa- 5 tion’s British Hospitality: Trends and Statistics 2000 Report. 6 7 Colin G. Bamford is Professor of Transport and Logistics at the 8 University of Huddersfield, West Yorkshire. His interest in trans- 49111 port issues orginated in the early 1970s when he was one of Ken

●●● ix List of contributors

1111 Gwilliam’s researchers at the University of Leeds. At 2 Huddersfield he has been responsible for the development of a 3 pioneering suite of undergraduate courses in transport and logis- 4 tics management, More recently, he has been involved in setting 5 up a new distance-learning training programme for logistics 6 managers in Hungary. He has written articles and supervised 7 research on a variety of supply chain management topics and 8 published textbooks in the field of transport economics. 9 1011 David Barling is a Senior Lecturer at the Centre for Food Policy 1 at the Wolfson Institute of Health Sciences, Thames Valley 2 University in London. He is programme leader for the MA in 3111 Food Policy, the first taught MA of its kind. David has researched 4 the regulation of GM food since the early 1990s and has published 5 in a number of journals. He was lead author of a policy assess- 6 ment of GM foods, entitled ‘The social aspects of food 7 biotechnology: a European view’, published in Environmental 8 Toxicology and Pharmacology in 1999. 9 20111 Sean Beer is an agriculturalist with considerable practical expe- 1 rience, but for the past twelve years the focus of his work has 2 been in education. He is currently Senior Lecturer in Agriculture 3 at the Centre for Land Based Studies at Bournemouth University. 4 Current research and consultancy interests include retailing and 5 the food supply chain, marketing and cooperation in agricul- 6 ture, small family farms, the producer/consumer relationship, 7 and hill and upland farming. He has been awarded both a Rotary 8 Foundation Scholarship and a Winston Churchill Fellowship. He 9 was recently made a Nuffield Scholar and is a regular commen- 30111 tator on rural, food and environmental matters on radio and 1 television. 2 3 Anthony J. Berry is Professor of Management Control at Sheffield 4 Hallam University. His research interests cover supply chains 5 and he has managed a number of consultancy projects in risk 6 and control. He previously spent 14 years in the UK and US 7 aircraft industry and 25 years at Manchester Business School. 8 He is joint editor of the Leadership and Organizational Development 9 Journal. 40111 1 Michael A. Bourlakis is a Lecturer in Food Marketing in the 2 Department of Agricultural Economics and Food Marketing, 3 University of Newcastle-upon-Tyne. He graduated in Business 4 Administration at the Department of Business Administration, 5 Athens University of Economics and Business, Greece and 6 obtained his MBA degree in 1995 from the Department of 7 Business Studies, University of Edinburgh. Michael worked as 8 a sales manager for the largest dairy company in Greece, and 49111 as a research associate at the Management Centre, University of

●●● x List of contributors

1111 Leicester and at the Oxford Institute of Retail Management, 2 Templeton College, University of Oxford. His current teaching 3 and research interests include logistics and supply chain manage- 4 ment, food marketing, European food retailing and retail 5 strategy. 6 7 Paul D. Cousins is a Lecturer at the University of Bath, a post he 8 has held (amongst others) since 1993. Paul began his working life 9 with Westland Helicopters Ltd, Yeovil, Somerset, where he was 1011 employed as chief buyer. He has had further experience as a con- 1 tractant negotiator for Sikovsky Aircrafts, USA and AT Kearney 2 consultants. In 1993 he won, along with Richard Lamming, a 3111 research grant to develop a methodology for assessing supplier/ 4 buyer relationships in a project known as the ‘RAP project’. 5 Thereon followed other key research projects in supply chain 6 management, including ESSCMO, Environmentally Sound 7 Supply Chain Management. Paul has written extensively in this 8 area, including academic texts and papers. 9 20111 John Cullen is Professor of Management Accounting at Sheffield 1 Hallam University. He worked in senior financial and commer- 2 cial roles in the manufacturing industry before entering into 3 higher education. He has written books, with other colleagues, 4 on the management of financial resources and the consequences 5 of inter-firm supply chains for management accounting. He 6 has also published numerous articles in both academic and 7 professional journals. He is the Head of the Centre for Supply 8 Chain Accounting Research, which is based at Sheffield Hallam 9 University. His current research interests are in the areas of 30111 supply chain accounting, management control and developing 1 management accounting systems in the health service. 2 3 4 Rachel Duffy is a PhD student at Imperial College Wye, 5 University of London. Her PhD focused on food supply chain 6 issues. 7 8 Jane F. Eastham is a Senior Lecturer in Food Management at 9 Sheffield Hallam University. The daughter of an archaeologist 40111 who was interested in eating patterns of Palaeolithic man, she 1 developed an early interest in food, sources of food and food 2 consumption. After a number of years in the hospitality sector, 3 she moved into higher education, in 1990, to teach food and 4 hospitality students at Sheffield Hallam University. Her research 5 interests include supply/demand issues for the hospitality 6 industry, supply chain management, total quality management 7 and the role of independents in new concept development. She 8 has been involved in a number of consultancy projects across 49111 the fresh produce sectors.

●●● xi List of contributors

1111 Andrew Fearne is a Senior Lecturer in Food Industry Manage- 2 ment at Wye College, University of London. The son of a pig 3 farmer in the South East of England, he is a graduate from 4 Kingston, and Newcastle-upon-Tyne Universities. His main 5 research interests are supply chain management, consumer 6 behaviour and market research. He is editor of Supply Chain 7 Management, an international journal which addresses both prac- 8 tical and research issues concerned with the linkages in the food 9 supply chain, from the primary producer to the consumer. 1011 1 Matthew Gorton is a Lecturer in the Department of Agricultural 2 Economics and Food Marketing, University of Newcastle-upon- 3111 Tyne. His research considers the evolution of agri-food systems 4 in Central and Eastern Europe. 5 6 Ferenc Z. Guba is a PhD research student at the Budapest 7 University of Economic Sciences. His research focuses on agri- 8 food industry restructuring and his thesis considers transfers and 9 inefficiencies along Hungarian food supply chains. 20111 1 Lynette Harris is Director of HR Professional Development at 2 the Nottingham Trent University’s Business School. Prior to 3 joining the university in 1988 Lynette was a personnel director 4 and has worked as a personnel practitioner in both the public 5 and private sectors. Lynette is the joint editor of Strategic Human 6 Resourcing: Principles, Perspectives and Practice (1999: Financial 7 Times/Pitman Publishing), an active researcher on contempor- 8 ary issues in human resource management and the author of 9 articles in both academic and practitioner journals. Lynette is a 30111 member of the IPD’s Membership and Education Committee, 1 serves on its Quality Assurance panel and is policy adviser to 2 the Derbyshire and Nottingham Branch. 3 4 David Hughes is Sainsbury Professor at Wye College, University 5 of London, a post he has held since September 1991. David has 6 over twenty years’ experience in the fields of agribusiness 7 management and food marketing and is a frequent speaker at 8 major national and international conferences on global food 9 industry issues. He has published extensively in areas of food 40111 supply chain. 1 2 Tim Knowles is Senior Lecturer in Hospitality Management at 3 Sheffield Hallam University. His PhD in the field of Food Safety 4 applied to the European Hotel Industry was awarded from the 5 University of Luton. He is consultant editor of Croner CCH Food 6 Hygiene Manual and is on the Editorial Board of the International 7 Journal of Wine Marketing. He has some 85 publications to his 8 name, including books, chapters in books and refereed articles 49111 in internationally recognized journals. In addition, he has

●●● xii List of contributors

1111 lectured extensively abroad for organizations such as the World 2 Tourism Organization, British Council, Cyprus Government, 3 Chilean Government and the European Commission. 4 5 Herbert Kotzab is an Assistant Professor of International Supply 6 Chain Management in the Department of Operations Manage- 7 ment at the Copenhagen Business School. He received a Master of 8 Business Administration in Marketing and Management and a 9 doctorate degree from the Vienna University of Economics and 1011 Business Administration. His research focuses on the critical 1 success factors of retail logistics systems and the application of 2 new information technology for supply chain management. He 3111 has lectured and offered executive education programmes in close 4 cooperation with the Budapest University of Economic Sciences, 5 the J.L. Kellogg Graduate School of Management and INSEAD. In 6 1998, he was visiting scholar at the Centre for Transportation 7 Studies at the Massachusetts Institute of Technology. 8 9 Kevin Nield has worked in a wide variety of positions within 20111 the catering and retail industries. His specialist subject areas are 1 the economic and financial aspects of international hospitality 2 management and quality management. He has written a number 3 of papers on the subject of quality management and has given 4 presentations at international conferences, in particular on work 5 conducted in Romania. Kevin is the member of the editorial advi- 6 sory committee for Hospitality magazine and is a member of the 7 Council for Hospitality Management’s teaching, learning and 8 assessment committee. Kevin has undertaken consultancies for 9 small, medium and large-scale concerns in the hospitality 30111 industry in areas such as market research, facilities development, 1 menu design and costing. 2 3 4 Rayka Presbury has 21 years’ experience in hospitality manage- 5 ment and has held management roles at the Sydney Marriott, 6 Southern Cross Hotel and Holiday Inn Menzies. She has run 7 Customer Service and Banquet Sales courses for a number of 8 five star hotels, including the Cebel, the Wentworth, Quay West 9 and the Carlton Crest Hotels. Rayka is currently enrolled as a 40111 M.Comm. (Hons) student and her research interests are in the 1 area of customer service, employee relations and empowerment. 2 3 Terry Robinson is Reader in Marketing and the leader of the 4 marketing section at the University of Teesside. He has published 5 extensively in the areas of relationship marketing, the interna- 6 tionalization of retailing and retailing in the newly emergent 7 states of central and Eastern Europe. He has taught in many 8 countries in Central and Eastern Europe and given research 49111 papers in conferences around the world.

●●● xiii List of contributors

1111 William Seal is Professor of Management Accounting in the 2 Department of Accounting, Finance and Management at 3 the University of Essex. He has published extensively in 4 accounting and management control systems. His research inter- 5 ests range from accounting in post-socialist Europe, management 6 accounting and autopoietic systems theory and management 7 accounting in supply chains. 8 9 Liz Sharples has a wide experience of the hospitality industry 1011 with a background in hotel management and university catering. 1 Her teaching and research interests relate to the management of 2 food in hospitality operations, environmental issues and the 3111 inter-relationships between food, wine and tourism. Her publi- 4 cations have focused on vegetarianism, environmental impact of 5 the food supply and wine tourism. She has acted as consultant 6 to several national organizations advising on concept develop- 7 ment, hospitality operations and the implementation of healthy 8 eating programmes. 9 20111 Denis R. Towill is presently Director of the Logistics Systems 1 Dynamics Group, Cardiff University. He holds a Doctor of 2 Science Degree from the University of Birmingham, is a Fellow 3 of the Royal Academy of Engineering, and a distinguished over- 4 seas scientist in Eta Kapa Nu. He has served as chairman of 5 the management division, Institution of Electrical Engineers, 6 and been a member of the Royal Academy of Engineering 7 Construction Sector Panel and Management of Technology Panel. 8 Professor Towill has wide industrial and academic experience 9 in the areas of engineering management, logistics and manu- 30111 facturing systems. He has also been selected to receive the 1 Andersen Consulting Award for the best paper published in 2 the International Journal of Logistics Management. 3 4 Jennifer A. Wade is a Senior Lecturer in Hospitality Management 5 at Sheffield Hallam University. Jennifer has researched and 6 published on the hospitality industry and environmentalism for 7 more than a decade. Jennifer is a member of the HCIMA 8 Environmental Working Group. 9 40111 Kathryn Webster is a Lecturer in the School of Service Manage- 1 ment at the University of Brighton. Her areas of research include 2 food and health policy, and environmental management in the 3 hospitality industry. Her book Environmental Management in the 4 Hospitality Industry was published by Cassell in 2000. 5 6 7 8 49111

●●● xiv Foreword

1111 2 3 4 5 6 7 8 Foreword 9 1011 1 2 3111 4 5 6 Of all the commercial sectors that espouse the concept of supply 7 chains, the two that are addressed in this book can perhaps claim 8 the most legitimacy. 9 First, the very concept derives much of its logic from the 20111 fundamental principle of the food chain. A study of the passage 1 of matter from earth to earth through every living organism 2 on the planet, taking the many forms of mass and energy, has 3 much to teach us about supply – not least its cyclical nature and 4 fragility. 5 Second, the business of retailing has always been a genuine 6 chain of events – getting the goods to market. In some chains the 7 perishability of produce drives urgency and the search for effi- 8 ciency, creating in its wake social institutions ranging from the 9 early hours kept by fruit and vegetable markets to the annual dash 30111 to bring Beaujolais Nouveau to Britain. In others, the ability to 1 delay supply has long been a source of commercial power – make 2 it hard to get and the customers will beat a path to your door. 3 These historic and basic features of food and retailing have 4 always been critical to people and organizations engaged in these 5 sectors. The advent of electronic trading and genetic engineering 6 may be seen as revolutionary but they are perhaps no more pro- 7 found than, say, the invention of the refrigerator or pasteurization. 8 The sheer scale of connectivity in modern supply networks, how- 9 ever, means that impacts are felt very quickly in many sectors – 40111 and become widespread, internationally, almost immediately. 1 A colleague of mine recently commented that in developing 2 personalized marketing and home proficiency in home delivery 3 of groceries, Tesco have finally mastered the services provided 4 for centuries by the corner shop! Perhaps nothing is really new. 5 The concepts of inter-organizational strategic supply relation- 6 ships, supply mapping and dynamics, international operations 7 and so on, covered in this book, are clearly of central impor- 8 tance to managing this dynamic and fragile part of human 49111 endeavour.

●●● xv Foreword

1111 How might collaboration be combined with competition 2 between buyer and seller? How can large-scale logistics be rec- 3 onciled with Victorian infrastructure? Are people going to stay at 4 home and buy their groceries by computer: what will happen to 5 shops? Will all hotels and restaurants look the same, eventually? 6 These chapters provide many valuable perspectives on these 7 questions and many more, dealing with the management chal- 8 lenges associated with supply chains in the food industry and 9 the retail and hospitality sectors. I commend the editors in their 1011 choice of authors. 1 2 Richard Lamming 3111 CIPS Professor of Purchasing and Supply Management 4 Director: Centre for Research in Strategic Purchasing and Supply 5 School of Management 6 University of Bath UK 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● xvi 1111 2 3 4 5 6 7 8 Preface 9 1011 1 2 3111 4 5 6 This book takes as its theme food supply chain management. 7 Supply chains and their management are relatively new, yet 8 important, emerging, fields of interest. Both are fast becoming 9 pivotal to business success and survival. This is as much a truism 20111 for those sectors involved with food as it is for all other indus- 1 trial sectors. This book concentrates upon the application 2 of supply chain management to the food retail and hospitality 3 sectors – both of which are large and significant. 4 This text is believed to be the first of its kind and has come 5 about from a longstanding personal interest in supply chain 6 management. This interest has brought me into contact with col- 7 leagues from Innovative Supply Chain and Networks (ISCAN), 8 and the research body attached – the Research Development and 9 Dissemination Unit (REDDIS), some of whose members have 30111 contributed to this book. A further consequence of my interest 1 in the management of supply chains has been the development 2 of a much needed unit in food supply chain management for final 3 year undergraduates at Sheffield Hallam University. This book 4 will be of help to them in their studies. 5 It is intended that the book be used on a variety of business and 6 management courses at undergraduate and postgraduate level, 7 but, in particular it has been designed to meet the needs of final 8 year undergraduates on Food and Hospitality Management pro- 9 grammes. Postgraduate Management students, particularly those 40111 on conversion masters, will also benefit. The book is also relevant 1 for managers who are active in the food industry. 2 The principal aim of the book is to enable readers to make 3 the transition between operations management and the more 4 holistic approach of supply chain management. With the assis- 5 tance of a number of experts from across traditional functional 6 areas, who have in common a focus on the ‘business’ of managing 7 across businesses, the intention is to analyse the food supply 8 chain and issues of managing according to cross organizational 49111 management principles.

●●● xvii Preface

1111 The text emphasizes these ideas through a series of case 2 studies drawn from the hospitality and retail sectors. Given the 3 sensitivity of businesses to the disclosure of their activities in 4 this area, some of the names of the organizations have been 5 changed. 6 Supply chain management is a new business practice and has 7 been stimulated by the growth of global markets and the diver- 8 sity of market needs. It has arisen from individual business 9 sectors, like the catering and food retail sectors, as a means of 1011 managing the increased complexity within the marketplace. In 1 post-industrial society businesses have moved away from 2 vertical integration strategies towards concentrating on core 3111 competencies in order to reduce costs and add value. Supply 4 chain management is thus a response to two main factors; 5 the management of outsourced non-core activities and, given the 6 diversity of consumer markets, the recognition of the synergistic 7 value of collaboration, in terms of market access, information, 8 technological developments and innovation. 9 The recent fuel crisis in the UK and other Western European 20111 countries demonstrated the significance of supply chains and 1 their management. In Autumn 2000, hauliers, farmers and other 2 interested bodies reeked havoc on the supply structure of these 3 countries. The failure to maintain supplies of fuel from UK 4 refineries and depots to retailers and consumers resulted in a 5 restricted movement of raw materials, finished goods and people. 6 Such action raises complex issues relating to, on the one hand, 7 the interconnectivity of the supply structures and of businesses, 8 and, on the other, the implications of managing a business oper- 9 ation when the action of one part of the supply chain has a major 30111 impact on another. 1 If the ingredient of ‘quality’ is then added, it can be demon- 2 strated that the success of a business revolves around its ability 3 to coordinate key suppliers and suppliers of suppliers, in line 4 with customer needs and expectations. A firm’s success is linked 5 to the strengths of its weakest supply chain partner. 6 So what is supply chain management? Responses vary, even 7 from the contributors to this book. Paraphrasing Lummas and 8 Vokurka (1999), we as editors define supply chain management 9 as the: 40111 1 Coordination and integration of all activities in delivering 2 a product from its initial primary source through to the con- 3 sumer into a seamless process, thereby linking all part- 4 ners in the chain internal and external to the organization. 5 External linkages can be both horizontal and vertical. 6 7 Issues about managing across organizational boundaries are 8 different from those of just internal functions (Harland et al., 49111 1999) Whilst this could imply that there is a need to move

●●● xviii Preface

1111 purchasing out of the realms of a clerical activity into a strategic 2 function, there is an argument that all operational functions like- 3 wise need to become strategic in function. 4 This book has three main objectives: 5 6 1. to examine the development of food supply chain manage- 7 ment related to the hospitality and retail industries; 8 2. to explore issues for operational management; 9 1011 3. to present a range of expert perspectives relating to food 1 supply chain management and to the hospitality and retail 2 sectors. 3111 4 To reflect these, the text is divided into three sections: 5 6 Part 1 – Supply Chain Management 7 Part 2 – Management of the Supply Chain 8 9 Part 3 – Supply Chain Perspectives. 20111 1 In Part 1 we examine the nature of the food supply chain and 2 the development of supply chain management in the food 3 sectors. Authors explore the function of food in society in the 4 food supply chain, the nature of supply chain management in 5 principle and practice, and broader issues such as social respon- 6 sibility. It is worth noting that the term ‘food’ has been taken to 7 refer to both food and drink. The contributors in this section 8 include Sean Beer, Kathryn Webster, Andrew Fearne, David 9 Hughes, Rachel Duffy, Colin Bamford and Jenny Wade, all of 30111 whom are specialists in their fields. 1 Part 2 is designed to confront the issues for operational 2 management in the management across organizational bound- 3 aries. Paul Cousins, Denis Towill, Lynette Harris, Tony Berry, 4 John Cullen, William Seal and Terry Robinson confront issues 5 such as stages of emergence of long term relationships and the 6 importance of trust and commitment. The key to this section is 7 in recognizing the implications of changing from traditional 8 adversarial relationships to those of collaboration. Problems of 9 changing culture, practice and mindsets appear critical to busi- 40111 ness success. In this section all authors are actively involved in 1 research in their respective operational areas and are drawing 2 ideas from a whole range of industries, including food. 3 Part 3 is a group of diverse perspectives offered by 4 experts in their fields including, Nick Alexander, Kevin Nield, 5 David Barling, Tim Knowles, Herbert Kotzab, Rayka Presbury, 6 Matthew Gorton, Ference Guba, Michael Bourlakis, Sean Beer 7 and Steve Allen. This section is divided into three parts – 8 Internationalization, in both the hospitality and retail sectors, 49111 Contemporary Issues and Insights into the Future.

●●● xix Preface

1111 In the International section we note, with interest, the diverse 2 market penetration strategies of the retail and hospitality sectors 3 as they move towards international status. 4 In other instances authors have conflicting perspectives. For 5 example, in the Kotzab discussion on ECR (Efficient Consumer 6 Response) in Europe, he suggests that Category Management 7 has enhanced the grocer’s ability to meet consumer needs – 8 a distinct variance to Allen’s proposition that Category 9 Management and the de-listing process will, in effect, reduce the 1011 number of small and medium-sized suppliers, produce choice, 1 and thus negatively impact on the retailers’ ability to meet 2 customer needs. These highlight current debates such as the 3111 relative value of regional as against global commerce. The impli- 4 cations of the legislative process on the compatibility of food 5 safety policy in European hotels, and comparisons between ECR 6 in the US with the development of ECR in the EU and their 7 respective impact on the supply chains. 8 Finally, on a personal note, my co-editors and I would like to 9 acknowledge the contributions from all the authors, and proffer 20111 our thanks for both their enthusiastic support and their patience 1 on receipt of more feedback than anticipated. 2 Jane F. Eastham 3 Sheffield 2001 4 5 References 6 7 Harland C.M., Lamming R.C. and Cousins P.D (1999) Developing 8 the concept of supply strategy. International Journal of 9 Operations and Production Management, 19 (7), pp. 650–73. 30111 Lummas R.R. and Vokurka R.J. (1999) Defining supply chain 1 management: a historical perspective and practical guide. 2 International Management and Data Systems, 99 (1), pp. 11–17. 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● xx 1111 PART 2 ●●●● 1 3 4 5 6 The Supply Chain 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 CHAPTER 2 ●●●● 1 3 4 5 6 The catering and 7 8 9 1011 food retail 1 2 3111 4 industries: a 5 6 7 8 contextual insight 9 20111 1 2 Jane F. Eastham, Stephen D. Ball 3 and Liz Sharples 4 5 6 7 8 9 30111 1 Key objectives 2 3 • To define the catering and the food and drink retail indus- 4 tries 5 6 • To explain the blurring between the two industries 7 • To identify similarities and differences between the two 8 industries 9 40111 • To provide an overview of the size, scale, structures and 1 operating formats of the catering and the food and drink 2 retail industries 3 • To identify and discuss the key issues that have affected 4 the food and drinks supply chain related to the catering 5 and the food and drink retail industries 6 7 8 49111 Food Supply Chain Management

1111 Introduction 2 3 Put simply, consumers have two basic options when purchasing 4 and consuming food and drink. One is to eat and drink outside 5 the home in a hospitality operation. The other is to purchase 6 food and drink from food retailers, which is fresh or partially 7 prepared, for consumption in or away from the home, but 8 outside a hospitality operation. This basic distinction conceals 9 many exceptions such as: the purchase of ready meals from deli- 1011 catessens, takeaway meals from fish and chip shops, Chinese, 1 Indian or other takeaways, hot pies or filled sandwiches from a 2 baker’s shop or garage forecourt. The boundary between catering 3111 and food and drink retail is therefore fuzzy and the division 4 between the two industries is becoming increasingly blurred as 5 a result of technological developments and the activities of oper- 6 ators. These factors are explained further below. This chapter 7 takes the stance that because of this blurring, issues facing the 8 food supply chain of each of these industries, cannot be consid- 9 ered independently. This stance underpins the rationale for the 20111 consideration of these industries jointly throughout this book. 1 The purpose of this chapter is to provide the contextual back- 2 drop for the rest of the book. The UK scene is emphasized in 3 particular. However, given the global nature of both industries 4 reference will also be made to the international perspective. 5 6 Defining the catering and food and drink retail industries 7 8 Ideally in order to examine food and drink supply chain manage- 9 ment, in the context of the catering and food retail industries, 30111 the constituents and boundaries of each need first to be defined. 1 Unfortunately, this is less than straightforward, as there are 2 no single, universally accepted definitions or interpretations for 3 either of these industries. 4 Inconsistencies particularly lie in the classification of subsec- 5 tors and their constituents. Different sources such as government 6 agencies, market intelligence consultants and other experts use 7 different criteria. Jones (1996), for example, uses a sectoral clas- 8 sification for the foodservice/catering industry in order to focus 9 on the customer’s needs and how the industry responds opera- 40111 tionally to these needs. Market intelligence agencies reporting 1 on the retail sector, may variously classify according to store 2 size, customer usage, and ownership. This leads to inconsisten- 3 cies in data provided. 4 5 Retail defined 6 7 Market pressures and changing life styles have brought about 8 new formats. In the 1970s food retail establishments could be 49111 divided into multiples, co-operatives (Co-ops) and independents.

●●● 4 The catering and food retail industries: a contextual insight

1111 Changes in shopping patterns and preferred retail formats and 2 the emergent dominance of the major retailers in the market- 3 place, have resulted in the appearance of, on the one hand, new 4 retail formats e.g. convenience stores, and on the other, the diver- 5 sification of non-food retailers into the food retail sector. As 6 major retailers have moved into other retail sectors as a means 7 of increasing market share, other retail sectors such as petrol 8 stations and licence retailers, have adapted to supply the growing 9 convenience market. Food retail can be now classified according 1011 to usage. Shopper surveys (Mintel 1999a) demonstrate a clear 1 increase in secondary shopping activity. Whilst the main weekly 2 shop may still be conducted at an out of town or edge of town 3111 location, increasingly there is a demand for local en-route units. 4 Likewise, treats may be purchased from specialist producers or 5 vendors. At its simplest this means that we can identify three 6 venue types: major shopping venues, secondary shopping 7 venues or convenience, and specialist shops. Main weekly shops 8 tend to be carried out at multiple retailers, particularly the 9 Big Four, i.e. Sainsbury, Tesco, Asda and Safeway, although a 20111 smaller proportion of consumers utilize discounters, e.g. Netto. 1 Secondary shopping takes place at convenience retailers, which 2 are constituted of a wide range of formats including forecourts, 3 Co-ops, symbol groups and licensed retailers. 4 5 Catering defined 6 7 In contrast, the catering industry is simply considered to 8 cover all undertakings concerned with the provision of prepared 9 food and drink ready for consumption away from home. It 30111 also includes establishments that provide a take-away and/or 1 delivery service where the food and/or drink are prepared 2 within the establishment but consumed elsewhere. Yet, likewise, 3 convenience stores, major retailers and independent retailers 4 increasingly provide a similar service. 5 The industry can be characterised by its diversity comprising 6 many types of food and beverage outlets in a range of different 7 sectors. It is possible to distinguish the different types of outlets 8 in various ways. For instance, distinctions can be made according 9 to: size, core products (menu items sold), branded or unbranded. 40111 Catering can be also classified according to whether catering 1 is the main activity of the undertaking as, for example, in a 2 privately owned restaurant, and those where it is a secondary 3 activity as, for example is the case of catering in a school. 4 Traditionally catering activity has been divided into either that 5 associated with ‘profit’ markets or ‘cost’ markets. The former 6 includes such profit-orientated establishments as restaurants, 7 fast-food chain outlets, cafes/takeaways, pubs, leisure and travel 8 catering outlets while the latter includes catering outlets for busi- 49111 ness, education and health care. This system of classification may

●●● 5 Food Supply Chain Management

1111 have its shortcomings; recent developments have blurred the 2 division between profit- and cost-orientated establishments, for 3 example, some hospital catering is now carried out by profit 4 centred contract caterers. It is generally understood, however, 5 that in the main most establishments fall into one of these cate- 6 gories and it is this system that is used by most market research 7 organizations. 8 9 Separate or overlapping industries? 1011 1 The distinctions between catering and food and drink retailing 2 are becoming blurred for a variety of reasons. 3111 4 Changes in food processing and packaging (Lawson 1987) ●●● 5 6 Take sandwiches for example. The advent of vacuum packaging 7 has enabled these to be sold in food retail outlets as well as in 8 hospitality operations. Corporate high street retailers such as 9 Boots and Marks & Spencer have dominated the sandwich 20111 market. The purchase of commercially prepared meals for 1 consumption at home, or away from the home, which minimize 2 the need for preparation, are a key contributory factor towards 3 the blurring of catering and food and drink retailing. Technomic, 4 a USA consultancy firm, relates this blurring to the desire for 5 convenience (see Figure 1.1). 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 Figure 1.1 6 Blurring definitions – the 7 growth of ‘convenience’ 8 (Technomic 1997, cited in 49111 Haines and Turner, 1998)

●●● 6 The catering and food retail industries: a contextual insight

1111 The operator ●●● 2 3 Often organizations may be considered hospitality entities, e.g. 4 quick service restaurants or public houses but their operators 5 call themselves retailers. 6 7 The location ●●● 8 9 Some retailers are located adjacent to hospitality operations thus 1011 offering themselves as alternative sources of food for immediate 1 consumption. 2 3111 An overlap of interests ●●● 4 5 This has led to an increased investment by retail, hotel and leisure 6 groups in setting up their own foodservice operations either 7 independently or through agreements with established restau- 8 rant chains. Retailers have become increasingly aware that their 9 revenues can grow through foodservice as a result of retaining 20111 shoppers on site for longer and attracting more customers and 1 the relatively higher margins on foodservice products vis-à-vis 2 food retail items. Similarly, hotel and leisure groups have used 3 foodservice to extend their product mix for customer benefit and 4 enhance their overall margins. 5 6 Conglomerate activity ●●● 7 8 Certain companies have interests in both food/drink retailing 9 and catering. Whitbread plc, for example, operates, amongst 30111 others, First Quench, which is a prominent name in High Street 1 drinks retailing with retail brands such as Thresher, and restau- 2 rant brands such as Beefeater and Pizza Hut. 3 The diversification of retailers, leisure groups and others 4 into catering and the growth of home meal replacement has 5 contributed to the blurring and has led the Henley Centre to 6 state that ‘The dividing line between catering and food retailing 7 is getting thinner. How, for instance, should sandwich bars, home 8 delivery pizza and sandwich bars from convenience stores be 9 defined?’ (Haines and Turner 1998). 40111 1 Size, significance and growth of the UK catering industry 2 3 Catering, or what is increasingly being called foodservice, forms 4 a substantial part of the British hospitality industry and, as such, 5 it can be regarded as an industry in its own right. However, it 6 is important to note that independents continue to hold the 7 predominant market share – 66% of sales and 71% of outlets – 8 and are particularly prevalent in less central urban and rural 49111 locations (Eastham and Johnston 1998).

●●● 7 Food Supply Chain Management

1111 Today, the UK catering industry generates large revenues for 2 its providers and is a valuable contributor to government income, 3 economic growth, the balance of payments and employment. 4 The precise numbers employed in ‘catering’ occupations are 5 unknown but in 1998 of the 1.88 million total hospitality 6 employees, 1 263 000 were employed in specialist hospitality 7 businesses, i.e. hotels, restaurants, pubs, clubs and bars, contract 8 catering or were self-employed, while the remainder were 9 employed in hospitality services, e.g. health care and services 1011 (HtF, 1999). It is estimated that about 75% of hospitality 1 employees are employed in the provision of food and drink away 2 from home and that around 70% are part-time employees. 3111 In 1999, the UK catering industry grew compared with the 4 previous year and 1995 in terms of food sales, meals consumed 5 and food purchases, even though the total number of outlets 6 declined marginally (see Tables 1.1 and 1.2). The profit sector, 7 8 9 20111 1995 1998 1999 1 Outlets 301 619 297 872 296 541 2 Profit sector meals (m) 5351 5820 5853 3 Cost sector meals (m) 3132 3145 3123 4 Total meals (m) 8483 8965 8976 5 Food purchases (£bn) 8.3 8.7 8.7 6 Food sales (£bn) 21.2 22.5 22.6 7 Table 1.1 Source: Foodservice Intelligence 8 UK catering industry, NB Prices are expressed in constant 1999 prices 9 1995, 1998 and 1999 30111 1 2 Hotels 60 949 3 Restaurants 15 954 4 Fast food 2221 5 Cafes and takeaways 29 270 6 Pubs 54 723 7 Travel 1359 8 Leisure 48 523 9 Subtotal for profit sector 212 999 40111 Business and industry 20 683 1 Health care 25 075 2 Education 34 429 3 Ministry of Defence 3355 4 5 Subtotal for cost sector 83 543 6 Overall total 296 541 7 Table 1.2 Source: Foodservice Intelligence 8 Number of outlets in the 49111 profit and cost sectors, 1999

●●● 8 The catering and food retail industries: a contextual insight

1111 which represented almost three-quarters of all catering outlets 2 in 1999, accounted for this decline, with cafes and takeaways 3 and public houses being mainly responsible. Some profit sectors 4 did, however, increase their numbers of outlets, most notably 5 the fast-food, leisure catering sectors and hotels (BHA 2000). In 6 the cost sector the number of health care catering outlets espe- 7 cially increased, while outlets in business and industry decreased. 8 Table 1.1 shows the outlet numbers in 1999. Over 8900 million 9 meals were served from UK catering outlets in 1999, with the 1011 majority from the profit sector. This showed an increase from 1 1995. While those served from profit sector outlets increased, 2 those from the cost sector declined slightly. 3111 4 5 6 In 1999 the value of food purchases in the profit sector 7 accounted for over 82% of all food purchases within the 8 catering industry (see Table 1.3). From 1995 to 1999, at 9 constant prices, the value of purchases in the profit sector 20111 increased by nearly 7% while those in the cost sector 1 declined by 5%. In 1999, food sales in the profit sector 2 accounted for 93% of total food sales. Yet in comparison to 3 the retail sector the range of products purchased by each 4 operating unit is relatively small. A pizzeria outlet may 5 stock a total of 60 SKUs (stock keeping units) as opposed 6 to 25 000 SKUs found within a major supermarket chain, 7 600–800 SKUs held by discount stores, and 100–500 SKUs 8 held by specialist retailers. 9 30111 1 2 1995 1999 3 Hotels 1579 1667 4 Restaurants 1081 1137 5 Fast food 606 684 6 7 Cafes and take-aways 1018 959 8 Pubs 1580 1878 9 Travel 319 357 40111 Leisure 516 574 1 Business and industry 527 513 2 Health care 525 500 Education 517 469 3 Ministry of Defence 86 84 4 5 Total 8354 8741 6 7 Table 1.3 Prices are expressed in constant 1999 prices. 8 Value of food purchases Source: Foodservice Intelligence 49111 (£m), 1995 and 1999

●●● 9 Food Supply Chain Management

1111 Three hundred and forty-seven companies with branded food- 2 service units have been identified by the Hotel and Catering 3 Research Centre (HCRC) (2000). In 1999 they operated 713 brands 4 with 22 859 units. Table 1.4 shows that Scottish and Newcastle 5 Retail is the leading operator with seven other brewers/pub retail- 6 ers. The 20 leading UK foodservice operators in 1999 represented 7 nearly 62% of all the branded foodservice units. However, the 8 industry is fragmented and no operator dominates. Table 1.5 shows 9 that the three largest UK foodservice brands are pub retailers. 1011 1 Size, significance and growth of the UK retail sector 2 3111 The grocery retail sector is a significant area of economic activity 4 in the UK. It employs more than 950 000 people and it has a 5 current value of £9.6 billion (IGD 2000). The UK grocery sector 6 is the third largest in the European Union. However, the 7 projected market size for the year 2005 has been given (IGD 8 2000) at £112 billion, representing a continuation of the slow- 9 down in market growth that began in the 1990s. 20111 1 Retail formats 2 3 Supermarkets ●●● 4 During the second half of the twentieth century, UK food retail 5 formats have changed significantly. The supermarket, which 6 first emerged in the USA in 1930, arrived in Europe after the 7 Second World War, and now has become the major form of food 8 retailing across the UK and Northern Europe. In the UK the top 9 four food retailers hold 45% of the market share (see details in 30111 Tables 1.6 and 1.7). The supermarket, in its current form, carries 1 20 000–25 000 SKUs, half of which are own brand, produced by 2 the manufacturers to retailer specifications. 3 From the 1980s, larger stores were developed in areas of town, 4 or on the edge of towns, and are linked to major road infrastruc- 5 tures. This promoted access and encouraged still further the 6 trend of one-stop, weekly shopping. During this period retailers 7 sought to achieve greater efficiencies through retailer controlled 8 regional distribution centres (RDCs). RDCs receive, and consoli- 9 date produce from a whole range of suppliers, before delivery to 40111 stores. Although many of the distribution centres are composite 1 (Marchant 1999), i.e. receive all ranges of produce – ambient, 2 chilled, frozen etc. – this is not always the case. In addition, there 3 are variations relating the degree of contracting out. This appears 4 to vary according to the scale of investment. ‘Smaller companies, 5 with one or two depots, tended to run their own operation 6 whereas the majors had a mix of in-house and contracting out 7 . . .’ (Marchant 1999). Centralization has the additional advantage 8 of increasing their purchasing power and changing the power 49111 balance in the supply chain in their favour (Harvey 2000).

●●● 10 The catering and food retail industries: a contextual insight

1111 Operator Units in % mkt 2 1999 share 3 4 Scottish and Newcastle Retail 1978 8.2 5 Whitbread Inns 1832 7.6 6 Allied Domecq Restaurants & Bars 1534 6.4 Greggs plc 1057 4.4 7 McDonald’s Restaurants 851 3.5 8 Wolverhampton and Dudley Brewery plc 825 3.4 9 Whitbread Restaurants 769 3.2 1011 Greenalls Pub Division 656 2.7 1 Bass Leisure Retail 615 2.6 2 Allied Domecq Inns 598 2.5 3111 Granada Little Chef and Travelodge 470 2.0 4 Burger King (UK) 460 1.9 5 Tricon International 400 1.7 6 Pizza Hut (UK) 389 1.6 7 Greene King plc 355 1.5 City Centre Restaurants 303 1.0 8 JD Wetherspoon 295 1.2 9 Rank Hovis 281 1.2 20111 Wimpy International Ltd 270 1.1 1 Table 1.4 Tesco 232 1.0 2 The leading UK foodservice 3 operators by number of Source: HCRC 1999 4 units, 1999 5 6 Brand units in % mkt 7 1999 share 8 9 Scottish and Newcastle Mgd Pub Estate 1331 5.5 30111 Allied Domecq Mgd Pub Estate 1137 4.7 Whitbread Inns Mgd Pub Estate 1077 4.5 1 McDonald’s 850 3.5 2 Greenalls Mgd Pub Estate 594 2.5 3 Greggs 536 2.2 4 Wolverhampton & Dudley Mgd Pub Estate 528 2.2 5 Burger King 460 1.9 6 KFC 400 1.7 7 Little Chef 400 1.7 8 Brewer’s Fayre 394 1.6 9 Pizza Hut 389 1.6 40111 Big Steak 366 1.5 1 Strollers 300 1.3 Wetherspoon’s 295 1.2 2 Wimpy 270 1.1 3 Three Cooks 268 1.1 4 Beefeater 253 1.1 5 Mr Q’s 247 1.0 6 Tesco Coffee Shops 232 1.0 7 Table 1.5 8 The leading UK foodservice Source: HCRC 1999 49111 brands by units, 1999

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1111 Retail format Sales Number of Major players 2 (£) outlets 3 4 Main weekly shop a 5 Hypermarkets, superstores, 69.8bn 4078 Tesco, Asda, Sainsbury, Safeway, 6 supermarkets Iceland, Morrisons, M&S, Somerfield, Waitrose 7 Discount stores 815m 1373 Aldi, Netto, Lidl, Kwiksave 8 9 Secondary shopping 1011 Convenience stores 19.2bn 56 473 1 Petrol station forecourts 3168m 10 061 Esso, Elf, BP, Texacob 2 Convenience multiples 2171 2715 Alldays, T&S stores, one-stop 3111 community stores 4 Co-ops 972m 1236 (48 groups) CWS, CRTG, CRS (Co-operative) 5 United Northwest 6 Symbol groups 4000m 6961 Spar, Londis, Costcutter 7 Independents – non-affiliated 8861m 35 500 (63%) First Quench, Paris, Unwins licensed retailers 8 9 aIGD 2000 20111 bSome of these are joint ventures 1 Source: Extracted from Beard et al. 1999; IGD 2000 2 3 4 Table 1.6 Retail formats 5 6 Main players £ billion Market Number 7 (1998/99) share of stores 8 1998 1/1/99 9 Tescoa 15.835 15.6 593 30111 Asdaa 8.178 8.7 223 1 Sainsburya 12.100 12.6 410 2 Safewaysa 7.511 7.7 471 3 Somerfield/KwikSave 3.8 + 3.4 1421 4 Morrisons 2.552 2.6 95 5 Iceland 1.8 755 6 Marks & Spencer 3 170 3.1 294 7 Waitrose 1.638 1.9 117 Total 67 bn 61.2% 8 9 aTesco, Asda, Sainsbury and Safeway hold 45% (Mintel 2000). 40111 Source: Data are extracted from two key sources: Mintel (2000) and 1 Table 1.7 Beard et al. (1999). Discrepancies in the figures are due to the times at 2 Breakdown of major players in which company reports are published 3 the main weekly shop sectors 4 5 ●●● 6 Discount stores 7 Discount stores arrived in the UK in 1959. Kwiksave offered a 8 product range of around 800 items at discounted prices. Kwiksave 49111 has subsequently extended its product range to 3000 lines, but

●●● 12 The catering and food retail industries: a contextual insight

1111 there has been a new influx of ‘hard’ discount stores, which began 2 in 1990 when Aldi, a German discount store, opened in the UK, 3 closely followed by Netto and Lidl. These offer a limited range of 4 600–800 product lines. Whilst Aldi represent 30% of the market in 5 Germany, they have proved less successful in the UK. 6 7 Convenience sector ●●● 8 9 Whilst convenience stores remain relatively new in the UK, the 1011 format is gradually replacing a whole series of store formats. 1 Stores which have previously traded as small grocers (i.e. sym- 2 bols and Co-ops), CTNs (confectioners, tobacconists and news- 3111 agents), petrol forecourt shops and off licences, have broadened 4 their product range as a means of replacing turnover lost to the 5 multiples. The format of convenience stores looks to continue 6 changing. Bread and milk are currently the most frequently pur- 7 chased items from convenience stores (Mintel 1999b). Changes in 8 demographics and the increases in single person households, 9 who have less need for superstore trolley shopping (Mintel 1999b) 20111 is driving convenience stores more towards ready meals and meal 1 solutions, e.g. Spar (Beard et al. 1999). 2 3 New formats ●●● 4 5 Farmers’ markets 6 In response to the continued decline in income, due to the 7 changes in the EU’s Common Agricultural Policy, the high rate 8 of the pound sterling, increases in imports and the purchasing 9 decisions of large multiples and manufacturers (Stewart 1999), 30111 farmers have sought an alternative route to the consumer. Farm 1 shops have long been evident within the UK countryside, 2 however outlets are dispersed and are not easily accessible 3 (Lohmann and Foster 1997). 4 The first UK farmers’ market opened in Bath in 1997. In 1999 5 there were 36 farmers’ markets being held regularly across the 6 UK (Stewart 1999) and at the time of writing there are over 200 7 (MAFF 2000). Farmers have been reported to say that the devel- 8 opment of farmers’ markets not only enables them to retain a 9 greater proportion of added value but also offers consumers 40111 greater certainty as to the origins of the produce purchased 1 (Stewart 1999). This is increasingly important in days where 2 consumer sensibilities are very much heightened as the result of 3 scares such as E. coli, BSE and GM foods. 4 5 Home shopping – e-commerce and e-markets 6 7 The emergence of home delivery or more precisely home shop- 8 ping is a recent ‘grocery’ retail stratagem. In many respects this 49111 is not a new idea. Grocers in local communities traditionally

●●● 13 Food Supply Chain Management

1111 offered consumers a delivery service. Brown and white goods 2 retailers such as Comet, Currys, MFI offer a free or minimal 3 charge delivery service to all consumers. Furthermore, organi- 4 zations such as Grattans and Empire (catalogue retailers) offer 5 home delivery to all customers. 6 With the advent of the Internet, home delivery has become an 7 alternative marketplace to a whole range of retail formats. The 8 Internet has been used by small bakers such as ‘Bothams’ at 9 Whitby to extend both area and times of sales outside their phys- 1011 ical locational constraints. The small convenience store chain T&S 1 have recently linked up with Littlewoods to offer a home delivery 2 service. The big four – Asda, Sainsbury, Tesco and Safeway – 3111 have all invested in this market. 4 However, not all systems are based on the Internet. Asda, 5 Iceland and Safeway are limited to phone/fax ordering. There 6 are other restrictions such as minimum order levels and areas 7 of delivery, e.g. Asda restrict delivery to the London area only 8 for a minimum order of £50 (Anon 1999). Whilst there is some 9 dispute as to the long-term value of home shopping (Terbeek 20111 1996; Morganosky and Cude 2000; Småros and Holström 2000), 1 many appear to consider that there is a strong likelihood that 2 the trends towards markets found in the US market will be 3 shortly reflected within the UK (Pratt, 2000). 4 5 Required supply procedures of the grocery retail and 6 catering sector 7 8 In an earlier section we explored the breakdown of sharp distinc- 9 tions between the nature of the product and service offered by 30111 the retail and catering sectors, a change primarily instigated 1 by the diversification strategies employed by the food retailers, 2 competing in a mature market. 3 When comparing the two industries, however, it is evident 4 that whilst there is less differentiation between the retail 5 and catering sectors on the demand side, there are distinctly 6 different supply structures and conditions of supply developing. 7 Traditionally, within the two sectors there were: 8 9 a. strong similarities in sources of supply 40111 b. similar sourcing strategies 1 2 c. similar procurement procedures. 3 4 Food traditionally passed through the same intermediaries of 5 farmers, manufacturers and/or wholesalers who delivered 6 locally to the food outlets or operated as ‘cash and carrys’. 7 Multiples retailers, including to some extent symbol groups and 8 Co-ops, have by-passed these supply routes and operate either 49111 partially, or totally, their own logistics systems.

●●● 14 The catering and food retail industries: a contextual insight

1111 Similarly, centralized purchasing departments have emerged 2 within the catering sector. Organizations such as Granada 3 employ the distribution and stockist facilities of catering supply 4 companies, e.g. 3663 (see Chapter 3) but, as yet, have not moved 5 to the contracted or in-house distribution systems favoured 6 by the retailer. Single-branded catering operations such as 7 McDonald’s and Dominos (see Towill, Chapter 8) have, however, 8 developed central distribution businesses. This suggests that 9 organizations feel that in circumstances, where they are oper- 1011 ating multiple brands, savings are not necessarily found through 1 operating centralized contracted/inhouse distribution systems. 2 An exception can be found in the Whitbread in-house system, 3111 a system that reputedly could restrict the flexibility of sourcing, 4 required for a multi-product, multi-brand operation, particularly 5 as regards new brand development. In essence, irrespective of 6 size, the diversity of ‘Branded’ establishments and the large 7 number of widely dispersed catering outlets operated by any 8 one organization, have resulted in a continued reliance on the 9 wholesaling sector. 20111 However there is a more recent supply initiative, the devel- 1 opment of which could be interesting to observe. Recent reports 2 in trade magazines (Carmichael 2000) have indicated that home 3 delivery services initiated by retailers to serve consumer markets 4 have now been opened up to supply the catering sector. This 5 builds upon an existing trend, where small-scale catering orga- 6 nizations find considerable savings (e.g. time and money) by 7 sourcing through supermarkets rather than from traditional 8 catering sources of supply. 9 30111 Own labels and ranges of product formula 1 2 The manufacture of own label products, and organizational 3 specific product formula, is generic across retail, catering supply 4 companies, wholesalers and catering organizations. However, 5 manufacturers find that product sizes, and the requisite product 6 formulae, vary across sectors (Eastham 2000). A multi-brand 7 catering organization may require a greater range of formula 8 and packaging than its retail equivalent; each formula and pack- 9 aging being integral to the specific brand operated. The top three 40111 UK catering operators have 46 fascias/brands across 10 000 1 outlets, an average of 200 outlets (Backman 2000) per fascia, each 2 potentially requiring distinctive formula. 3 4 Price negotiation 5 6 Opportunities for price negotiation with independent operators, 7 either retail or catering, are limited. Much is dependent on 8 volume sold and the promotional activities of the wholesale 49111 sector (Eastham, 2000). Multiple retailers, wholesaler/catering

●●● 15 Food Supply Chain Management

1111 supply companies and multiple catering organizations negotiate 2 through their central purchasing department with manufac- 3 turers, growers and importers on price, quality and volume. 4 Discounts are obtained on volume, and described as ‘over rider 5 discounts’ reimbursed to head office. 6 Contracts with multiple caterers, e.g. Granada, are more 7 complicated. Caterers will negotiate with manufacturers, price 8 and quantities for products, but will be supplied through the 9 catering supply company and/or wholesaler, usually on a cost- 1011 plus basis. This means that the initial price paid by the caterer 1 will be the same as the price paid normally by the catering 2 supply company. The manufacturer will refund the difference 3111 between the initial price and the negotiated price to the caterer 4 subsequently, this is known as a ‘confidential rebate’. 5 6 Supply chain costs and technological systems 7 8 Retail ●●● 9 20111 • In the 1980s improvements in the distribution systems within 1 retail in the 1980s brought about large efficiency gains to this 2 sector (Marchant 1999). 3 4 • In the 1990s incremental reductions to the cost of supplying 5 food were also generated through the development of 6 technological systems such as EPoS, EDI, EFTPoS, inventory 7 management schemes designed to manage stock from regional 8 distribution centres (RDCs) more effectively. 9 • Automatic ordering systems such as sales based order (SBO), 30111 SABRE and SM111 are now prevalent. Tesco orders 97% of 1 lines through SBO (IGD 1998). 2 3 • Self-scanning systems also appeared in the multiple sector in 4 the 1990s. 5 • The penetration of EPoS, EDI to the independent and conve- 6 nience retail sectors remains marginal, recent figures (IGD 7 2000) indicate that only 46% of symbol group stores have 8 EPoS. Wholesalers and buying groups are starting to promote 9 such systems, offering funding to members (e.g. Londis, 40111 Bestway) to install equipment. 1 2 • Co-ops have introduced technology such as EPoS and EFTPoS 3 more rapidly. 4 • Late 1990s–2000 category management and ECR are becoming 5 standard within the multiple retail sectors. This involves greater 6 sharing of information between retailer and manufacturer. 7 8 • The twenty-first century – the next stage will be e-markets 49111 and e-commerce (Heathcote 2000).

●●● 16 The catering and food retail industries: a contextual insight

1111 Catering ●●● 2 3 • EPoS is now prevalent within the hospitality sector. 4 • EFTPoS is emerging, particularly within pub chains and 5 restaurant sectors. 6 7 • Technology remains little advanced with the exception of large 8 operators, there is considerable resistance to EDI, sales based 9 ordering systems. Primary reasons for this relate to the struc- 1011 ture of the catering sector. The sector is still dominated by 1 independents, for which the cost of EDI, EPoS/EFTPoS is 2 prohibitive. 3111 • Procurement procedures in large catering organizations are 4 becoming more advanced but still lag behind the retail sector. 5 6 • EFR (Efficient Foodservice Response), launched in the USA in 7 1994, is being piloted in the UK supported by key players in 8 the manufacturing, catering supply and catering sectors. 9 • Contract caterers have tended to lead the way, installing 20111 inventory systems as early as the 1970/80s. 1 2 Further factors 3 4 Catering is seen to be a far more complex market than its retail 5 counterpart. Caterers are seen by their suppliers to be more cost 6 sensitive (Eastham 2000). Supply volumes are significantly lower, 7 outlets dispersed, forecasting techniques particularly underde- 8 veloped, formula range greater, and orders are predominantly 9 made by telephone. Catering, by its nature, takes place in small 30111 units, the customer cannot be herded into a parallel consumer 1 experience as in retail (with certain mass consumer exceptions). 2 Even so, it would be incorrect to suggest that the supply require- 3 ments required by each sub-sector of the catering industry 4 are identical. Independents and ‘undisciplined multiples’ (i.e. 5 smaller hotel chains) (Haines and Turner 1998) require a wide 6 range of produce, whilst ‘disciplined’ (i.e. larger hotels, pub and 7 pub restaurant chains) require a more limited static range of 8 produce. However, they do require suppliers to offer some flex- 9 ibility in the range offered and can negotiate flexible drop sizes. 40111 The key concerns of the cost sector are ‘ price’ and more recently 1 with changes in legislation, traceability. 2 3 Conclusion 4 5 As a backdrop to the text this chapter provides an insight into 6 the issues of supplying both the retail and catering industries. 7 The structure of each industry is defined and explored along 8 with their respective issues for supply. As discussed previously, 49111 the level of differentiation between the two industries is more

●●● 17 Food Supply Chain Management

1111 marked at the supply side than at the demand side, where 2 distinct blurring is taking place between the catering and retail 3 sectors. 4 There is some question as to whether this state of affairs will 5 continue given the growth of multiples within the catering sector. 6 The development of centralized distribution systems operated 7 in the food retail sector may yet emerge within the catering 8 sector, although the development of catering supply companies 9 suggests that this is problematic. The adoption of technological 1011 systems such as EPoS, EFTPoS and sales based order systems 1 has been relatively slow. Much of this would appear to be due 2 to the continued predominance of independents within the 3111 catering sector. With the growth of multiple catering organiza- 4 tions within the catering industry, the low level of technology 5 may be redressed. 6 Therefore, whilst it is important to recognize that the boundary 7 between catering and food retail is distinctly fuzzy in relation 8 to the product they serve and technological developments, they 9 do remain distinct industries. 20111 1 References 2 3 Anon (1999) Who offers what? A guide to home shopping. The 4 Grocer 11 September, p. 19. 5 Backman P. (2000) ‘The next decade for food service’, IGD 6 Conference – The Future of Food Service, 19 April 2000. 7 Beard J., Gordon D., Spillow L. et al. (1999) Grocery retailing, 8 The Market Review (IGD), pp. 16, 18, 36 (section 1 plus section 9 3.6 p. 171). 30111 BHA (2000) British Hospitality: Trends and Statistics. London: 1 British Hospitality Association. 2 Carmichael M. (2000) Catering for all tastes, The Grocer, 18 3 November, pp. 40–2. 4 Eastham J.F. (2000) Unpublished research on the perceptions of 5 suppliers of the operating constraints regarding supply for 6 the retail and catering industries. 7 Eastham J.F. and Johnston S. (1998) ‘The independent catering 8 market within Yorkshire and the Humber’, Report 2 – Fresh 9 Produce Wholesale and Independent Catering, ISCAN July 40111 1998, unpublished. 1 Haines D. and Turner D. (1998) Catering 1998, Surveying the 2 Supply Chain, Institute of Grocery Distribution. 3 Harvey M. (2000) Innovation and competition in UK supermar- 4 kets. Supply Chain Management: an International Journal, (1), 5 pp. 15–21. 6 HCRC (2000) The UK Food Service Brands Directory. Huddersfield: 7 Hotel and Catering Research Centre. 8 Heathcote P. (2000) ‘Responding to the challenge of e-business’, 49111 IGD Conference – The Future of Food Service, 19 April 2000.

●●● 18 The catering and food retail industries: a contextual insight

1111 HtF (1999) Key Facts and Figures. London: Hospitality Training 2 Foundation. 3 IGD (1998) Grocery Wholesaling. Institute of Grocery Distribution. 4 IGD (2000) Grocery Retailing. Institute of Grocery Distribution. 5 Jones P. (1996) Introduction to Hospitality Operations. London, 6 Cassell, p. 117. 7 Lawson F. (1987) Restaurants, Clubs and Bars. London: 8 Architectural Press. 9 Lohmann U. and Foster C. (1997). From ‘niche’ to ‘mainstream’ 1011 – strategies for marketing organic food in Germany and the 1 UK. British Food Journal, 99 (8), pp. 275–82. 2 MAFF (2000) Farmers’ markets – good for British agriculture and 3111 the food chain. News Release, 25 May; www.Maff.gov.uk/inf/ 4 newrel/2000/000525b.htm. 5 Marchant C. (1999) Retail Logistics. IGD Business Publications, 6 pp. 3–6. 7 Mintel (1999a) Consumer shopping. Food Retailing, 23 June 8 (Mintel International). 9 Mintel (1999b) The convenience shopper. Convenience Retailing, 20111 April (Mintel International) 1 Mintel (2000) Food Retailing, August (Mintel International) 2 Morganosky M.A. and Cude B.J. (2000) Consumer response to 3 online grocery shopping. International Journal of Retail and 4 Distribution Management, 28 (1), pp. 17–26. 5 Pratt R. (2000) ‘The implications of the information revolution’, 6 IGD Conference – The Future of Food Service, 19 May. 7 Småros J. and Holmström J. (2000) Viewpoint: reaching the 8 consumer through e-grocery VMI, International Journal of Retail 9 and Distribution Management, 28 (2), pp. 51–61. 30111 Stewart J. (1999) Gamekeepers turn poachers, The Grocer, 15 May, 1 p. 44. 2 Terbeek G.A. (1996) 1996 and beyond: the value of value. 3 Progressive Grocer, December, pp. 91–5. 4 5 Activities 6 7 1. Using appropriate information, identify and define all sub- 8 sectors of the retail and catering sectors illustrated within this 9 chapter. 40111 2. For a defined geographical area, establish the number and 1 type of catering, and food and drink, operations. Try to classify 2 these. What are the issues in tackling this activity? 3 4 3. Visit two to three different local supermarkets. Observe 5 whether they have any catering operations. For those that do 6 identify specific characteristics of both their retail and catering 7 operations. Do they have anything in common and if so what? 8 Should each be treated separately? Are they clearly members 49111 of different industries?

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1111 4. For each of the following: 2 • an independent catering operation 3 4 • a branded catering operation 5 • an independent food and drink retail operation 6 7 • a branded food and drink retail operation 8 attempt to discover: the annual turnover of each, the number 9 of suppliers each has and the criteria for selecting these sup- 1011 pliers. Are there any noticeable commonalties or differences? 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 20 1111 CHAPTER 2 ●●●● 2 3 4 5 6 Food and society 7 8 9 1011 Sean Beer 1 2 3111 4 5 6 7 8 Key objectives 9 20111 The objectives of this chapter are for readers: 1 • To understand how our food supply chain has developed 2 3 • To develop a model that will help to put food into context 4 within any given situation 5 • To develop an appreciation of some of the dynamics of 6 our food supply chain and the influence of those who sell 7 food and those who consume it 8 9 30111 1 Introduction 2 3 Food is central to life. If you remove everything that plays a 4 part in sustaining life, the last things that you consider are 5 air, food and water. Therefore food, as fuel, underpins all that 6 we do. Above and beyond this biological need, food also 7 permeates all aspects of our culture and society; these social 8 patterns of food production and consumption are sometimes 9 known as the ‘social appetite’ (Germov and Williams 1999). 40111 Our relationships revolve around food. Our pursuit of a mate, 1 the basis of family life (although some would argue that family 2 life and the role of food within it are both in decline) and our 3 business deals, all involve it. The study of food is in itself a 4 truly vast subject. This chapter aims to help readers under- 5 stand how our food supply chain has developed. It will go 6 on to develop a model that will help them put food into 7 context within any given situation. And finally, it will help 8 the reader develop an appreciation of some of the dynamics 49111 Food Supply Chain Management

1111 of our food supply chain and the influence of those that sell 2 food and those that consume it. It is not meant to be a fully 3 comprehensive overview of food and culture but an entrée to 4 aspects of food and how it affects our lives. 5 Given the vastness of food as a subject area, it is unlikely that 6 one single academic approach can ever do it justice. What is 7 needed is a truly interdisciplinary holistic approach. Consider, 8 for example, the current discussions surrounding the technology 9 of genetic modification. Despite all of the media coverage and 1011 fierce debate, how much do we really know and understand 1 about genetic modification (GM)? The question is do we under- 2 stand and trust the science and do we trust those that control 3111 it? What will be the effect of this technology on society? One 4 way or the other many consider that the revolution in biotech- 5 nology will overshadow that in Information Technology. And 6 how do we examine it? Traditional academic approaches are 7 reductionist, that is, they try to break down everything into small 8 subjects. What we need are interdisciplinary ways of working, 9 looking at systems from a new perspective. There are not many 20111 people who think in this way. 1 2 What is food: modern and post-modern definitions of food quality 3 4 Genetic modification asks fundamental questions of us in terms 5 of what food is, and what good food is. A food is generally 6 defined as a substance taken into the body to maintain life. Yet 7 it is, of course, much more than this. Increasingly society is 8 obsessed with quality; people talk about good quality and bad 9 quality but the reality is that quality is all about a given specifi- 30111 cation at a given price. Yet what goes into that specification? In 1 many ways the actual concept of food quality is still developing. 2 There have been trade classifications for a long time, but these 3 have often been very limited and addressed only specific dimen- 4 sions of the quality concept. A new concept of food quality is 5 now emerging. For sake of argument we could call this a post- 6 modern view of food quality. (For early reviews see Kilkenny 7 1994; Lowman and McClelland 1994; Ritchie and Leat 1994.) 8 The traditional view of food quality was based on appearance, 9 technical quality and biological quality (see Wood et al. 1994 40111 amongst others.) Thus, you expected your food to look good, to 1 taste good and to do you good, or, at least, no direct harm. 2 Recently this definition has extended to look at factors relating 3 to cultural, environmental and ethical values. Cannon (1990) 4 highlights biological, sensual, nutritional and environmental 5 factors. Woodward et al. (1990) categorize the major components 6 of food quality as being authentic, sensual, biological, nutritional 7 and ethical (see also Foster and Macrae, 1992). All these must 8 exist within a social, political and economic environment, and 49111 reflect society’s increasing interest in the environment, animal

●●● 22 Food and society

1111 welfare and culture. This change in the concept of food quality 2 is illustrated in Figure 2.1 taken from Beer (1998). 3 It is not easy to merge social, psychological, environmental 4 and ethical considerations into the quality framework. When 5 does the food stop and when does the eating experience begin? 6 Many of these more qualitative traits give rise to a blurring 7 of quality definitions. However, it is against these criteria that 8 food quality must ‘supposedly’ now be measured. The word 9 ‘supposedly’ is used because just as the term ‘post-modern’ is 1011 an ‘educated middle class’ expression that most people do not 1 know the meaning of, so many of the new ideas of food quality 2 are equally foreign. Social and psychological factors are prob- 3111 ably quite strong. Thus, we are what we eat, but also, we eat 4 what we are. In other words, our patterns of consumption reflect 5 who we are, and who we want to be. Consuming a pie at a foot- 6 ball match maybe what you have always done or it may be a 7 way of accessing the trendy football culture that is a new middle- 8 class aspiration. The same applies to the restaurant with the £100 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 Figure 2.1 8 The changing view of food 49111 quality (Beer 1998)

●●● 23 Food Supply Chain Management

1111 per person dinner price tag: is this good food in a fantastic setting 2 or conspicuous consumption and social climbing? 3 Ethical and environmental considerations are also things to 4 think about. In the UK, there is a very vocal consumer lobby 5 keen on animal welfare and the environment, that petitions for 6 restrictive laws and legislation. But, in general, people go out 7 and buy the cheapest food they can, often from abroad, thereby 8 exporting the ethical problems along with rural jobs. This at a 9 time when, in real terms, food has seldom, if ever, been so 1011 cheap. If consumers really are so ethical why do they consume 1 so little organic food, free range eggs and food from fair trade 2 labels? When it comes down to it, a possible 10% of people 3111 will pay an extra 10% for some additional social/psychological, 4 environmental or ethical dimension. (Good reviews of food 5 and ethics can be found by Adams et al. 1991; Mepham 1996 6 and Strong 1996.) 7 So where does all this this leave us? Food is a vast subject 8 that needs an interdisciplinary approach if we are to get to grips 9 with it. To give us a start there is quite a useful analytical frame- 20111 work in terms of the commonly used PESTE analysis. This views 1 things from a Political, Economic, Social, Technological and 2 Environmental series of perspectives, and will allow us to look 3 again at food. But first the chapter examines how the food supply 4 chain has developed, the relationship between food and the 5 economy and the globalization of the food economy. 6 7 Evolution of the food supply chain 8 9 The food supply chain is not a static entity and has evolved over 30111 time. It has developed from the hunter–gatherers through prim- 1 itive agriculture to developed agricultural economies. Gradually, 2 agricultural revolutions took place with the evolution of scien- 3 tific agriculture, then industrial agriculture, and now towards 4 genetic agriculture. As this process evolved, so more interme- 5 diaries stepped into the chain between producer and consumer. 6 Figure 2.2 illustrates this. 7 As mentioned before, initially there was a direct link between 8 food producer and consumer (Time period 1 in Figure 2.2). Here, 9 those who grew the food, then sold it direct on a local basis. 40111 Subsequently, with increasing urbanization (period 2) small 1 retailers developed in the towns. Some of these then developed 2 into large retailers and a dual track system was formed (period 3 3). With increasing concentration, this is increasingly favouring 4 the large retailers. Vertical and horizontal integration followed. 5 Vertical integration where organizations along the chain join 6 together to facilitate supply. Retailers developing supplier 7 contracts would be an example of this. Horizontal integration 8 involves organizations at a given level getting together. Trade 49111 organizations would be an example of this. (Obviously this is

●●● 24 Food and society

1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 Figure 2.2 8 Various stages in the 9 evolution of the food 20111 supply chain 1 2 3 looked at further in the book, but also see Bawcutt 1997, Dussage 4 and Garette 1999, Hughes 1994, King and Phumpiu 1996, 5 O’Keeffe 1997, Spedding 1989 and Tarrant 1996.) 6 Farmers in the UK are increasingly going back to the first 7 model and supplying the consumer direct. Farmers’ markets are 8 an example of this. Indeed it has been estimated that about 200 9 farmers’ markets are now generating an extra £65 million in sales 30111 for the agricultural industry (Brown 2000.) The Internet may also 1 provide opportunities for consumers to purchase direct, with 2 better communication about the producer, information on the 3 product and product authenticity as key elements of added value. 4 This is fuelled increasingly by perceived inequalities of return 5 in food supply chains (see Beer 1999). 6 7 Relationship between food and the economy 8 9 The food industry is a major economic player. In the UK food 40111 makes a significant contribution to the Gross National Product 1 directly, and also indirectly, through the service industries. 2 Estimates of output are very variable and tend to be dated; 3 however, in 1996 home farm output was estimated at about £8 4 billion (MAFF 1997). Food imports (raw and processed) for 1996 5 were estimated at £14.8 billion (Howitt 1998a). At the same time, 6 output from the catering industry was estimated at £40.7 billion 7 (Howitt 1998b) and the retail industry at £76.3 billion (Howitt 8 1998a). On one hand this represents a significant industry. 49111 Globally, this situation needs to be set in context. Wal-Mart, the

●●● 25 Food Supply Chain Management

1111 United States based retailer, had sales in the accounting year 2 ending 31 January 1998 of US$ 118 billion (Wal-Mart 1998), some 3 £82 billion at current exchange rates – a global phenomenon in 4 a truly global industry. 5 The economic relationship between food cost and the food 6 consumer is a complex one. First, between the farm gate and the 7 consumer there is often a long chain, in which value is added 8 and profits taken. The relative returns are difficult to assess. 9 There are suspicions that retailers may be making excessive 1011 profits. This has given rise to a Competition Commission inquiry 1 into food retailing. The reality is a complex situation, and needs 2 careful analysis. However figures like those in Table 2.1 have 3111 fuelled the debate and more work, openness and honesty is 4 required in this area. 5 The other important point to bear in mind is that consumers, 6 who tend to look upon food as fuel, pursue cheap food. This has 7 an on-going effect within the economy, in that food costs increas- 8 ingly less in real terms. The percentage of average ‘total income’ 9 spent across all households on food in the UK has declined from 20111 33% in 1957 to 13.75% in 1986 to 10.6% in 1997 (Holroyd 1997.) 1 This is an example of Engel’s law (see Burk 1962, Tangermann 2 1986). Engel’s law indicates that with increased personal income, 3 the proportion of income spent on food declines. 4 It is possible that food expenditure will increase in the future 5 but food share of total expenditure will decline (Cranfield et al. 6 1998). The reality is a genuine downward pressure on food 7 commodity prices in real terms. Thus, UK farm gate prices for 8 wheat (tonne), lamb (per lamb) and milk (litre) were £93, £38 9 and 16p in 1987 and over the next 12 years this changed, by, on 30111 average, –2%, 0% and +1.6% per year, respectively (Nix 1987, 1 1999). This has a pressurizing effect on the food supply chain in 2 that by no stretch of the imagination does this keep up with 3 inflation. 4 5 6 Commodity Average Average 7 percentage percentage 8 change in farm change in retail 9 gate prices prices 40111 1 Milling wheat (bread) –33% +0.5% Lamb –36% –4% 2 Beef –35% –4% 3 Pork –57% –23% 4 Milk –22% +1% 5 Eggs –36% –3% 6 Table 2.1 Chicken –26% –3% 7 Farm gate prices versus 8 retail prices, September 1996 Source: Knight Frank, 1999 49111 to September 1998

●●● 26 Food and society

1111 There is a final point in all of this. Not all the costs of food 2 production are accounted for. Environmental costs associated 3 with the transport of food have already been alluded to, but 4 there are a whole host of other add-on costs. Redman (1996) has 5 tried to identify some of these simply for the primary producer 6 in his report ‘The Hidden Costs of Industrial Agriculture’. In 7 this he looks at a series of case studies such a BSE, soil erosion, 8 the cost of removing pesticides from drinking water and the cost 9 of pesticides to human health. It makes an interesting point to 1011 start off discussion. These costs all represent costs of food produc- 1 tion but they are externalized, i.e. you do not pay for them when 2 you pay for your food. Thus, you do not see them. This penal- 3111 izes producers of, say, organic food as it is supposed that organic 4 food is more expensive. A true comparison, however, reveals 5 that the normal food prices do not include all of the hidden 6 costs. 7 8 Globalization of the food economy 9 20111 We are now looking at a global food supply chain. We can buy 1 the best foods from all over the world. We eat glorious food and 2 partake of food cultures that originate thousands of miles from 3 home. I can go out this evening and eat Italian or Indonesian, 4 or with the help of a cookbook or, aided by a celebrity chef from 5 the television, I can go to the supermarket, buy the food and 6 cook the meal myself. This represents a fantastic opportunity to 7 be innovative in terms of food. We can develop new products 8 by using a whole range of cultural backgrounds and food 9 producers. It also represents an enormous market for products 30111 and services. This global dimension has challenges associated 1 with dealing with, and operating in, new situations, cultures and 2 countries. 3 There is, however, a downside. Increasingly large multina- 4 tional companies dominate the global economy. The classical 5 Friedman (1962) business paradigm states that the first duty of 6 every business is to its shareholders. There are, however, a whole 7 series of other stakeholders involved in any business. How multi- 8 national companies relate to these stakeholders is open to debate. 9 David Korten’s book When Corporations Rule the World (1995) 40111 provides a fascinating insight into this whole area and draws 1 some rather disturbing conclusions. Power can corrupt and glob- 2 alization is not necessarily to our benefit. 3 There are also environmental implications. It may only cost 4 20p to ship a kilogram of meat from New Zealand but there are 5 associated environmental costs. It has been estimated that the 6 contents of the average shopping trolley has travelled 4000 miles 7 before it reaches you at home. What is the cost of this envi- 8 ronmental impact? As long as there is comparatively cheap oil, 49111 the actual cost is not felt. For consumers and those involved in

●●● 27 Food Supply Chain Management

1111 the food industry, other costs can be put out of our mind and 2 effectively ignored until our group social conscience recognizes 3 it and forces us to address the issues through legislation. 4 There are also other issues relating to world trade. Simply, the 5 distribution of food is a cause for concern. While the Western 6 world has a surfeit of food many people in developing countries 7 are starving. (See commentators such as Brown and Kane 1995.) 8 Indeed 24 000 people a day die from hunger or hunger-related 9 illness: 75% are children (http://www.thehungersite.com). It can 1011 be argued that purchasing decisions in the developed world kill 1 people in the third world, and in the developed world obesity 2 increases and along with it obesity-related disease. This whole 3111 issue is tied up with third world debt. Third world countries 4 need hard currencies to pay off the debt and so produce cash 5 crops, often at the expense of feeding their own populations, to 6 sell to consumers in developed countries. This can be viewed 7 as a modern-day slavery (see http://www.oxfam.org.uk and 8 http://www.tearfund.org, Brown and Kane 1995 and Whit 1999). 9 The globalization juggernaut is launched. Many argue that this 20111 is progress and a lack of acceptance reflects the philosophy of the 1 luddite, and anyway, it is not desirable nor possible to turn 2 the clock back. In many ways this is the case. But the protests 3 at the recent World Trade Organization (WTO) discussions in 4 Seattle would seem to indicate that there is a different viewpoint, 5 and an increasing number of people, including some of those 6 involved in the negotiations themselves, are sympathetic to it. 7 8 STEEP or PESTE analysis of food as a model 9 30111 So how do we look at food and society? A STEEP or PESTE 1 model which looks at things from a Social, Technological, 2 Environmental, Economic and Political perspectives is a good 3 starting point. What does this involve? One way to do this is to 4 go through the different areas using an example, in this case the 5 meat lamb. 6 7 Social 8 9 The sociological analysis of food can be complex. Willis (1995) 40111 uses a model based on historical, structural, cultural, critical, 1 dimensions to a product/situation. This is imposed onto what- 2 ever you want to examine. Thus, for our lamb, we might do the 3 following: 4 • Historical, the evolution of lamb in different cultures, the 5 role of lamb versus mutton and lambs for meat as opposed 6 to wool. 7 8 • Structural, how the economy and government regulations seek 49111 to control the structure of the industry.

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1111 • Cultural, different cultural relations to the product, for 2 example Christians and Jews have a religious connection with 3 lamb. For Jews, it is the feast of the Passover and much more 4 and for Christians, Jesus was the Lamb of God. Both cultures 5 are linked through it. 6 • Critical, how over-grazing of sheep in the uplands may cause 7 environmental damage to heather moorland. 8 9 Sociological study of food obviously involves a whole host of 1011 different areas and overlaps with many others. Germov and 1 Williams, A Sociology of Food and Nutrition (1999) provides a fasci- 2 nating starting point for such a study. They look at the subject 3111 in terms of McDonaldization (standardization), social differ- 4 entiation (consumption and identity) and self-rationalization 5 (nutrition, food and the body). Other authors such as Harris 6 1985, Schwartz 1986, Mennell et al. 1992, Whit 1995, McIntosh 7 1996, Ritzer 1996 and Warde 1997) also give a real insight into 8 this area of food sociology. 9 20111 1 Technological 2 Food as technology and the technology of producing food is the 3 basis and the process of the food industry. Thinking about the 4 lamb, the genetic makeup of the animal, and how it is fed will 5 influence how fat the meat is. Alternatively we could genetically 6 engineer the lamb to produce leaner meat. Once we have that 7 meat, how do we go about processing it to add value before it 8 is consumed? There are many ways of reducing the fat from 9 direct trimming, to fat removal during cooking. One of the prob- 30111 lems with the fat is that it is here, that much of the flavour 1 resides. Breeding leaner animals has resulted in much blander 2 tasting meat, a lesson that livestock producers and consumers 3 are learning to their cost. 4 5 6 Economic 7 The economic question is often the most important as cynically 8 money can often help ease other areas. When we look at the 9 humble lamb one question might be who benefits from its death, 40111 financially. Recently this question has been much in the news 1 given declining farm gate prices and ‘stable’ prices at the retail 2 end of the market. Some commentators have tried to analyse 3 this but it is difficult, as the figures below show (see Table 2.2). 4 5 Environmental 6 7 Food production and the environment are inherently linked, as 8 it is through the exploitation of our environment that we eat. 49111 Lamb production is quite good in that, on the whole, it utilizes

●●● 29 Food Supply Chain Management

1111 grass as a food, something that humans cannot readily eat. Other 2 systems of production rely on cereals, which we could consume 3 directly ourselves. Passing them through another animal merely 4 wastes resources and adds to pollution. The sheep industry is 5 not without its problems though, as previously indicated with 6 regard to overgrazing in the uplands. (Food and the environ- 7 ment is another vast area. To get a better insight to the downside, 8 try Carson 1965, Harvey 1998; Body 1982, 1984, 1987, is more 9 balanced; Clunies-Ross and Hildyard 1992 is interesting.) 1011 1 Political 2 3111 Within Europe and the world, the lamb is one of the ultimate 4 symbols of food politics. The political game of food production 5 personified in the Common Agricultural Policy often revolves 6 around the lamb. There are subsidies, quotas, inspectors, trade 7 wars and millions of pounds tied to the little woolly characters 8 that originally gave Britain its head start in international trade 9 through wool. Globally, they still exert their power, forming the 20111 central point of many arguments within the WTO, particularly 1 with countries such as New Zealand and Australia. 2 3 Contrasting views of the modern consumer 4 5 The food consumer exists in a complicated socio-economic/envi- 6 ronmental/political/technological melting pot. The same can be 7 said for all connected with the food industry. Between the 8 ‘plough’ and the ‘plate’, or ‘the seed and the soul’, lie innu- 9 merable intermediaries with their own agendas. These agendas, 30111 along with those of the consumer, form a milieu or possibly a 1 mêlée that we might call popular food culture. The consumer 2 is, however, central to this process. 3 If we look at consumer behaviour in a holistic way we can 4 see the consumer as the one that consumes, and also as a player 5 within food culture. There are many good accounts of consumer 6 behaviour (see East 1990, Engel et al. 1990, Gabriel and Lang 7 1996). The way in which they behave is complex, but can be and 8 needs to be understood. Engel et al. (1990) outline four princi- 9 ples that underline consumer behaviour. 40111 1 1. The consumer is sovereign. 2 2. Consumer motivation and behaviour can be understood 3 through research. 4 5 3. Consumer behaviour can be influenced. 6 4. Consumer influence is socially legitimate. 7 8 In short, the consumer is king, but can be manipulated. The 49111 consumer therefore has power to consume in such a way that

●●● 30 1111 2 3 4 5 6 7 8 9 1011 1 2 1998 3111 4 5 6 Farmers Weekly (A) retail (A) retail (B) retail (B) retail 7 retailer retailer retailer 8 9 20111

1 Telegraph 2 3 4 5 6 7 8 b 9 (£) (B) price (C) price (D) price (C) price (D) retail costs (D) on cost on cost on cost on cost

30111 average for November of each year. 1 2 3 4

5 Farmers Weekly 6 7 8 9 40111

1 costs (£) (£) (A) added MLC (C) 2 3 4 42.829.8 1.4 5 16.7 16.7 60.9 51.5 69.2 59.8 62.8 62.8 87.0 87.0 3.0 18.0 17.0 28.0 -10.1 4.8 7.4 18.2 5 price (£) wholesale costs cost cost with price price for for for for

6 Beer 1999, based on data from Johnston 1998 (all basic figures unless stated otherwise) and

7 a a

8 Figures calculated using lamb prices from Additional retail costs put forward by British Retail Consortium of £8.26 per lamb 1998 Year Market Abattoir/ Retailer Total Total Retail a Retail b % return % return % return % return 19971998 42.41997 36.0 1.4 5 16.7 16.7 60.5 57.7 68.8 66.0 62.8 62.8 87.0 87.0 3.7 8.1 17.4 20.6 -9.5 -5.0 7.9 11.1 MLC: Meat and Livestock Commission. Source:

49111 Table 2.2 Percentage returns on sheep meat for a retailer given range of cost scenarios Food Supply Chain Management

1111 fulfils their own agendas and value systems, but may be manip- 2 ulated to fulfil those of others. If we are dealing with businesses 3 perceived as being ‘ethical businesses’ this needs to be done 4 ‘fairly’. Engel et al. (1990) qualify their fourth principle by saying 5 that ‘the key to social legitimacy is a guarantee that the consumer 6 retains complete and unimpeded freedom throughout the pro- 7 cess. This freedom is manifested when nothing induces the 8 consumer to act in ways that would be regretted and even 9 disavowed after more careful reflection.’ A significant statement. 1011 In the end complex questions arise. What do consumers want? 1 Whom do they trust? What is the role of industry, is it to shape 2 or respond? There is good evidence to suggest that consumers 3111 want cheaper, innovative, timesaving, safe products. Some may 4 want something with some sort of other added value in terms 5 of culture and the environment, but few will pay for it. In terms 6 of trust, increasingly it would seem that we trust no one and 7 need everything backed up with a quality assurance scheme from 8 plough to plate, at least in the retail sector that is. And what is 9 the role of industry? If we are market orientated, then it should 20111 be one of responding to the needs of our customers. The reality 1 is that responding and shaping are bedfellows in the modern 2 food industry and to say anything else, is to ignore the truth. 3 4 Conclusions 5 6 This chapter set out to look at food and society. An enormous 7 subject, in fact something that enters every area of our lives. As 8 such, the chapter was not designed to be a fully comprehensive 9 account but a taster of a rich subject. The references provide a 30111 resource to plunder for further information. 1 You should now have a better understanding of how our food 2 supply chain has developed, a model that will help put food 3 into context within any given situation, and an appreciation of 4 some of the dynamics of our food supply chain. You should also 5 have an insight into the influences of both the people selling the 6 food and the consumer who buys it. 7 The best way to learn about the food industry is to get 8 involved. It is amazing the number of people involved in the 9 food and hospitality industry who have no clue as to where their 40111 food comes from and who never cook! 1 The reality is that, as food consumers, we will probably get 2 the food that we deserve – whatever that might be! 3 4 References 5 6 Adams R., Curruthers J. and Fisher C. (1991) Shopping for a Better 7 World: A Quick and Easy Guide to Responsible Shopping. London: 8 Kogan Page. (2000 edn published by the Council for Economic 49111 Priorities.)

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1111 Bawcutt D.E. (1997) Agricultural marketing in a highly compet- 2 itive and customer responsive total UK food chain. Agricultural 3 Progress, 72, pp. 75–88. 4 Beardsworth A. and Keil T. (1997) Sociology on the Menu. London: 5 Routledge. 6 Beer S.C. (1997) BSE a systems analysis: lessons to be learnt. In 7 Proceedings of the International Conference on Agriculture and 8 Nutrition, Tufts University, pp. 35–46. 9 Beer S. (1998) Cultural tokenism? An investigation into the nature 1011 of food quality assurance schemes with specific reference to the 1 meat production sector. In Proceedings of the Second International 2 Conference on Culinary Arts and Sciences, Global and National 3111 Perspectives (ed. J.S.A. Edwards), Worshipful Company of 4 Cooks Centre for Culinary Research, Bournemouth University, 5 pp. 225–36. 6 Beer S. (1999) What has happened to the integrity of our food 7 supply chain? Moves towards an ethical framework for food 8 retailing in the United Kingdom. Proceedings of the 10th 9 International Conference on Research in the Distributive 20111 Trades, pp. 47–56. 1 Body R. (1982) Agriculture: the Triumph and the Shame. London: 2 Temple Smith. 3 Body R. (1984) Farming in the Clouds. London: Temple Smith. 4 Body R. (1987) Red or Green for Farmers (and the Rest of Us). 5 Broadleys Publishing Company. 6 Brown D. (2000) Market revival gives a £65m boost to farmers. 7 Daily Telegraph, 25 May, p. 14. 8 Brown L.R. and Kane H. (1995) Full House. London: Earthscan 9 Publications. 30111 Burk M.C. (1962) Ramifications of the relationships beween 1 income and food. Journal of Farm Economics, XLIV, 1 February. 2 Cannon G. (1990) Food policy and definitions of food quality, 3 in L. Woodward, S. Stolton and N. Dudley (eds), Food Quality: 4 Concepts and Methodology. Elm Farm Research Centre. 5 Carson R. (1965) Silent Spring. Harmondsworth: Penguin. 6 Clunies-Ross T. and Hildyard N. (1992) The Politics of Industrial 7 Agriculture. London: Earthscan. 8 Cranfield J.A.L., Hertel T.W., Ealse J.S. and Preckel V. (1998) 9 Changes in the structure of global food demand. Staff 40111 paper 98–5, Department of Agricultural Economics, Purdue 1 University. 2 Dussauge P. and Garrette B. (1999) Co-operative Strategy. 3 Competing Successfully through Strategic Alliances. Chichester: 4 John Wiley & Sons. 5 East R. (1990) Changing Consumer Behaviour. London: Cassell. 6 Engel J.F., Blackwell R.D. and Miniard P.W. (1990) Consumer 7 Behaviour, 6th edn. Hinsdale, IL: The Dryden Press. 8 Farmers Weekly (1998) Market reports, 4, 11, 18 and 25 November 49111 1998.

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1111 Foster A. and Macrae S (1992) Food quality. What does it mean? 2 In National Consumer Council, Your Food, Whose Choice? 3 London: HMSO. 4 Friedman M. (1962) Capitalism and Freedom. Chicago: University 5 of Chicago Press. 6 Gabriel Y. and Lang T (1996) The Unmanageable Consumer, 7 Contemporary Consumption and Its Fragmentation. London: Sage 8 Publications. 9 Germov J. and Williams L. (1999) A Sociology of Food and Nutrition. 1011 The Social Appetite. Oxford: Oxford University Press. 1 Harris M. (1985) Good to Eat. Riddles of Food and Culture. London: 2 Allen and Unwin. 3111 Harvey G. (1998) The Killing of the Countryside. London: Jonathon 4 Cape. 5 Holroyd P.H. (1997) The changing food chain. Journal of the Royal 6 Agricultural Society of England, 158, pp. 87–96. 7 Howitt S. (ed.) (1998a) UK Food Sector 1998 Marketing Review. 8 Hampton, Middx: Keynote. 9 Howitt S. (ed.) (1998b) UK Catering Market 1998 Marketing Review. 20111 Hampton, Middx: Keynote. 1 Hughes D. (1994) Breaking with Tradition. Building Partnerships 2 and Alliances in the European Food Industry. Ashford, Kent: Wye 3 College Press. 4 Johnston P. (1998) Farm gate prices are falling: so who gets the 5 biggest slice of the Sunday joint? Daily Telegraph, 15 November, 6 pp. 15–16. 7 Kilkenny B. (1994) Quality in the marketing of meat. In Quality 8 Meat and Milk from Grassland Systems. Reading: British 9 Grassland Society. 30111 King R.P. and Phumpiu P.F. (1996) Reengineering the food 1 supply chain: the ECR initiative in the grocery industry. 2 American Journal of Agricultural Economics, 78, pp. 1181–6. 3 Knight Frank (1999) Cited by F. Fulford, While farmers face 4 disaster and farm gate prices continue to drop, supermarkets 5 glean the profits. The Field, January, pp. 31–32. 6 Korten D.C. (1995) When Corporations Rule the World. London: 7 Earthscan. 8 Lowman B.G. and McClelland T.H. (1994) An overview of quality 9 assurance schemes. In Quality Meat and Milk from Grassland 40111 Systems. Reading: British Grassland Society. 1 MAFF (1997) UK Food and Farming in Figures. London: 2 Government Statistical Service. 3 McIntosh W.A. (1996) Sociologies of Food and Nutrition. London: 4 Plenum Press. 5 Menell S., Murcott A. and van Otterloo A.H. (1992) The Sociology 6 of Food: Eating, Diet and Culture. London: Sage Publications. 7 Mepham B. (1996) Food Ethics. London: Routledge. 8 Nix J. (1987) Farm Management Pocket Book. London: Wye College. 49111 Nix J. (1999) Farm Management Pocket Book. London: Wye College.

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1111 O’Keeffe M. (1997) Supply chain management. Agricultural 2 Science, 10 (3), pp. 29–32. 3 Redman M. (1996) Industrial Agriculture: Counting the Cost. Bristol: 4 Soil Association. 5 Ritchie C.A. and Leat P.M.K. (1994) A supermarket view of 6 marketing quality meat and milk. In Quality Meat and Milk 7 from Grassland Systems. Reading: British Grassland Society. 8 Ritzer G. (1996) The McDonaldization of Society, 2nd edn. London: 9 Pine Forge Press. 1011 Schwartz H. (1986) Never Satisfied: A Cultural History of Diets, 1 Fantasies and Fat. New York: The Free Press. 2 Soucie W.G. (1997) Efficient consumer response meets the indus- 3111 trialization of agriculture. Agribusiness, 13 (3), pp. 349–55. 4 Spedding C.R.W. (1989) The food chain: forging links, in The 5 Human Food Chain. Amsterdam: Elsevier Applied Science. 6 Stainer L., Gully A. and Stainer A. (1998) The UK food supply 7 chain – an ethical perspective. Business Ethics: A European 8 Review, 7 (4), pp. 205–11. 9 Strong C. (1996) Features contributing to the growth of ethical 20111 consumerism – a preliminary investigation. Marketing 1 Intelligence and Planning, 14 (5), pp. 5–13. 2 Tangermann S. (1986) Economic factors affecting food choice, in 3 R. Ritson, L. Gofton and J. McKenzie (eds), The Food Consumer. 4 Chichester: John Wiley & Sons, pp. 61–8. 5 Tarrant S. (1996) Partnership in the food chain – the role of sup- 6 port players. Food Science and Technology Today, 10 (1), pp. 35–8. 7 Warde A. (1997) Consumption Food and Taste. London: Sage 8 Publications. 9 Wal-Mart (1998) Wal-Mart 1998 Annual Shareholder Report, 30111 Bentonville, Arkansas. 1 Whit W.C. (1995) Food and Society. A Sociological Approach. New 2 York: General Hall. 3 Whit W.C. (1999) World hunger. In J. Germov and L. Williams 4 (eds), A Sociology of Food and Nutrition. The Social Appetite. 5 Oxford: Oxford University Press. 6 Willis E. (1995) The Sociological Quest, 2nd edn. Sydney: Allen 7 and Unwin. 8 Woodward L., Stolton S. and Dudley N. (1990) Food Quality 9 Concepts and Methodology. Elm Farm Research Centre. 40111 Wood J.D., Enser M. and Fisher A.V. (1994) Meat quality defin- 1 itions and factors affecting it. In Quality Meat and Milk from 2 Grassland Systems. Reading: British Grassland Society. 3 4 Activities 5 6 1. For any given food product, outline its journey from plough 7 to plate and evaluate the added financial value at each stage. 8 What relationship does this have to profit and return on capital 49111 for each member of the chain?

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1111 2. Start a collection of supermarket food magazines. Identify and 2 analyse the messages that they are trying to put across with 3 regard to food. 4 5 6 Questions 7 8 1. Outline your image of the food supply chain in 30 years’ time. 9 1011 2. Can consumers have their cake and eat it? 1 3. What duty of care does the food industry owe to its stake- 2 holders? 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 36 1111 CHAPTER 2 ●●●● 3 3 4 5 6 The scope and 7 8 9 1011 structure of the 1 2 3111 4 food supply chain 5 6 7 8 Kathryn Webster 9 20111 1 2 3 4 5 6 Key objectives 7 8 • To define the term ‘supply chain’ 9 • To define the term supply chain management 30111 1 • To identify the various sectors of the food supply chain in 2 the UK 3 • To discuss the issues for each sector, at each stage in the 4 food supply chain 5 6 7 8 Introduction 9 40111 The value of spending on food and drink in the UK, whether 1 on food designed to be eaten in the home, or away from home, 2 has increased substantially year on year. People’s disposable 3 incomes are rising, and one consequence of this is their ability 4 to spend relatively more on sophisticated styles of eating. This 5 increased ‘spend’ is reflected in the industries which provide 6 this food at increased profitability; and with this comes 7 increased complexity. The customer is now more demanding, 8 and no longer relies on ‘seasonal’ foods. It is now possible, 49111 Food Supply Chain Management

1111 in fact, to purchase foods from every corner of the globe, at any 2 time of the year, generally at an affordable price. We are used 3 to being able to shop seven days a week, and in most urban 4 areas of the UK, 24 hours a day. The consumer does not expect 5 to see empty shelves at any time. When eating out, the UK 6 customer has a very wide choice of eating experiences: take- 7 aways, bistros, restaurants and coffee shops offering cuisine from 8 all over the world, and this trend has been replicated by the 9 major supermarkets who offer packaged takeaway meals to 1011 challenge the traditional outlets. This chapter explores how orga- 1 nizations meet these challenges, identifies the issues at every 2 stage, and considers how the use of partnerships is harnessed 3111 to achieve this. In the first instance, it is necessary to examine 4 some terminology, and to define exactly what is meant by the 5 term ‘supply chain’. 6 7 Definition of the food supply chain 8 9 The food and drink supply chain has been a linear relationship 20111 involving the primary producers, or farmers, the manufacturers 1 or processors who ‘fabricate’ the food for the table, and the 2 retailers who gather a range of such products and sell them to 3 the consumer. Food supplies have traditionally been sourced not 4 only from within the UK, but widely from all parts of the world. 5 Indeed the UK was the traditional market for its colonies until 6 it joined the European Economic Community in 1973. Figure 3.1 7 shows that the UK continues to import a substantial quantity of 8 its food. 9 The food and drink supply chain can be sub-divided into a 30111 number of sectors. Agriculture, horticulture, fisheries and aqua- 1 culture are the ‘primary producers’, the manufacturers who 2 process the food into products ready for the table or further 3 cooking, together with the packaging companies, are an inter- 4 mediate stage, and the wholesalers, retailers and caterers are the 5 end stages of the supply chain. At each stage in the chain the 6 food is passed into a new ownership and ‘value’ is added to 7 allow for the costs of the journey, and also to provide a small 8 margin of profit. 9 In 1999, excluding imports and exports, the entire food chain 40111 was worth £56 billion, contributing towards 8% of the UK’s GDP, 1 and it employed 3.3 million people (12% of the workforce). It 2 provided 6% of the country’s total exports, worth £9 billion 3 (MAFF 1999a). 4 Figure 3.1 shows how the food chain in the UK starts, as in 5 any country, with the primary producers, the farmers and the 6 fishing industry. In 1999 the farming sector was worth £8.2 7 billion, and the UK fishing sector landing fish, into the UK, 8 £0.4567 billion. Note that the country imported raw and 49111 processed foods to the value of £16.9 billion.

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 Figure 3.1 The food and drink supply chain in the UK 4 5 6 After harvest, or slaughter, or upon landing in port, the raw 7 materials are sent to the manufacturers for some style of 8 processing. This will range from milling grain into flour, malting 9 of grain for alcohol production, grading, trimming and packing 40111 of vegetables, to a variety of processes ending in cooking and 1 packing. This sector was worth £18.7 billion in 1999. 2 Processed products are then either sent directly to the retailers, 3 or to wholesalers for distribution to the smaller retailers, or in 4 the case of catering, to specialist wholesalers for onward sale to 5 caterers. In each case the consumer is the final customer. 6 We also can see from Figure 3.1 that, although the UK imported 7 £16.9 billion worth of raw and processed foods, there were 8 exports to the value of £9.1 billion in 1999. International trade 49111 is a significant factor at all stages of the UK’s food chain.

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1111 ‘Value added’ in the food and drink supply chain 2 3 At each stage in the food chain ‘value’ is added: this means that 4 the additional costs of processing, packaging and distribution, 5 together with profits, are added on. The costs of unwanted or 6 waste products are also covered at these stages. For example, 7 in the case of beef, the costs of disposal of the ‘fifth quarter’ 8 (hide, offal, carcass etc.) are covered by their incorporation into 9 the selling price. There is a general ‘rule of thumb’ that only 1011 15% of the final retail cost of any product will reflect the cost of the original agricultural raw material, the balance reflecting 1 ‘value added’ at various stages, and representing the degree of 2 processing that it has received (MAFF 1999a). 3111 In the summer of 1998, there were accusations that at market, 4 farmers were being paid a pittance for their sheep, whereas the 5 cost of lamb in the shops was prohibitively expensive. Super- 6 market chains were accused of making unfair profits (Anon 7 1998, Gannaway 1998). However, research commissioned by the 8 Ministry of Agriculture, Fisheries and Food (MAFF) suggested 9 that although meat price changes are transmitted equally along 20111 the food chain, from producer to retailer, there tends to be a 1 time lag for such ‘adjustments’ to work their way through the 2 supply chain, which can result in unfair price comparisons. 3 Further investigations by the ‘Competition Commission’ in 2000 4 supported these findings and found that there had been no unfair 5 profiteering (Competition Commission 2000). 6 7 8 Introducing supply chain management 9 ‘Older’ business practices involved managing the problem of 30111 stocking shelves or restaurants by maintaining high levels of all 1 products: in warehouses, stores, in freezers and on storeroom 2 shelves. This meant buying enough goods, far enough in 3 advance, to ensure that supply was seldom jeopardized by short- 4 ages of goods, ingredients or menu items. Tougher competition 5 has demanded shorter ‘product life cycles’ and made such an 6 approach increasingly expensive. Today ‘service-driven systems’ 7 are replacing these old ‘inventory-driven systems’. This type 8 of system is ‘pulled’ by customer demand rather than being 9 ‘pushed’ by a supply system. The system, pioneered by the retail 40111 industry, has been copied over the past decade by the catering 1 wholesaling and other manufacturing sectors, in order to main- 2 tain a competitive edge. It has involved heavy investment in 3 technology and often a change in attitude toward the customer 4 – indeed a complete culture change. 5 Supply chain management is a concept that is used increas- 6 ingly to replace traditional fragmented management approaches 7 to the buying, storing and moving of goods. Companies have 8 tended, in the past, to move and store goods in a disparate 49111 way, using different departments and different managers. The

●●● 40 The scope and structure of the food supply chain

1111 supplier would transport the goods to the purchaser, who would 2 then handle all internal transport and storage. But there would 3 be separate transport or distribution departments to handle trans- 4 portation to the ultimate customer. Supply chain management 5 deals with the same issues, throughout the chain, from their 6 source to the customer, but is concerned with ensuring quality, 7 continuity of supply, the control of costs, customer service, and 8 the increase of profits. In essence, supply chain management is 9 managing flows across departments, sites and often companies, 1011 for which a high degree of management integration is needed. 1 2 The supply chain 3111 4 Agriculture and associated trades 5 6 In 1999, the agricultural industry accounted for gross ‘value 7 added’ of £8.2 billion, equivalent to 1.2% of the UK’s GDP. This 8 sector’s contribution to the country’s GDP is one of the lowest 9 in the world, and reflects the UK’s ‘post-industrial’ economy. 20111 The sector only produced 53% of the total food that the country 1 consumes, the balance being imported (MAFF 1999a). It is impor- 2 tant to note that this is balanced by the fact that the UK exported 3 £851 million of unprocessed food (i.e. raw materials) in 1999, 4 being the equivalent of 0.5% of the country’s total exports. 5 The agricultural sector itself is diverse, ranging from small 6 scale to large scale businesses. Tenant farmers to owners, 7 managed farms to family-run businesses, some of these being 8 full-time operations, but increasingly the smaller farms are char- 9 acterized by being run on a part-time basis. Some farms are 30111 mixed, others are cereal based, some are virtual monocultures 1 and yet others are accredited organic production systems. There 2 were in total about 450 000 registered agricultural businesses in 3 the UK in 1999, of which 300 000 were classified as ‘minor’. 4 Some 150 000 farms were registered for VAT, which implies 5 an individual turnover of more than £52 000 (as of 6 April 2000). 6 Of this number, 2800 had a turnover of £31 million or more, and 7 300 had a turnover of £5 million or more (1999 figures). 8 Despite such diversity, there are many things which the 9 farmers have in common. The sector has been reduced to being 40111 a very small player in the UK food chain over the past 50 years, 1 and as such, has limited power to determine what is grown. 2 As a consequence, farmers are forced to make commercial deci- 3 sions based upon pressures from their suppliers, from their 4 purchasers, and also as a result of national and international 5 policies such as the Common Agricultural Policy (CAP). It used 6 to be custom and practice for farmers to sell their produce to 7 a wholesaler, who in turn would sell the products on to a range 8 of manufacturers and retailers. Figure 3.2 provides four exam- 49111 ples of a particularly complex chain, that of red meat.

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1111 2 3 4 5 6 7 8 Figure 3.2 Four alternative models of the beef supply chain 9 1011 1 However, a number of recent initiatives have led to a more 2 direct relationship between the primary producers and the end 3111 user, or the farmers and the retailers. These include ‘contract 4 farming’, ‘farmers’ markets’, and the advent of ‘box schemes’. 5 6 Contract farming ●●● 7 8 This is a development whereby the farmer signs an agreement 9 to supply a food processor or retailer with a specific crop. The 20111 ‘contract’ will specify the variety of crop to be grown, when it 1 is to be planted, when and with what agro-chemicals it is to 2 be sprayed, when it is to be harvested and so on. Although 3 farmers have a guaranteed market, if the crops do not appear 4 at the right time, or to the required standard, the buyer can reject 5 them. In addition, if the produce is not selling well the buyer 6 can reserve the right to reduce the purchasing price or even 7 reject the crop. Like the CAP, this system encourages another 8 form of high dependency – this time upon the purchaser’s 9 business skills. Such an imbalance, maybe even an abuse, 30111 of economic power has been criticized as being potentially 1 dangerous to the agricultural and horticultural industries (Seth 2 and Randall 1999). Indeed Tansey and Worsley (1995) suggest 3 that farmers are now ‘out-workers in an industrialized food 4 production system’. 5 6 Farmers’ markets ●●● 7 8 These are a late 1990s development in which farmers responded 9 to the economic pressures on their businesses by creating a 40111 way in which local produce could be sold directly by the farmer 1 to the consumer. These markets provide an outlet for food that 2 has had minimal processing (fruit and vegetables), or where 3 processing has taken place on the farm (cheese manufacture), or 4 where the primary processor (abattoir) can return the product 5 to the farmer to sell (cuts of meat). The number of these 6 markets is expanding rapidly. In England, MAFF reported a 7 figure of between 50 and 60 operating on a regular basis in 8 1999 (MAFF 1999a); by 2000 this had increased to over 200 49111 (MAFF 2000).

●●● 42 The scope and structure of the food supply chain

1111 Box schemes ●●● 2 3 This is a development – exclusive to the organic sector – where 4 farms or co-operatives pack a ‘box’ with seasonal vegetables, 5 fruit, eggs and even bread and deliver them to a collection point 6 for the customer to collect. These have increasingly grown in 7 popularity in urban areas. They are successful in as much as 8 they bypass the retailer whose organic produce can be as much 9 as 50% more expensive. 1011 1 ‘Niche markets’ in agriculture ●●● 2 3111 Another development has been the growth of ‘niche markets’ 4 for specific produce; examples include the Jersey Royal potato, 5 Scottish beef and Welsh lamb. These are premium products 6 which are strongly marketed. 7 8 Issues for the agricultural communities 9 20111 The emergence of co-operatives ●●● 1 2 Co-operatives have long been present in France as a means 3 through which small farmers may access markets. In the UK, 4 co-operatives are beginning to emerge in response to the 5 increasing demands placed by retailers on the farming commu- 6 nities. Farmers, through their joint investment in marketing, 7 breeding programmes and consumer research are now able to 8 more effectively compete within the marketplace. An example 9 of this is Kentish Garden. Kentish Garden is a fruit growers 30111 co-operative comprising 53 members which had a turnover of 1 £31 million in 1999. This has been a result of joint initiatives, 2 e.g. marketing, breeding, consumer research and the commis- 3 sioning Research and Development. The co-operative now 4 supplies soft fruit to all the major supermarkets and also to 5 caterers. Outside the English growing season it packs imported 6 fruit so that it can maintain a year-round supply to its major 7 customers. Kentish Garden receives EU and MAFF assistance 8 as a ‘producer organization’ for work on improving growing 9 techniques, the introduction of new varieties, consumer research 40111 and improved planning and logistics. 1 2 Food safety ●●● 3 4 The introduction of the Food Safety Act of 1990 which makes 5 the retailer legally responsible for all aspects of the food they 6 sell, coupled with public concerns over the mishandling of the 7 BSE crisis, and increasing interest in animal welfare, has led food 8 retailers to restrict their range of suppliers. They now choose 49111 suppliers on the basis of consistency of the quality of the meat

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1111 and its traceability back to the farm (Hobbs 1996). Long term 2 supply relationships with a few suppliers, in order to minimize 3 their costs of monitoring, is now much more the norm. This 4 system, known as ‘vertical co-ordination’, will typically comprise 5 a grouping of a retailer, a processor and a limited number of 6 farmers. 7 8 Traceability ●●● 9 1011 Assured British Meat (ABM) is a food industry initiative to 1 improve consumer confidence in beef, lamb and pork by the 2 establishment of a safety assurance framework for the entire 3111 supply chain. Sector-specific standards cover the manufacture of 4 feed, on-farm production, transport, livestock markets, abattoirs, 5 caterers, butchers, manufacturers and retailers. All members of 6 the scheme are subjected to rigorous independent inspection to 7 ensure that they adhere to these standards; the standards 8 combining current legislation and industry good practice. Since 9 September 2000 sheep also comply with the tagging system 20111 already applied to cattle. 1 2 Food and drink manufacturing 3 4 Figure 3.1 shows how in 1999 in the UK this sector accounted 5 for gross ‘value added’ of £19 billion, equivalent to 2.6% of GDP. 6 Exports were worth £8.3 billion; £2.8 billion of this was alcohol 7 – 75% being Scotch Whisky (MAFF 1999a). The sector is highly 8 concentrated; in 1999 only 8000 businesses were classified as 9 food and drink manufacturers, of these, the largest ten food 30111 manufacturers accounted for 21% of the industry’s turnover. 1 Indeed there is a global trend towards this concentration of 2 market power and the internationalization of both manufacturers 3 and customers. Familiar international names include Procter and 4 Gamble, Nestlé, Unilever and Kelloggs. 5 6 7 Case study – Unilever 8 9 Unilever is a massive multinational • Ice cream 40111 company, whose world-wide sales in 1999 • Tea-based beverages (e.g. instant tea and 1 reached £27.3 billion. It was formed as the iced tea) 2 result of the merger of Dutch and British 3 companies in the 1920s. Unilever’s Food • Spreads and cooking products (e.g. 4 product categories include: margarine and oils). 5 • Culinary products (e.g. cooking sauces, 6 In 1999 the company made 27 acquisitions, mustards) 7 and a survey of company press releases 8 • Frozen foods (e.g. fish fingers, frozen for the first half of 2000 indicates a similar 49111 peas) pattern. The company acquired:

●●● 44 The scope and structure of the food supply chain

1111 • Grupo Cressida in March – Honduras- As a result of this, the Commission recom- 2 based: doubled Unilever’s presence in mended a ban on exclusive supply agree- 3 Central America. ments with retailers (FT 2000). All the major 4 manufacturers of ices, which include Nestlé • Ben & Jerry’s Homemade in May for $326 5 and Mars, will be similarly affected. million. 6 The reasons for the trend towards concen- 7 • SlimFast Food Companies for US$ 2.3 tration via mergers and acquisitions owes 8 billion in May. much to the belief that large scale produc- 9 tion is essential for global competitiveness, • Best Foods for $24.3 billion in June. 1011 particularly in the European Single Market. 1 In addition, in the 1980s, UK growth was The company sold: 2 funded by easy access to loans as a result of 3111 • Schoten meat factory to the Dutch Struik the liberalization of the UK financial sector 4 Food Group in May. by the Financial Services Act 1986, which 5 also fuelled the consumer boom and hence 6 Such massive interests inevitably create demand for products. By 1994, 13 of the top 7 problems for competing companies, which 20 European food companies were based 8 is illustrated by the following example. in the UK. These included Unilever, Grand 9 Unilever was investigated by the Competi- Metropolitan, Eridania, Allied Domecq, 20111 tion Commission for maintaining a monop- Guinness, Hillsdown, Dalgety, Bass, Tate 1 oly against public interest as a result of the and Lyle, Cadbury Schweppes, Booker and 2 activities of its Birds Eye Walls subsidiary. United Biscuits. 3 4 5 6 Statistical analysis of the manufacturing sector 7 8 The activities of food and drink processors and manufacturers 9 are divided into the following groups according to the Standard 30111 Industrial Classification system (SIC) (EuroPA 1995): 1 2 • Oils and fats 3 • Slaughtering of animals and production of meat and by- 4 products 5 6 • Preparation of milk and milk products 7 • Processing of fruit and vegetables 8 9 • Fish processing 40111 • Grain milling 1 2 • Bread, biscuits and flour confectionery 3 • Sugar and sugar by-products 4 5 • Ice cream, cocoa, chocolate and sugar confectionery 6 • Animal feeding stuffs (this should really be in the agricultural 7 sector) 8 49111 • Starch and miscellaneous foods

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1111 • Spirit distilling and compounding 2 • Wines, cider and perry 3 4 • Brewing and malting 5 • Soft drinks. 6 7 The food processing groups can be further sub-divided into first- 8 and second-stage groups. First-stage groups are those which 9 produce undifferentiated products, which are then sold on to 1011 intermediate producers. These include grain milling, sugar and 1 sugar by-products, animal feeding stuffs, and organic oils and 2 fats. Second-stage processors are those whose products are differ- 3111 4 entiated and which are sold to final-stage manufacturers who 5 ‘finish’ the manufacturing process. 6 Value is ‘added’ at these various stages in the supply chain 7 by the preparation of a range of dishes or ingredients for retail 8 sale; farm products are processed, and new food concepts are 9 developed. Originally preservers of food, the manufacturers are 20111 now continuous production lines. Interestingly, despite the trend 1 towards concentration, the market is becoming increasingly 2 segmented. Important new market ‘niche’ sectors have devel- 3 oped over the past 20 years, including cook–freeze, cook–chill, 4 regional, ethnic, vegetarian and organic foods; examples of other 5 niche products include ‘fun’ foods, i.e. foods containing minimal 6 or ‘non’ nutrients such as olestra, ‘lite’ foods, status foods like 7 bottled water, and ‘functional foods’ such as Benecol or the Aviva 8 range, and diet meals. 9 Research shows that people in ‘Western’ societies consume 30111 less food every decade, as the result of increasingly sedentary 1 life styles (MAFF 1999b), and that despite this increasing 2 numbers of people are becoming overweight or obese (DOH 3 1992). So it is clear that as total food consumption is unlikely to 4 grow in these Western societies, the continuous development of 5 new product lines with ‘added value’ is the only way that this 6 sector can ‘grow’. 7 8 Supplier–retailer collaboration 9 40111 Although this section is concerned with the role of the food 1 processors in the food chain, the increasingly close nature of 2 their working relationships with the major food retailing compa- 3 nies, in the UK, means that it is necessary briefly to examine the 4 relationship at this stage. Hogarth-Scott (1999) identifies three 5 differing types of retailer–supplier relationship which charac- 6 terize today’s environment: 7 8 1. Partnership between retailer and strong branded supplier, 49111 usually a market leader in which power is well balanced.

●●● 46 The scope and structure of the food supply chain

1111 2. Own brand/private label relationship. These are important 2 producers for the retailer and there is a very close working 3 relationship. This relationship can be seen as a ‘joint venture’. 4 3. Retailer relationships with ‘secondary brand’ manufacturers. 5 The supplier is dependent upon the retailer which leads to a 6 compliant relationship by the latter. 7 8 Today it is the major UK retailers who decide which manufac- 9 1011 turers they deal with, and which of their brands they offer for 1 sale; in other words, they control the manufacturer’s ‘access’ to 2 the consumer. This changed relationship means that the manu- 3111 facturer must agree to terms set by the retailers in order to ensure 4 that their products are not ‘de-listed’, and that they are displayed 5 in the best shelf positions. In today’s market, ‘branded’ merchan- 6 dise is a weakened product. 7 Like the multi-nationals, the major food retailers have also 8 been accused of anti-competitive practices such as demanding 9 ‘over-riders’ from the manufacturers. These are discounts 20111 demanded by the retailer from the manufacturer against volume 1 sales over a year, but which are not passed on to the consumer. 2 Manufacturers are also charged higher prices for special posi- 3 tioning of their products. 4 Another allegation of unfair competition by the retailers is 5 the marketing of ‘look-alikes’. In 1994 there were a series of 6 challenges to Coca-Cola by Sainsbury, Tesco and Virgin who 7 marketed their own brands of cola product in very similar pack- 8 aging at much reduced prices. The retailers were able to provide 9 premium positions in store for these products. 30111 There is some evidence to indicate that the success of ‘own 1 label’ products by the major retailers has led to a decline in 2 market concentration of the manufacturers. Retailers tend to use 3 small and medium-sized firms to produce their own label prod- 4 ucts, as this enables them to closely control production and 5 supply, with a view to ensuring quality and availability. 6 However this state may be redressed with the advent of ECR 7 (Efficient Consumer Response) and Category Management (see 8 Chapters 4 and 5). 9 40111 Wholesaling 1 2 This sector accounts for gross value added of £4.6 billion. The 3 sector is divided into three broad categories: ‘delivered’, ‘cash 4 and carry’ and ‘food service’ (catering supply). Included in these 5 categories are commission agents, commodity brokers and 6 wholesalers who trade on behalf of others, as well as those who 7 trade on their own account. In 1999 approximately 17 000 busi- 8 nesses were classified as food and drink wholesalers; although 49111 only a few large companies dominate the ‘delivered’ and ‘cash

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1111 and carry’ categories. ‘Foodservice’, which supplies the caterer, 2 is much more diverse, with many specialist operators embracing 3 a complex range of activities. Overall, the largest ten firms 4 account for 17% of the wholesale sector’s turnover. In addition, 5 the few independent convenience stores have formed their own 6 buying groups to protect their interests; names like Spar and 7 Londis are familiar. 8 Traditionally, retail wholesalers would purchase in bulk from 9 a wide range of manufacturers, and then sell these products on 1011 to the retailers. However, as the retailers have become more effi- 1 cient in their own logistical operations, this role has declined 2 substantially. Manufacturers now deliver directly to retailers 3111 rather than to ‘middle men’. In contrast, the ‘foodservice’ side, 4 delivering to caterers, has expanded in the wake of the growth 5 of eating out in the UK. 6 We should note that, unlike retail wholesalers, catering whole- 7 salers combine a range of functions including primary 8 manufacture as well as distribution. Larger companies also offer 9 a full service to their clients, including business advice, supply 20111 of equipment, large and small, and also nutritional and legal 1 advice. Many of these companies are also characterized by their 2 international and multi-divisional natures. The following 3 company profiles indicate the range and variety of activities that 4 some of the major players in this sector undertake. 5 6 7 Case study – Booker Cash and Carry 8 9 In April 1999 Booker sold off its food delivery service worth £400 million in its first 30111 service business to Bidvest SA. As Booker year. 1 Cash and Carry, the company operates 176 2 branches in the UK. It is the country’s largest Collaboration with suppliers 3 cash and carry operation, with over 35% Booker has initiated ‘category partnerships’ 4 of market share. In the late 1990s Booker with a number of leading, branded suppliers. 5 acquired its competitor, the Nurdin and Typically, these initiatives involve signing 6 Peacock Cash and Carry chain, and substan- up to common goals, implementing agreed 7 tially invested in a new central distribution action plans, and then carrying out stringent 8 project, known as Heartland. With sales evaluation of the outcomes. The aim of these 9 of £3.4 billion, it is the key link between and other branded supplier initiatives is to 40111 independent retailers, caterers and the generate more profit throughout the supply 1 manufacturing sector, its customer base chain; pilot schemes have proved encourag- 2 comprising over 100 000 retailers and 300 000 ing, with all parties seeing more profit. 3 caterers. It is a major purchaser of major 4 manufacturing brands including Cadbury, Own label ranges 5 Walkers Crisps, Coca-Cola and Mars, with In 1998 Booker’s range of private labels 6 significant buying power. The company accounted for over 14% of sales. These lines 7 also has its own strong private label brands providing increased profit margins for 8 for the caterer, retailer and licensed trade. both the wholesaler and the customer. For 49111 In 1998 the company also introduced a instance, there are over 200 Happy Shopper

●●● 48 The scope and structure of the food supply chain

1111 lines for the independent retailer, Chef’s as Lovell and Christmas, Fitch and Sons, 2 Larder is Booker’s own-brand for caterers, Kearley and Tonge, Allinson, Bluecrest, 3 and Malt House Vintners is Booker’s own Kinloch, Snowden and Bridge, United Yeast, 4 label for the licensed trade. Ross, Young and Pullman Foods. 5 Booker Foodservice itself supplies all the 6 Booker Foodservice major food brands as well as their Coronet, 7 This company is a leading distributor of Ashcroft & Moreton and own label products. 8 frozen, chilled and ambient food for caterers. The range of up to 15 000 lines includes 9 Sold off from the main Booker cash and frozen and chilled foods, groceries, cleaning 1011 carry company in 1999, it was acquired by materials, disposables and other non-food 1 the South African Bidvest Group. The products. It also stocks light catering equip- 2 company trades under its own name as well ment and utensils. 3111 as owning a range of famous names such 4 5 6 7 Case study – Brake Brothers 8 9 This company is another major supplier to logistics service delivering ambient, chilled 20111 the catering trade. In 2000 its pre-tax profits and frozen foods to large multiple caterers 1 were £35.5 million, an 18% increase over who need tight central controls to ensure 2 1998. Its turnover had increased by 28% consistency throughout their branded 3 during that year, to £970 million. Like most outlets nation-wide. Larderfresh provides 4 major companies, it has built itself by the fine foods with an emphasis on fresh chilled 5 judicious purchasing of a range of other products. Brake France is the supplier in 6 companies which have been ‘off loaded’ by France. 7 others, to give it a balanced, but specialist Watson & Philip offers grocery and chilled 8 portfolio. Current divisions of the Brake products to the catering trade; products 9 Brothers chain include Brake France, include its own brand Orchard Farm food 30111 Larderfresh, Puritan Maid, Country Choice range and Catercare non-food and cleaning 1 and Foodservice. products. 2 Brake Bros Foodservice supplies over 1000 A Taste of Italy is Brake Brothers’ 3 frozen lines to the catering industry in the specialist importer and distributor of prod- 4 UK. Country Choice supplies bakery and ucts to the Italian restaurant sector. Twin 5 branded frozen products to the independent Chef Foods is the Group’s manufacturing 6 bakery and retail sectors. It also offers tech- division, specializing in product develop- 7 nical support, advice on equipment, product ment and innovation, both in the Brake 8 range, bakery techniques, merchandising, Brand and bespoke for major caterers. M&J 9 added value and profit generating ideas. Seafoods is a specialist supplier of seafoods. 40111 Puritan Maid offers a multi-temperature 1 2 3 The competitive nature of the catering wholesaling sector reflects 4 the activities of the major caterers themselves. The following 5 example serves to illustrate the complex inter-relationships and 6 challenges of the hospitality industry. 7 The pub chain Wetherspoon has plans to expand to 800 outlets 8 by 2005. In the spring of 2000 Brake Brothers’ Puritan Maid won 49111 a three-year contract worth £30 million annually to supply the

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1111 chain. At the same time Granada terminated its £50 million con- 2 tract with Puritan Maid. Although this contract involved the sup- 3 ply of over 2000 lines, the ‘drop size’ delivered to each outlet at 4 Wetherspoons will equal that delivered to Granada. The smaller 5 number of lines, coupled with a similar size ‘drop’, should make 6 for better profit margins than the Granada business had offered. 7 Wetherspoon was previously supplied by Holroyd Meek, part 8 of Booker Foodservice. Holroyd Meek is gaining the Granada 9 business that Brake Brothers are losing, which it can combine 1011 with its sales to Burger King (owned by Granada). 1 In concluding this section, we should note that, like the food 2 manufacturers who supply the retail trade, the catering whole- 3111 salers and product suppliers also see that innovation is the key 4 to increased profitability, especially with their own label ranges. 5 Brake Brothers has been disappointed with the performance of 6 their own manufacturing division, Twin Chef Foods, and see the 7 development of new products as the way to improve this. In the 8 same way, Booker Foodservice plans to introduce a new quality 9 own label range for caterers in 2000 to take the place of Booker 20111 Cash and Carry’s ‘Chef’s Larder’ range. Branding and differen- 1 tiation are just as much key tools for success in this sector as in 2 the retail sector. 3 4 Food and drink retailers 5 6 The food and drink retail sector accounted for gross ‘value 7 added’ of £12.5 billion in 1999. About 60 000 businesses (with 8 90 000 outlets) were classified as mainly or specialized food and 9 drink retailers. The industry is highly concentrated. The propor- 30111 tion of independent grocers fell from just over half in 1961 to 1 one-third of this in 1978, and by 1999 the largest ten food retail 2 companies accounted for 62% of the industry’s turnover 3 (MAFF 1999a). Today four major companies dominate the sector: 4 Tesco, Sainsbury, Asda (owned by the US company Wal-Mart) 5 and Safeway. Smaller players include Somerfield, Waitrose, 6 Morrisons and the Co-op. The UK ‘multiple grocers’ make two 7 or three times the operating profit of their European counter- 8 parts: up to 8%, compared with 2% in EU states and 1% in 9 Australia. Large stores can stock between 20 000 and 30 000 lines, 40111 and have many hundreds of suppliers (IGD 1998). 1 This chapter has already discussed the fact that the economic 2 ‘balance of power’ has shifted from manufacturers and proces- 3 sors to the retailers over the past 20–30 years. Like the manufac- 4 turers, the food retail sector can only ‘grow’ by selling more 5 ‘added value products’, by increasing their market share and/or 6 by diversification. Whilst the development of IT, as a means of 7 increasing the efficiency of logistic systems, has contributed to the 8 changes in market structure, other factors include the increasing 49111 concern, by both consumers and legislators, about food safety,

●●● 50 The scope and structure of the food supply chain

1111 traceability and quality. To facilitate this, many of the supermar- 2 kets directly obtain their food products from ‘preferred suppliers’ 3 which in turn have groups of ‘designated producers’ supplying 4 them to a particular specification. One drawback of this type of 5 collaboration is that if company A is collaborating with company 6 B, and company C with company D, then it might not be possi- 7 ble for company A to be able to work with company D. In this 8 way, the collaboration is restricted to a few key players, and 9 companies are very rigidly tied in with each other (Hogarth- 1011 Scott 1999). 1 The collaborative nature of the UK supply chain is probably 2 the most sophisticated in the world, although it is important to 3111 note that the UK’s grocery retailing environment is very different 4 from that of other countries, where the market is far more 5 segmented, and the sales mixes are very different. For instance, 6 the UK sells twice as much frozen food and far fewer perish- 7 ables than any other country in Europe (IGD 2000). In addition, 8 people shop less often than their European neighbours, prefer- 9 ring to make weekly ‘big shops’ instead of daily visits; this 20111 requires a sophisticated supply chain able to provide volume 1 supplies at a rapid speed. As a result of such differences, savings 2 in the UK retail sector, which are reflected in profits, are typi- 3 cally between 0.5% and 2% of retail sales over comparable 4 turnover in Europe (IGD 2000). 5 6 Discount retailers ●●● 7 8 There are some sectors of the UK retail market where collabo- 9 ration between the manufacturer and the retailer is inappro- 30111 priate. In the discount sector the drive for low prices overrides 1 consistency of supply, and many suppliers are ‘de-listed’. 2 Manufacturers that are prepared to collaborate with the discount 3 sector are limited (Walker 1994). 4 5 Caterers 6 7 In 1999 the UK non-residential catering sector accounted for 8 gross ‘value added’ of over £9.1 billion (MAFF 1999a). Caterers 9 are the single largest employers in the food system. In 1999 40111 approximately 90 000 businesses (with 250 000 outlets) were clas- 1 sified as caterers; indeed concentration in this sector is very low 2 – the largest ten firms accounting for only 21% of the sector’s 3 turnover (MAFF 1999a). Low concentration means that this sector 4 is characterized by the variety of its outlets, which include fast- 5 food outlets, self-service cafeterias, motorway service stations, 6 restaurants, bistros, cafes, ethnic restaurants of every style, hotels 7 of all classes, motels and so forth. 8 However, there are a few large companies which do dominate 49111 the sector, mirroring the complexity of some of the companies

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1111 in the retail, foodservice and wholesaling sectors. The major 2 players include Granada, whose catering interests include hotel 3 chains, a road service division and catering contracting, the inter- 4 national company Sodexho, which owns a range of familiar 5 catering contractors such as Gardner Merchant and Ring and 6 Brymer, and pub chains such as Bass and Whitbread. For trading 7 purposes each ‘division’ is self-sufficient and is responsible for 8 its own supply chain. 9 Given the variety of catering outlets, the issues in terms of 1011 supply chain management are disparate. Certain major compa- 1 nies own their own supply and manufacturing divisions (see 2 section on wholesaling), whereas the smaller outlets will source 3111 their produce from the wholesalers who specialize in catering 4 for the hospitality industry. In many cases, these are different 5 names but they are owned by the same parent company. 6 However, the issues of quality, consistency of supply, traceability 7 and price remain as important for this sector as for any other in 8 the food industries. 9 20111 Conclusion 1 2 This chapter has examined a number of the challenges which 3 face the food and drink supply chain today. These include: 4 5 • Globalization of markets. 6 • An acute emphasis on food safety, so the utilization of ‘tools’ 7 such as ‘due diligence’, HACCP, and ‘traceability’, assurance 8 schemes and so on are present at all stages of the supply 9 chain. 30111 1 • Greater customer choice and market segmentation. 2 • Diversification in the rural economy: farmers are increasingly 3 squeezed in a cost/price wedge that demands higher produc- 4 tion and greater technological inputs, and results in either 5 larger holdings or part-time farming. 6 7 • A major shift in power relationships over the past 30 years 8 between the manufacturers and the retailers. 9 40111 References 1 2 Anon (1998) Manufacturers split over multiple power. The Grocer, 3 8 August, p. 4. 4 Competition Commission (2000) Supermarkets – a report on the 5 supply of groceries from multiple stores in the UK, CM44842 6 10/10/2000 (www. Opengov.uk). 7 Dobson P., Waterson M. and Chu A. (1998) The Welfare 8 Consequences of the Exercise of Buyer Power. Paper No. 16. 49111 London: Office of Fair Trading

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1111 DOH (1992) The Health of the Nation. London: HMSO. 2 EuroPA (1995) The UK Food and Drink Industry: A Sector by Sector 3 Economic and Statistical Analysis. Cambridge: EuroPA and 4 Associates. 5 FT (2000) Kellogg set to eat its words. Financial Times, 25 6 February. 7 Gannaway B. (1998) The OFT’s new stamping ground. The Grocer, 8 8 August, pp. 26–7. 9 Hogarth-Scott S. (1999) Retailer–supplier partnerships: hostages 1011 to fortune or the way forward for the millennium? British Food 1 Journal, 101 (9), pp. 668–82. 2 Hobbs J. (1996) A transaction cost analysis of quality, traceability 3111 and animal welfare issues in UK beef retailing. British Food 4 Journal, 98 (6), pp. 16–26. 5 IGD (1998) Efficient Consumer Response. An Industry Response. 6 Institute of Grocery Distribution. 7 IGD (2000) European Grocery Retailing 2000: A Practical Guide. 8 Institute of Grocery Distribution. 9 MAFF (1999a) Working Together for the Food Chain. Views from 20111 the Food Chain Group. London: Ministry of Agriculture, 1 Fisheries and Food. 2 MAFF (1999b) The National Food Survey. London: Ministry of 3 Agriculture, Fisheries and Food. 4 MAFF (2000) Farmers’ markets – good for British agriculture and 5 the food chain. News Release, 25 May; www.Maff.gov.uk/ 6 inf/newrel/2000/000525b.htm 7 Seth A. and Randall G. (1999) The Grocers: The Rise and Rise of 8 Supermarket Chains. London: Kogan Page 9 Tansey G. and Worsley T. (1995) The Food System: a Guide. 30111 London: Earthscan. 1 Walker M. (1994) Supplier–retailer collaboration in European 2 grocery distribution. Logistics Information Management, 7 (6), 3 pp. 23–7. 4 5 Activities 6 7 1 (a) Visit a supermarket and calculate the selling price of a 8 whole lamb. You will need to refer to a text that shows 9 all the cuts from the carcass first. Which of these cuts 40111 are to be found within the supermarket? Consider how 1 the butcher may use the missing parts. 2 3 (b) Carry out the same exercise at a local independent butcher. 4 (c) Find out: 5 6 (i) the cost of the whole lamb to the farmer (a copy of 7 Farmers’ Weekly may help you) 8 (ii) the value of the whole carcass to the caterer (prices 49111 are published in Caterer and Hotelkeeper)

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1111 (iii) calculate the difference in the value of that lamb to 2 the farmer and the cost to the consumer. 3 (d) What steps in the food chain may account for this price 4 difference? 5 (e) How can the independent butcher or the supermarket 6 justify the prices that they charge? 7 8 2 Visit a number of websites for large foodservice companies: 9 (a) Identify the range of innovations that they are offering. 1011 (b) Is this ‘value added’? 1 2 (c) What are the advantages for the caterer in using these 3111 products? 4 (d) To what extent are the innovations reflected in those of 5 competitor foodservice companies? 6 7 8 Questions 9 20111 1. ‘. . . buyer power may be socially detrimental where it under- 1 mines the long term viability of suppliers and their willingness 2 to commit to new product and process investments’ (Dobson, 3 Waterson and Chu 1998). Discuss this statement. 4 5 2. A number of companies in both the foodservice and food 6 retailing sectors now consider their prime objective to be 7 ‘customer satisfaction’. Why should this concept be the current 8 ‘buzzword’ of the business? 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 54 1111 CHAPTER 2 ●●●● 4 3 4 5 6 Concepts of 7 8 9 1011 collaboration: 1 2 3111 4 supply chain 5 6 7 8 management in a 9 20111 1 2 global food 3 4 5 6 industry 7 8 9 30111 Andrew Fearne, David Hughes and 1 Rachel Duffy 2 3 4 5 6 7 8 9 Key objectives 40111 1 • To examine the process of globalization and the emer- 2 gence of food retailers as the dominant force in the food 3 supply chain 4 5 • To explore the strategic response of the food manufac- 6 turing sector 7 • To explore the theoretical constructs of supply chain 8 management 49111 Food Supply Chain Management

1111 Introduction 2 3 Less than a decade ago, the days of the giant conglomerate 4 seemed over; they were too big, too complacent and too inflex- 5 ible. However, the US economy has grown fast since 1992, with 6 many big organizations becoming flatter, less bureaucratic and 7 hierarchical in structure. The big corporation of the twenty-first 8 century looks like being a loose alliance, a confederation of small 9 entities, held together by knowledge and competencies, shared 1011 values and integrated missions. The edges of these amorphous 1 organizations will become fuzzier, but their control, through 2 patents and contractual agreements seems likely to grow. The 3111 knowledge economy requires ‘big science’ and only big corpo- 4 rations with big Research and Development budgets look 5 likely to be able to afford it. Of course, the human brain cannot 6 continue to accommodate an exponential growth of knowledge 7 and the 300-year-old explosion of knowledge was flattening off 8 by the 1960s. It is these diminishing returns to Research and 9 Development that means the future belongs to the big corpora- 20111 tion with deep pockets. 1 This chapter is concerned with the battle for supremacy in a 2 food industry in which competition is played out on a global 3 field, with fewer, larger, global players battling for market share. 4 The stalemate which results from global retailers confronting 5 global manufacturers has been broken by the introduction of 6 Efficient Consumer Response (ECR) and the realization that 7 co-operation between trading partners is more effective than 8 confrontation. Traditional inter-firm competition is being 9 superseded by competition between supply chains, as retailers 30111 and manufacturers alike seek competitive advantage through 1 strategic supply chain partnerships. 2 3 The globalization of grocery retailing 4 5 The latter half of the twentieth century, in both Europe and 6 North America, has seen the emergence of the supermarket as 7 the dominant grocery retail form. The reasons why supermar- 8 kets have come to dominate food retailing are not hard to find. 9 The search for convenience in food shopping and consumption 40111 coupled to car ownership, led to the birth of the supermarket. 1 As incomes rose and shoppers sought both convenience and 2 new tastes and stimulation, supermarkets were able to expand 3 the products offered. The invention of the bar code allowed a 4 store to manage thousands of items and their prices, and led to 5 ‘just-in-time’ store replenishment and the ability to carry tens 6 of thousands of individual items. Computer-operated depots 7 and logistical systems integrated store replenishment with 8 consumer demand in a single electronic system. The superstore 49111 was born.

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1111 The expansion of retailers across European borders has been 2 one characteristic of structural change in industry in general and 3 the food industry in particular (Table 4.1). Starting slowly in the 4 1970s, retail firms sought to extend their market territories within 5 Europe. The pace of expansion accelerated in the 1980s and 1990s; 6 with over half of post-Second World War retail firm moves 7 within Europe being initiated during the 1990s. 8 The 1980s were a decade of ‘border hopping’. Firms from many 9 sectors expanded into adjacent markets – fashion retailers were 1011 most active in the first half, followed by the French grocery 1 hypermarket companies (e.g. Carrefour) expanding into Spain, 2 Italy and Greece and German hard discount chains (e.g. Aldi) 3111 moving into adjacent countries in the second half. Cross- 4 border alliances between non-competing national grocery retail 5 firms were initiated with the intent of enhancing purchasing 6 power and developing new product sourcing opportunities, for 7 example, the European Retail Alliance/Associated Marketing 8 Services. 9 In Europe and led by grocery retailers, the ‘border hopping’ 20111 accelerated during the 1990s, despite the economic recession 1 early in the decade. With the end of the ‘Cold War’, German 2 3 4 Pre-1980s 1980s 1990s 5 Percentage of 11 34 55 6 cross border 7 retail moves 8 9 Top 5 Destinations Belgium Belgium UK 30111 France Spain Spain 1 Austria Germany Germany 2 Netherlands UK France Switzerland Netherlands Czech Rep. 3 4 Top 5 Initiators UK France UK 5 Germany UK France 6 France Germany Germany 7 Netherlands Outside Europe Outside Europe 8 Sweden Italy Netherlands 9 40111 Most active Fashion/ Fashion/ Grocery 1 sectors footwear footwear Fashion/ 2 Grocery Grocery footwear 3 Health/beauty Health/beauty Household 4 5 Source: Oxford Institute of Retail Management and James Lang Wooton 6 Table 4.1 (1997) Shopping for New Markets: Retailers Expansion Across Europe’s 7 Retailers’ expansion across Borders. Oxford Institute of Retail Management, Templeton College, University of Oxford. November, 1997 8 European borders, pre-1980s 49111 to 1997

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1111 and other Northern European retailers expanded into Eastern 2 and Central European countries. Firms from Germany (e.g. 3 Tengelmann), France (e.g. Carrefour), Belgium (e.g. Delhaize Le 4 Lion) and the Netherlands (e.g. Royal Ahold) have taken a global 5 perspective on trading. The major UK retailers have had less of 6 an international presence – Sainsbury in the USA, Tesco faltering 7 in Northern France and, then, acquiring retail businesses in 8 Eastern Europe and Thailand. 9 At the end of the twentieth century there are three grocery 1011 retail firms – Wal-Mart, Carrefour and Royal Ahold – who have 1 strikingly similar global aspirations. For example, Royal Ahold’s 2 mission statement is ‘to grow quickly and profitably to become 3111 the world’s leading supermarket company’, a statement that is 4 strikingly similar to that espoused by the other two major inter- 5 national players. 6 7 Supermarketing retail strategy 8 9 The genesis of the supermarket era – the emergence of the self- 20111 service grocery store – is attributed to retail developments in the 1 USA. The first supermarket was opened in 1930 (King Kullen) 2 by Michael Cullen, a New York merchant and, numerous super- 3 markets then emerged at varying speeds in the years 4 immediately following the Second World War, as the major form 5 of food retailing right across North America and Northern 6 Europe. The principal merchandising model that emerged and 7 was adopted by major supermarket chains can, for shorthand, 8 be labelled the ‘American model’. The model can be character- 9 ized as having a wide range of branded goods, a narrower range 30111 of much cheaper own label/store brand products, with the 1 promotional focus on price discounts, ‘specials’ etc. and the stores 2 leased, not owned, by the supermarket chain. 3 From the American model emerged two alternates. First, 4 German ‘hard’ discount chains. These are secondary small stores 5 with a limited, largely low-price, product offer, with store/own 6 label brands. These stores offer minimum in-store service. The 7 second is the UK retailing model – out of town, company-owned 8 super stores with a far greater product range. As much as half 9 of their products may be own label/store brand items, posi- 40111 tioned to compete with national brands on an equal and slight 1 price discount basis. There is a strong emphasis on premium 2 quality, chilled, almost exclusively own label value-added food 3 products. Company staff work closely with manufacturers of the 4 own label products and new product development is prolific 5 (e.g. Sainsbury and Tesco each launch around 1500 new own 6 label products per annum). The overall offer to the customer is 7 value driven. 8 Arguably, the UK model can be seen as merely a variant 49111 of the ‘American’ model, with particular emphasis placed on

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1111 premium own label and fresh foods. Certainly it has delivered 2 higher margins to British grocery retailers (double or even triple 3 the net profit margins of other countries). Its proponents argue 4 that the UK shopper is well satisfied. Yet British shoppers 5 do also have the opportunity to patronize price-driven retail 6 formats. For example, European hard discounters have a place, 7 although a modest one, in the UK grocery market. 8 The focus on price competition and average quality, rather 9 than service and/or high quality, that is characteristic of most 1011 Northern European and North American food retailers, is a self- 1 reinforcing merchandising strategy that encourages periodic 2 price wars. Typically a retailer will respond to declining sales 3111 by reducing prices. It is important to note that a drop in sales 4 tends to be linked to a decline in numbers of shoppers rather 5 than a reduction in average spend, thus the aim of a price reduc- 6 tion is to attract customers back into the store. When retailers 7 are operating at relatively low net profitability levels (i.e. 1–2%), 8 a small downturn in sales for the retailer is translated into a 9 disproportionately high decline in net profitability (Table 4.2). 20111 In the example given, a sales decline by a modest 2% and, in 1 the short term, the retailer has little flexibility in cutting costs. 2 Some minor adjustments can be made, for example, by reducing 3 the usage of part-time staff to push variable costs down. 4 A high decline in net profitability to retailers operating on a 5 low net margin is crucial as it has a disproportionate negative 6 impact on return on equity (ROE). A modest increase in sales 7 boosts net margin sharply and, in turn, this has a very attrac- 8 tive impact on ROE. From the example (Table 4.3), a 0.1% decline 9 in net margin for the French or USA retailer translates into a 30111 tenfold decline in ROE, i.e. the ROE falls by a full percentage 1 point. The UK retailer, operating at much more attractive levels 2 3 4 5 $000 $000 6 Sales 100 98 7 COGS 80 78.4 8 9 Gross margin 20 19.6 40111 Fixed costs 13.3 13.3 1 Variable costs 5.7 5.6 2 Net profit ($000) 1.0 0.7 3 Net margin (Net profit/Sales)% 1.0 0.71 4 5 A 2% decline in sales translates into a 29% decline in net margin 6 Table 4.2 7 The impact of a sales decline COGS: Cost of Goods Sold. 8 on retail net margins: a Source: Hughes and Ray 1999 49111 hypothetical example

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1111 of net profit margin, has substantially more latitude should there 2 be a short term dip in sales. In the example given, a 0.1% decline 3 in net margin translates into a threefold decline, 0.3%, in ROE 4 – reason for considerable concern, but not for mass panic and 5 the slashing of product prices across the board. 6 Interestingly, the ROE of French/American grocery chains are 7 not substantially different to those earned by the ‘high margin’ 8 UK retailers and thus has equal attraction for shareholders. 9 However, there is a fundamental difference between the two 1011 models in the means by which an similar ROE is achieved, as 1 seen in Table 4.3. 2 In the American model it is the leverage (i.e. assets divided 3111 by shareholder equity), that drives the return on shareholder 4 funds (ROE). The ‘American’ model retailers invest little in the 5 physical stores, preferring to lease rather than purchase. The 6 financial trump card in this form of retailing is to maximize the 7 extent to which the business can be run on supplier credit (i.e. 8 through gaining extended terms of payment) thereby, maxi- 9 mizing leverage. 20111 In the UK, the major retailers are ‘blue chip’ quoted, public 1 companies, with strong balance sheets reflecting their investment 2 in the, now very scarce, out of town sites for superstores and 3 the bricks and mortar of the stores themselves. This high level 4 of capitalization reduces leverage and identifies that UK retailers 5 are in two businesses, namely grocery retailing and property 6 development and investment. 7 There are three principal implications of the ‘American’ retail 8 model focus on price, with service being an ancillary concern. 9 1. There is consistent pressure within the supermarket business 30111 – from board level to store department manager – to reduce 1 2 3 Net Profit × Sales × Assets ROE = ––––––––– ––––––– ––––––––––––––––– 4 Sales Assets Shareholder Equity 5 6 Return on Equity Net Asset Leverage 7 Margin Turnover 8 9 Northern Europe/North American retailer 40111 ROE = 1.6 × 2.0 × 4.9 = 16 1 0.1% decline/increase translates to ±1.0% change in ROE 2 UK retailer 3 ROE = 6.1 × 1.4 × 2.1 = 18 4 0.1% decline/increase translates to a ±0.3%change in ROE 5 6 Source: Adapted from Wileman and Jary 1997 7 8 49111 Table 4.3 The impact of a decline in net margins on ROE for grocery retailers

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1111 in-store labour and to minimize head office staffing costs, with 2 a net impact of: 3 (a) reducing the quality of the shopping experience for the 4 customer, 5 (b) allowing head office staff less time to develop effective 6 commercial relationships with their suppliers and shop- 7 pers. 8 9 2. The totally price-driven model has the effect of fostering an 1011 ethos of constant confrontation between retailers and their 1 suppliers – manufacturers, distributors, growers etc. 2 3111 3. The transfer of income from manufacturers to retailers – in 4 the form of ‘street money’ such as slotting fees (overriders 5 etc.) increases the comparative advantage of large versus small 6 manufacturers through raising entry barriers to the food 7 industry. 8 9 An almost exclusive focus on price, rather than other product 20111 attributes and supplier services, ensures that supplier–retailer 1 relationships are, characteristically, confrontational and, in most 2 cases, dominated by the retailer. Further, the merchandising 3 tactic of using ‘specials’ has convinced shoppers that they should 4 only buy when many products are ‘on offer’. This creates signif- 5 icant inefficiencies in the supply chain; for example, creating 6 ‘spikes’ in demand for products with the consequential require- 7 ment for suppliers and retailers to build up huge inventories in 8 anticipation of abnormal demand. The combination of a frus- 9 trated shopper and a ‘bullied’ supplier will serve to accelerate 30111 the demise of traditional supermarket retailing as it exists in the 1 late-1990s. Clearly, there are supermarket firms to whom this 2 does not apply (e.g. some American examples of best retailing 3 practice would include Wegman’s, H.E. Butt, Hannaford Bros.). 4 However, for many, the final decade of the twentieth century 5 may have been the supermarkets’ halcyon period of domination 6 in many markets in Northern Europe and North America. 7 The competitive threat for retailers is increasing as new routes 8 to the shopper and consumer emerge. Traditional supermarkets 9 have struggled to maintain market share in the face of increasing 40111 competition from growth sectors such as food service, warehouse 1 clubs, gas station/forecourt ‘mini-supermarket’ outlets and the 2 much-publicized, although still incipient, home delivery options 3 using the Internet, telephone etc. As shown in Tables 4.2 and 4 4.3, a relatively small decline in sales for some supermarket 5 companies, which can result from this competitive pressure can 6 have a draconian impact on net profit margin and ROE. 7 The flurry of supermarket chain acquisition and merger 8 activity in the latter part of the 1990s in Northern Europe and 49111 North America is testament to this as the more aggressive firms

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1111 seek to consume their competitors and generate scale efficien- 2 cies in purchasing, logistics and promotion etc. 3 4 Changing retailer behaviour 5 6 Successful retailers now recognize that it is their customers 7 who are their greatest assets, not their stores. Thus, a race has 8 been initiated to establish loyalty programmes that will bind 9 customers to specific stores through their lifetime, a cultural shift 1011 for retailers who, in history, were fixated on maximizing trans- 1 actions and traffic, irrespective of relative profitability of types 2 of customers. Clearly, the current loyalty schemes represent 3111 the first tentative steps of retailers learning how to cope with 4 the mountain of data that is generated through the bar codes on 5 every product and every till. In many cases, the schemes are no 6 more than discount programmes that benefit shoppers who may, 7 or may not be, profitable for the retailer in question. They have 8 been beneficial in attracting trip loyalty rather than higher trip 9 spend and spend is clearly the next target. The future emphasis 20111 will be a move from ‘one to many’ mass marketing towards ‘one 1 to one’ mass customization. 2 The implementation of Category Management, as part of the 3 global ECR initiatives, provides a scientific boost to the business 4 of retailing as it relies on comprehensive analyses of store- 5 and market-level data for making a wide range of strategic and 6 tactical decisions. Further, it requires the retailer to appraise 7 its relationships with key suppliers and to move away from 8 confrontation and towards co-operation. This, in itself, is a 9 cultural volte face that many will fail to attain. When retail buyers 30111 have been trained through the years to gain maximum leverage 1 from their suppliers (‘bullying’ in many cases) and to consider 2 all retail sales data as confidential, simply re-labelling the buyer 3 as a category manager will not be sufficient to change the nature 4 of the commercial relationship. Yet, Category Management is not 5 ‘rocket science’! In the final analysis, it is simply getting the 6 basics of retailing right, namely listing the consumer relevant 7 SKUs (stock keeping units); having them in-store at the right 8 time; merchandising the display cabinet/shelfspace efficiently 9 and effectively; providing effective promotional support; and 40111 ensuring price competitiveness on products that are price sensi- 1 tive. In short, it is a matter of understanding the shopper and 2 generating shopper and consumer enthusiasm for each product 3 category and for the store overall. 4 Thus, to survive in the twenty-first century, traditional super- 5 markets must change radically. In essence, they must use IT and 6 transformed staff to recreate the customer–retailer relationship 7 that was characteristic of the very best specialist retailer busi- 8 nesses in the early twentieth century. Radical changes will come 49111 quickly. AC Nielsen Europe surveyed 300 leading European

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1111 grocery retailer executives and asked them about the changes 2 they expected to see in their sector in the first decade of the next 3 century. Responses to four of the key questions are instructive: 4 5 • What percentage of today’s food retailers will be in existence 6 in 2005? 63% said less than 50%. 7 • Who will own most of the stores in 2005? 65% said large inter- 8 national/global retailers. 9 1011 • If you were not in the food business, would you invest 50% 1 of your personal wealth in food retailing, today? 52% said 2 definitely not. 3111 • By what date will consumer-direct sales represent 20% or more 4 of food ‘retail’ volume? 20% said by 2005 and 48% said by 2010. 5 6 If changes in the retail sector occur of the expected magnitude 7 and at the expected pace, then, there will be substantial rever- 8 beration throughout the food industry. In the next section 9 the consequences of such radical change for manufacturers are 20111 explored in more detail. 1 2 Food manufacturing – the clash of the Titans 3 4 In this section, the focus is placed on the larger scale manufac- 5 turing companies – fast moving consumer goods (FMCG) 6 companies – such as Unilever, Kraft Jacob Suchard, Nestlé – and 7 particular account is taken of their evolving relationships 8 with major national and international retailers. First, structural 9 changes in food and beverage manufacturing are addressed. 30111 Factors that stimulate international expansion of FMCG firms into 1 global markets are reviewed. Briefly, the relative performance of 2 food manufacturing firms is assessed and initiatives that major 3 FMCG firms can undertake to improve their commercial position 4 vis-à-vis large scale and often global retailers are discussed. 5 6 Structural changes in international food manufacturing 7 8 In the food industries of the developed world, the balance of 9 power has shifted over the past 30 years or so to favour food 40111 retailers. This has been particularly marked in Northern Europe 1 where national grocery markets are characterized by relatively 2 high levels of retail concentration. This is in contrast to the USA, 3 where retail concentration has been relatively low at the national 4 market level, but often high at the regional/state level. 5 In the early 1970s FMCG companies had field sales forces 6 roaming the land and taking orders from individual shops. 7 Promotions were local in orientation. In subsequent decades, the 8 retail landscape became, increasingly, structured with super- 49111 market chains consolidating and the trade focus shifting to

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1111 negotiations between retail head office and manufacturers. In 2 the low growth 1990s, margins have been under pressure for 3 most parties and the emphasis has shifted to capturing supply 4 chain efficiencies to compensate for low growth. In the next 5 decade, retailers will seek to reduce their supply bases and 6 concentrate on building partnerships with preferred suppliers. 7 Joint business planning will be initiated to build consumer 8 demand and to reduce logistics costs and improve supply chain 9 management efficiencies. 1011 While the globalization of retailing is a relatively recent 1 phenomenon, food manufacturing has been international in char- 2 acter for decades and, if not dominated, at least led by firms 3111 with their headquarters in the USA. The instigator of the 4 convenience food revolution, the USA, accounts for about one- 5 quarter of the industrialized world’s total processed food 6 production. American firms comprise the majority of both the 7 top 10 and top 30 global food and beverage manufacturers. The 8 UK is the next most frequently listed, followed by Japan and 9 France (Table 4.4). 20111 Since the 1970s, the nominal value of total world trade in 1 processed food has increased at an average annual rate of about 2 10.5%. This figure understates the importance of globalization 3 in the food industry, however, as it does not take into account 4 the trans-national activities of food processing firms. For 5 example: in 1994 sales from foreign affiliates of US processed 6 food firms exceeded $100 billion, more than four times the total 7 value of US exports of processed foods. Most of these sales were 8 in foreign markets; only about 2% were shipped to the USA. 9 The EU food manufacturing sector is highly fragmented, 30111 although sales are dominated by companies with more than 1 100 employees. In 1992, there were 256 000 food manufacturing 2 firms each employing less than 20 people and accounting for 3 15% of sector turnover, whilst 4500 firms with 100+ employees 4 accounted for 70% of sales turnover. Across-EU comparisons of 5 change in the size distribution of enterprises in the food and 6 drink manufacturing sector from 1980 to 1992 are difficult. 7 However, the various pressures that we expected to promote 8 concentration in the industry and lead to convergence of food 9 industry structures across Europe, appear to have had little 40111 impact during the 1980s. In the USA, food manufacturing is 1 much more concentrated: 16 000 registered food manufacturing 2 firms in 1995, with the top 50 companies accounting for an esti- 3 mated 50% of total sector output. 4 Modest although concentration may have been during the 5 1980s, the pace of structural change seemed to pick up during 6 the 1990s. The early 1990s saw substantial polarization taking 7 place in the European food manufacturing sector. In 1991, the 8 three largest companies, Philip Morris, Nestlé and Unilever, 49111 posted European food sales of ECU 48.5 billion, out of a total

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1111 Rank Company HQ base Food Total 2 sales sales 3 ($ billion) ($ billion) 4 5 1 Nestlé Switzerland 45.4 47.6 6 2 Philip Morris USA 31.9 72.1 3 Unilever UK/Holland 24.2 48.5 7 4 Conagra USA 24.0 24.0 8 5 Cargill USA 21.0 56.0 9 6 PepsiCo USA 20.9 20.9 1011 7 Coca-Cola USA 18.9 18.9 1 8 Diageo UK 18.8 20.2 2 9 Mars USA 14.0 14.0 3111 10 Danone France 14.0 14.8 4 11 ADM USA 13.9 13.9 5 12 IBP USA 13.3 13.3 6 13 Anheuser-Busch USA 12.8 12.8 7 14 Kirin Japan 10.9 10.9 15 Sara Lee USA 10.4 17.9 8 16 Eridania Béghin-Say France 9.6 10.7 9 17 H.J. Heinz USA 9.4 9.4 20111 18 Asahi Breweries Japan 9.1 9.5 1 19 RJR Nabisco USA 8.7 17.1 2 20 Best Foods USA 8.4 8.4 3 21 Suntory Japan 8.1 8.1 4 22 Campbell’s Soup USA 8.0 8.0 5 23 Seagram Canada 7.0 12.6 6 24 Kellogg USA 6.8 6.8 7 25 ABF UK 6.8 8.5 8 26 Cadbury Schweppes UK 6.8 6.8 27 Heineken Holland 6.8 6.8 9 28 Tate & Lyle UK 6.4 7.6 30111 29 Tyson Foods USA 6.4 6.4 1 30 General Mills USA 6.3 6.3 2 3 Table 4.4 Source: Cooke T. (1998) Leading food and drinks groups. In: Trends in 4 The top thirty food the Global Food Industry, 1998. Seymour-Cooke Food Research International, London, UK 5 manufacturing firms, 6 ranked by food sales, 1997 7 8 European food sales of ECU 135 billion from the top 50 compa- 9 nies, i.e. 36% of total. By the early part of the 1990s, the major 40111 sub-sectors of the European food manufacturing sector showed 1 a relatively high degree of three firm concentrations in most EU 2 countries (Table 4.5). With the exception of pasta in the UK (a 3 relatively under-developed market in European terms), the top 4 three manufacturers accounted for more than 50% of output in 5 the pasta, coffee, biscuit, chocolate confectionery, ice cream and 6 mineral water product areas. Within the selected NACE codes, 7 the leading manufacturers are, typically, multi-national firms 8 with a strong European presence at the least and, generally, a 49111 global presence (Table 4.6).

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1111 % of total supply 2 Pasta Coffee Biscuits Choc. Ice Mineral 3 confect. cream water 4 5 UK 27 78 70 79 58 50 6 France 58 64 50 51 56 76 Germany 57 63 50 51 88 24 7 Italy 52 67 67 50 80 34 8 9 These formed by independent wholesale operators in order to improve 1011 trading terms with suppliers and offer their members, through the power 1 of bulk buying, significant price benefits. The main distinguishing feature compared to symbol groups is that it allows members to trade under 2 their own name, facia or group identity. 3111 Table 4.5 Source: Fearne A. (1996) The Impact and Effectiveness of the Internal 4 Three firm concentration Market Programme on the Processed Foods Sector. Food Industry 5 ratios for selected food Management Group, Wye College, University of London, January 6 product categories, 1991 7 8 9 417 Pasta 423 Tea/Coffee 419 Biscuits 421 Confectionery 421 Ice Cream 20111 Barilla Douwe Egbertsa Bahlsens Keksfabrik Cadbury Unilever b 1 Danone Jacobs Suchard Campbell Ferrero Scholler b 2 RHM Nestlé Danone Suchard Nestlé Nestlé Unilever United Biscuits Mars Mars 3 Heinz RJR Nabisco Nestlé Grand Met. 4 5 424 Spirits 427 Beer 428 Soft Drinks 428 Mineral Water 6 Allied Domecq Anheuser Busch Coca-Cola Nestlé 7 Grand Met. Bass Pepsi-Cola Danone 8 Seagram Danone CCSBc San Benedetto 9 Guinness Fosters Bass San Pellegrino 30111 Heineken 1 a Sara Lee 2 b Phillip Morris 3 c Coca-Cola Schweppes (Cadbury) Beverages 4 Source: As Table 4.5 5 6 7 Table 4.6 Major manufacturers of selected food product categories (by NACE code) in the early 1990s 8 9 40111 In the early 1990s, merger and acquisition (M&A) activities of 1 major food manufacturing and beverage companies in Europe 2 was intense, accounting for close to two-thirds of all M&A 3 activity in the global food industry and, largely, cross-border in 4 nature as companies within the EU ‘jockeyed’ for commercial 5 position. By mid-decade, the global M&A activity remained at 6 high levels, but the proportion accounted for by EU firms had 7 declined. Within Europe the M&A activity was undertaken by 8 the major FMCG firms. Western European and US firms have 49111 dominated M&A activity during the 1990s, accounting for 70%

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1111 of total M&As in 1996 (Table 4.7). Globally, most M&As are 2 cross-border and, often, for non-EU and non-US firms, involve 3 purchases of mergers with firms in adjacent countries. American 4 firms accounted for around one-third of all M&As in the 5 mid-1990s, followed by firms from the UK, France, Canada and 6 Germany (Table 4.8). M&As are spread out over the food 7 industry by product category, although they are particularly 8 noticeable in the alcoholic and soft drink sectors (20% of global 9 total) and the dairy sector. 1011 Just as retailers have established horizontal, cross-border 1 alliances with each other in Europe, Northern Hemisphere-based 2 food manufacturers have undertaken similar initiatives. In the 3111 4 5 6 Region 1994 1995 1996 Percentage Percentage cross-border of total M&A 7 in 1996 in 1996 8 9 Western Europe 214 262 202 49 38 20111 Central/Eastern Europe 29 38 35 86 7 1 North America 143 158 168 22 32 2 Latin America/Caribbean 33 42 52 92 10 Asia/Pacific 47 44 48 85 9 3 Africa/Middle East 17 15 23 74 4 4 Total 483 559 528 51 100 5 6 Source: Cooke T. (1994, 1998) Mergers & Acquisitions world-wide. Seymour-Cooke Food Research 7 International, London 8 9 30111 Table 4.7 Food industry mergers and acquisitions, by major regions, 1994–6 1 2 3 HQ location of lead firm Percentage of total M&As 4 1994 1996 5 USA 32 35 6 UK 20 14 7 France 6 10 8 Canada 7 6 9 Germany 7 5 40111 Italy 4 4 1 Spain 5 4 Netherlands 4 4 2 Poland 2 3 3 Australia 3 3 4 Others 10 12 5 6 Table 4.8 Total 100 100 7 Mergers and acquisitions by 8 headquarters location of lead Source: As Table 4.7 49111 firm, 1994 and 1996

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1111 early 1990s, Nestlé and Coca-Cola formed the Coca-Cola–Nestlé 2 Refreshment Co. to develop ready-to-drink tea and coffee 3 markets outside Japan. Unilever linked up with Pepsi-Cola to 4 develop tea-based drinks and Danone to market frozen yoghurt 5 products. Most active has been General Mills, from the USA, 6 linking with Nestlé to form Cereal Partners World-wide, Pepsico, 7 to focus on the European snack market and Best Foods to launch 8 desserts and baking mixes in eight Latin American countries. 9 The three most commonly cited reasons for forming alliances 1011 are: to gain access to a market and/or a distribution system, to 1 exploit complementary technology and to reduce time taken for 2 innovation. Alliances are, likely, to be a sustaining feature of the 3111 food manufacturing scene. 4 5 Increasingly competitive environment in food manufacturing 6 7 Food manufacturers view the emergence of a relatively few, very 8 large global retailers with some trepidation. The major FMCG 9 food manufacturers have first hand experience in dealing with 20111 major national retailers in the mature market regions of Northern 1 Europe and North America and, more recently, it has been a 2 struggle. 3 From a period of market dominance in the 1950s and early 4 1960s, manufacturers have come under increasing commercial 5 pressure from major retail chains who, now, are expanding 6 aggressively on a global basis. In their home markets, food 7 companies have learnt that strong brands and market leadership 8 is critical to fending off the challenge of retailer own label prod- 9 ucts. This is particularly the case for premium own label products 30111 such as those offered by Sainsbury in the UK, Safeway Select in 1 the USA and President’s Choice of Loblaw’s in Canada. Even 2 in the USA where own label sales were slow to become estab- 3 lished, they are forecast now to increase at three times the rate 4 of nationally branded grocery products. 5 The launch of the Europe currency programme at the begin- 6 ning of 1999 has served to compound the challenges for the 7 multinational FMCG companies and, is a harbinger of what is 8 to come when the global retailers elect to source globally and, 9 seek a single net price from their major suppliers. Manufacturer 40111 selling prices for FMCG products have varied significantly across 1 the European Union as manufacturers have sought to exploit 2 their bargaining position by country reflecting, in the past, that 3 retailing was on a national basis. Cross-border mergers have 4 ‘Europeanized’ the market. With the introduction of the Euro 5 and removal of exchange rate risk, price differentials between 6 markets will become more transparent. For example, German 7 retailers may wish to quiz Coca-Cola on the rationale for 8 the 100% price differential between Germany and Spain for a 49111 1.5 litre bottle of Coke! The French food retailer, Promodès,

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1111 operates in France, Belgium, Italy, Spain and Portugal and, indu- 2 bitably, will be demanding one price and the very lowest price 3 from Coca-Cola for all its companies in Europe. 4 5 Combating the competitive threat from global retailers: 6 FMCG initiatives 7 8 There are a range of responses that FMCG companies can 9 consider as mechanisms to combat the growing competitive 1011 threat from increasingly powerful global retailers: 1 2 • Innovate 3111 • Cost leadership (cost consciousness) 4 5 • Diversify sectors within existing geographical markets 6 • Explore new distribution channels 7 8 • Seek to develop long term partnerships with those retailers 9 who will lead the industry in the future. 20111 1 The emergence of supply chain management as a source of 2 competitive advantage and, the growing emphasis on the devel- 3 opment of strategic supply chain partnerships within the global 4 food industry, is a relatively recent phenomenon. It is also one 5 of the challenges which retailers, food manufacturers, farmers 6 and all the other intermediaries in the food supply chain find 7 particularly difficult to tackle. This chapter now moves on to 8 discuss the principles of supply chain management and the key 9 requirements for the development of strategic supply chain part- 30111 nerships in the global food industry. 1 2 Supply chain partnerships for a global food industry 3 4 It is commonplace today for strategic writers to argue that 5 competition is dead (Moore 1996), or that co-operation rather 6 than competition is the way forward (Brandenburger and 7 Nalebuff 1996). At the operational level there has also been a 8 plethora of writing about more collaborative relationship 9 management and procurement, and logistical effectiveness and 40111 efficiency, that draws on this experience. The work by Bhote 1 (1989), Carlisle and Parker (1989), Christopher (1992, 1997), 2 Gattorna and Walters (1996), Harrison (1993), Hines (1994), 3 Houlihan (1988), Kay (1993), Lamming (1993), Lewis, (1990), Sako 4 (1992) and Saunders (1994) all falls into this category. 5 The basic argument of this writing is that business success 6 will be derived from companies managing the enhancement of 7 the total performance of the supply chain, so that it can deliver 8 improved value to customers. Thus waste is normally seen as 49111 the major enemy and closer and long term working relationships,

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1111 even partnerships, with suppliers at all levels in the chain are 2 recommended in order to deliver exceptional value to customers. 3 Companies are, therefore, instructed to construct ever more effi- 4 cient and responsive supply chains because it will no longer be 5 company competing with company, but supply chain competing 6 against supply chain. 7 The development of collaborative marketing ventures in the 8 global agri-food chain is a response to the economic pressures 9 that are driving the evolution of the chain and encouraging 1011 greater vertical and horizontal co-ordination. To some, such 1 vertical and horizontal collaborative ventures (‘linkages’, 2 ‘alliances’, ‘value added chains’ or ‘partnerships’) are seen as a 3111 compromise in market organization between the extremes of 4 open market trading and complete vertical integration. To others, 5 they offer an alternative less rigid way of co-ordinating the 6 market. 7 Christopher (1992) has defined the supply chain as a network 8 of organizations that are involved through upstream and down- 9 stream linkages in the different processes and activities that 20111 produce value in the form of products and services in the 1 hands of the ultimate consumer. Thus, a supply chain consists 2 of a number of businesses through which, information con- 3 cerning demand flows upstream, from the marketplace, and 4 ultimately to the raw material supplier. Material flows down- 5 stream, ending up as the particular physical product satisfying 6 end-customer needs. 7 Cox (1999) argues strongly that the supply chain concept has 8 both a strategic as well as an operational importance. Thus, he 9 regards the supply chain as having two dimensions. The first 30111 can be referred to as the operational supply chain; the second can 1 be referred to as the entrepreneurial supply chain. 2 The operational supply chain refers to the series of primary and 3 support supply chains that have to be constructed to provide 4 the inputs and outputs that deliver products and services to the 5 customers of any company. All companies have operational 6 supply chains and these supply chains are normally unique to 7 the company creating them. They have choices about the input 8 and output supply chains that they create operationally, and 9 about when they position strategically to provide a particular 40111 product and service within a specific primary supply chain. 1 This notion of companies positioning strategically within a 2 primary supply chain is an under-developed aspect of thinking 3 in business strategy. It is true that Porter (1980) was well aware 4 of the importance of buyer–seller relationships in the develop- 5 ment of his famous Five Forces Model. However, Cox argues, 6 that strategic management thinking has systematically under- 7 estimated the importance of these types of vertical business- 8 to-business relationships as the basis for a proper understanding 49111 of entrepreneurial action and, sustainable business success.

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1111 Furthermore, it is clear that supply chain thinking can provide 2 a significant insight into the conduct of business strategy and 3 that it is not merely an operational tool or technique. 4 In recent years, the idea of companies focusing on their core 5 competencies has been much-promulgated (Hamel and Prahalad 6 1990). Indeed, one could say that it has been the dominant 7 thinking in strategic management in the 1990s. The core compe- 8 tence paradigm is based on companies understanding what 9 internal skills and resources they should own and control 1011 through internal contracts, in order to sustain their business 1 success. It is also based on the understanding that the key 2 strategic decision within the company, the entrepreneurial 3111 make–buy decision, is always a supply chain management one. 4 When companies decide to become involved in any supply 5 chain they have to make decisions about how they will control 6 and manage the primary supply chain itself. They face decisions 7 about where they should position in the chain. At one extreme 8 they can decide to vertically integrate the whole chain, from raw 9 materials to end customer, or they can decide to own only one 20111 or two of the resources that exist in the chain. 1 It is clear that in an ideal world companies ought to position 2 strategically to own those supply chain resources that are diffi- 3 cult to imitate and around which they can build defensible 4 barriers to market entry. Only by possessing supply chain 5 resources, that have a low propensity for contestation, is it 6 possible for superior performance to be achieved by companies 7 over the long term. It follows, therefore, that companies ideally 8 must only outsource those supply chain resources that are highly 9 contested and which have low barriers to market entry. In this 30111 way it is likely that if the company also understands how 1 to limit its dependency on suppliers, and how continuously to 2 monitor any threats to its own supply chain position from 3 suppliers that the company will be able to maximize its ability 4 to appropriate value for itself. 5 This is what is meant by strategic, or entrepreneurial, supply 6 chain thinking. It is a way of thinking that recognizes that, for 7 whatever is produced for customers; it will always require the 8 construction of an entrepreneurially defined generic supply 9 chain. Within this chain there will be resources around which 40111 there is a variable scope for contestation and market closure. 1 Historically, strategy has tended to concentrate on horizontal 2 competitive rivalries around particular supply chain resources, 3 rather than on knowing entrepreneurially where to position to 4 own and control particular resources, within a specific supply 5 chain, in order to appropriate the maximum share of value for 6 oneself. 7 In practice, the concept of supply chain management is rela- 8 tively new, first appearing in the 1980s and emanating from 49111 the Japanese motor industry (Womack, Jones and Roos 1990).

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1111 The Japanese management philosophy ‘Kaizen’, which means 2 continual improvement, is at the core of supply chain manage- 3 ment. The Japanese were the first to recognize that in increasingly 4 competitive markets, continual improvement, however it is 5 measured in a business context, is increasingly difficult to achieve 6 when business organizations work in a vacuum. The paramount 7 importance of meeting consumer needs more quickly, more effec- 8 tively and more efficiently, led them to share their strategic vision 9 with their suppliers and their distributors and invited members 1011 of their respective supply chains to contribute to the process of 1 making the Japanese motor industry the ‘best in class’. 2 Following the success enjoyed by the Japanese motor industry 3111 during the late 1980s and early 1990s, manufacturers worldwide 4 began to view their supply chains as an important source of 5 competitive advantage. Initially, the emphasis was on logistics 6 and the reduction of lead-times and inventory levels, reducing 7 uncertainty and making better use of production capacity and 8 hitherto under-utilized resources. Thus, efficiency was the key 9 driver at the outset. More recently, the emphasis has moved 20111 towards innovation and the creation of value added in the supply 1 chain. New product development and improved customer 2 service is a key motive for supply chain management in the 3 new millennium, embracing new technology and capitalizing 4 on the information revolution which has been created by the 5 Internet. 6 The food industry has been slow to emulate the success of the 7 motor industry and it is only in recent years that supply chain 8 management has made its way onto the boardroom agendas of 9 the world’s leading food manufacturers. Progress has been 30111 particularly slow upstream, where a distinct lack of trust between 1 trading partners has made the task more difficult and the process 2 longer. O’Keeffe (1998) identifies four key characteristics in the 3 agri-food sector that have historically impeded the process of 4 trust-building at the grow-processor interface: 5 6 • In commodity markets the sum of value created is fixed and 7 the major issue is how it is divided among channel partici- 8 pants. This is a win–lose game and leads to adversarial 9 relationships. 40111 • Auction systems and regulated markets isolate farmers from 1 the rest of the food system and farmers do not gain any insight 2 into their customers and why they act the way they do. 3 Likewise processors have not needed, or had the opportunity 4 to, develop relationships with growers. 5 6 • Supply chain management does not remove the volatile 7 nature of prices and supply, both quantity and quality, char- 8 acteristic of agriculture. Price volatility puts pressure on the 49111 relationship.

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1111 • Interdependence is difficult to achieve owing to size imbal- 2 ance between processors and farmers. 3 4 However, the launch of the Efficient Consumer Response (ECR) 5 initiative, initially in the US grocery industry and later 6 throughout Europe, represented a paradigm shift in the opera- 7 tion of the food supply chain, with adversarial trading 8 relationships being replaced by co-operation and co-ordination, 9 facilitated by a willingness to exchange information of both 1011 strategic and operational importance. As a result, the world’s 1 leading food manufacturers are shaving days off production 2 lead times, weeks off inventory levels and months off New 3111 Product Development (NPD) cycles. They are delivering a more 4 effectively managed range of carefully targeted products and 5 services to increasingly diverse groups of consumers, at substan- 6 tially lower costs. The commodity sectors have still a long way 7 to catch up, but it is evident that throughout the global food 8 industry supply chain management is here to stay and likely 9 to remain a key point of focus for the leading players in the 20111 future. For further insights into the topic of ECR, the reader is 1 directed to Kotzab’s perspective in Part 3 of the book. 2 3 The principles of supply chain management 4 5 What is most striking about the principles of supply chain 6 management is that they are extremely simple, yet implemen- 7 tation invariably proves problematic. The following definitions 8 demonstrate the scale and scope of supply chain management 9 from a functional, process and business philosophy perspective. 30111 Supply chain management is 1 2 the process of planning, implementing and controlling 3 the efficient, cost-effective flow and storage of raw mate- 4 rials, in-process inventory, finished goods and related 5 information from point-of-origin to point of final consump- 6 tion for the purpose of conforming to customer require- 7 ments. (Council of Logistics Management, What Is It All 8 About?, Oak Brook, IL, 1986) 9 the integration of business processes from end user 40111 through original suppliers that provides products, services 1 and information that add value for customers. (The 2 International Centre for Competitive Excellence 1994) 3 4 working together in all activities of the firm: Planning 5 (strategic and tactical), Operations (purchasing, manu- 6 facturing, sales, marketing, distribution, NPD), Human 7 Resource Management, Monitoring & Control (feedback). 8 (Fearne A. (1996) Editorial, International Journal of 49111 Supply Chain Management, vol. 1 no. 2)

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1111 In simple terms, supply chain management is concerned with 2 the sharing of information, in order to: 3 4 • Save time (markets across the world are becoming increas- 5 ingly dynamic and product life cycles are getting shorter). 6 • Reduce costs (manufacturing, inventory, distribution and 7 waste). 8 9 • Increase effectiveness (accurate targeting of consumer needs 1011 and wants). 1 2 • Add value (innovation in new product development and 3111 customer service remains the only sustainable source of 4 competitive advantage, difficult to achieve and most difficult 5 to emulate). 6 7 In practice, implementing supply chain management is compli- 8 cated by the fact that it requires a fundamental change in the 9 way firms operate. It is not merely a case of doing something 20111 better, it requires strategic managers to have an open mind 1 towards the alternative ways of getting things done (e.g. the 2 ‘make or buy’ decision) and effective mechanisms for commu- 3 nicating strategic objectives to operational staff, who live in fear 4 of rationalization and outsourcing. It also requires strategic 5 managers to re-visit the question of core competence and compet- 6 itive advantage from the perspective of the entire supply chain 7 not merely from where they are positioned. The problem here 8 is that this represents a major threat to the status quo, existing 9 authority relationships, responsibilities and the balance of power, 30111 within and between firms operating in the supply chain. 1 Figure 4.1 illustrates the basic structure of the food supply 2 chain, which combines the ‘push’ of value added material flow, 3 from the breeding of genetic stock downstream right through to 4 retail, with the ‘pull’ of information from the final consumer 5 upstream right through to the production of raw materials. 6 The supply chain comprises functions (what people and orga- 7 nizations do), such as those depicted in Figure 4.1 and processes 8 (the way in which things get done), which link the functions 9 and translate the information flow into value added activity, 40111 throughout the supply chain. 1 The focus of supply chain management is explicitly on 2 processes. Finding the most effective and efficient way of adding 3 value, with the aim of generating cross-functional solutions to 4 the many complex problems associated with meeting consumer 5 requirements effectively and at minimal cost. Cross-functionality 6 may occur within an organization (e.g. sales, marketing, logis- 7 tics and production combining to reduce inventory levels, whilst 8 maintaining customer service levels), or, between organizations 49111 (e.g. third party logistics, production planning and growers

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1111 2 3 4 5 6 7 8 9 1011 Figure 4.1 Basic structure of the food supply chain 1 2 3111 4 combining to manage raw material supplies in a way that opti- 5 mizes short term storage and the utilization of vehicle and 6 processing capacity). This is dependent on who does what and 7 how, the fundamental questions that supply chain management 8 aims to address. 9 As far as the food processing supply chain is concerned, the 20111 functions are known to all and not open to question. The produc- 1 tion of raw materials for processing requires breeding, production, 2 storage and distribution, the procurement of other inputs and the 3 management of a number of discrete ‘production functions’. 4 Agricultural commodities are subject to grading and storage will 5 be necessary for some, as will further preparation for certain 6 markets. The procurement of raw materials is undertaken in 7 tandem with the scheduling of various production processes 8 (continuous rather than discrete) within the processing plant. 9 Finished products are then stored and distributed to retail distri- 30111 bution centres, where consolidation takes place prior to distribution 1 to retail stores. Merchandising and marketing activities complete 2 the process from the selection of genetic stock to the purchase 3 of the finished product. 4 However, whilst most of the functions necessary for the trans- 5 formation of raw materials into finished food products are 6 universally accepted, the way in which they are undertaken, 7 individually and in combination, are not. There is no consensus 8 regarding the most effective and efficient way of combining these 9 functions to secure competitive advantage. 40111 What is quite clear is that in order for any process to be 1 completed efficiently there needs to be effective communication 2 between and within all organizations involved. In theory, market 3 forces and the dynamics of competition will force the discovery 4 or adoption of ‘the one best way’, as failure to do so will, other 5 things being equal, result in loss of market share. However, 6 sharing information poses a real threat to independence, partic- 7 ularly when those involved lack mutual trust and have a 8 tendency to behave opportunistically, with a short term plan- 49111 ning horizon – a real challenge for supply chain management.

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1111 Theoretical perspectives on supply chain partnerships 2 3 4 ‘A move from the traditional perspective’ 5 6 Traditionally the marketing literature has viewed exchange 7 between buyers and sellers as taking place on an ad hoc basis 8 in the competitive marketplace. Firms who wished to avoid the 9 market could do so by backwards or forwards integration. Based 1011 on these traditional views of exchange, exchange is conceptual- 1 ized as existing on a continuum with pure market transactions 2 at one end and hierarchical within firm transactions at the other. 3111 In-between these two extremes Williamson (1979) suggested that 4 the market mechanism could be modified through some kind of 5 formal or informal contractual arrangement between the parties 6 involved. 7 Traditionally, channel relationships have tended to be towards 8 the transactional end of this spectrum (Dawson and Shaw 1987). 9 Relationships at this end of the spectrum are assumed to be 20111 inherently arm’s length and adversarial (Carlisle and Parker 1989; 1 Ellram 1991; Heide and Stump 1995). In this type of transac- 2 tional relationship the primary goal of buyers is to minimize the 3 price of purchased goods and services. Spekman (1988) argues 4 that this is done by having a large number of suppliers who can 5 be played off against each other to gain price concessions while 6 still ensuring a continuity of supply. This model of buyer–seller 7 relationships centres on homogeneity of supplies and substi- 8 tutability of suppliers and as such does little to engender long 9 term co-ordination or co-operation between buyer and supplier. 30111 Therefore, the traditional adversarial model is a classic case of 1 win–lose, with both buyers and sellers spending considerable 2 amounts of time searching for ways to capture some of the other 3 party’s margin. 4 The movement away from the traditional model was driven 5 by the competitive pressures of the mid-1970s, such as the oil 6 crisis and the onset of global competition (Lamming 1993). These 7 pressures exposed the weaknesses of the traditional model, 8 which was not able to respond quickly or efficiently to the need 9 to reduce costs or improve quality due to the nature of the deal- 40111 ings between buyers and suppliers. Under this model, costs could 1 only be reduced by squeezing suppliers’ prices, this left them 2 unable to invest in the systems needed to ensure the quality 3 control required by manufacturers. Thus, for example, in the 4 motor industry, where supply chain partnerships originated, 5 Western companies, such as General Motors, engaging in tradi- 6 tional adversarial relationships found themselves losing market 7 share to Japanese manufacturers such as Honda and Toyota 8 who could produce cars of higher quality and at lower cost 49111 (Webster 1992; Lamming 1993).

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1111 Buyer–seller relationships in Japan involve partnerships with 2 fewer, larger and more talented suppliers who are the sole 3 sources of supply for varying components (Turnbull et al. 1993). 4 These partnerships are based on co-operation, a full exchange 5 of information and a commitment to improve quality and reduce 6 price. However, one of the key distinguishing features of these 7 relationships is that cost reductions and quality improvements 8 are made by working together. Although suppliers still have to 9 be highly competitive, under partnership arrangements cost 1011 reductions are achieved through co-operation rather than 1 confrontation. They state that bargaining is not based on price 2 per se but on how to reach the target price while maintaining a 3111 reasonable level of profit for the supplier. Therefore, the focus 4 of these relationships is on mutual benefit and as a result trust 5 and collaboration replace mistrust and antagonism. 6 This pattern of co-operation was virtually unknown in the 7 adversarial sourcing systems of US manufacturers, and other 8 researchers suggest that it was these co-operative partnerships 9 that were giving Japanese competitors, in numerous industries 20111 a competitive advantage against their Western competitors. 1 There is therefore recognition that adversarial arm’s length 2 purchasing relationships have historically robbed firms of the 3 opportunity to gain a competitive edge. 4 Supply chain partnerships have thus emerged as a panacea 5 for improving a firm’s competitiveness. Literature suggests that 6 there have been widespread moves to emulate Japanese manu- 7 facturing practices, particularly in the automotive industry 8 (Hamel et al. 1989; Landeros and Monczka 1989; Turnbull et al. 9 1993; Heide and Stump 1995; Mudambi and Schrunder 1996). 30111 However, while most partnership activity may have started in 1 the car industry, the movement towards closer relationships is 2 seen to be a general trend that has been reported by numerous 3 researchers, in response to each industry’s own set of competi- 4 tive pressures. It is clear that supply chain partnerships are 5 emerging at a pace in the food industry, driven by private incen- 6 tives to secure market growth, gain market share, improve 7 margins and increase efficiency. Public pressure for transparency, 8 traceability and ‘due diligence’ throughout the food supply chain 9 has also played a role. 40111 In discussing the movement towards relationships of a more 1 co-operative nature, Spekman (1988) states that co-operative rela- 2 tionships seek to establish open lines of communication, nurture 3 and sustain longer relationships between trading partners, and 4 develop mechanisms to solve differences, such that the trading 5 relationship is maintained, to the mutual benefit of buyer and 6 seller. He adds that philosophically such a model can only be 7 built if trust and co-operation exist. Galt and Dale (1991) also 8 suggest that emerging long term supplier relationships require 49111 substantial changes in terms of behaviour and attitude. They

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1111 state that these new types of relationships must be based on 2 common aims, trust, co-operation, mutual dependency and a 3 joint problem-solving approach. This is in line with Lyons et al. 4 (1989), who argue that the new order of buyer–supplier rela- 5 tionships are characterized by cross-functional teams and team 6 decision making, longer term contracts and increased interde- 7 pendence. The main motivation for developing supply chain 8 partnerships is to gain competitive advantage. Successful compa- 9 nies today are those who have developed and are implementing 1011 a supply chain philosophy and that organizations who continue 1 to operate adversarial relationships with suppliers and customers 2 are eroding their competitive advantage. The adoption of a 3111 supply chain philosophy will increasingly become a critical 4 success factor as market demands of globalization, customer 5 expectations and satisfaction and technology drive the require- 6 ment to co-operate. 7 Hobbs (1996) suggests that supply chain management can be 8 viewed as a continuum of vertical integration. At one extreme 9 lie spot markets, where goods are exchanged between multiple 20111 buyers and sellers in the current time period, with price as the 1 sole determinant of the final transaction. In other words, other 2 aspects of the transaction are non-negotiable. The buyer either 3 accepts the product in its current form, or does not purchase it. 4 Examples of spot markets are auction markets, stock markets 5 and most consumer good purchases (e.g. purchases of food in 6 a supermarket). In a spot market transaction, management of 7 the supply chain, in any formal sense, is entirely absent. At the 8 other end of the vertical co-ordination spectrum lies full vertical 9 integration, where products move between various stages of the 30111 production–processing–distribution chain as a result of within- 1 firm managerial orders, rather than, at the direction of prices. 2 In between the two extremes of spot market transactions and 3 vertically integrated firms lie a myriad of alternative ways of 4 co-ordinating economic activity, from strategic alliances and 5 formal written contracts, to vertical integration. These represent 6 different degrees of supply chain management; some more for- 7 mal than others. A strategic alliance is an agreement mutually 8 entered into by two independent firms to serve a common strate- 9 gic objective. It is often more flexible than a contract or full 40111 vertical integration. Central to the success of a strategic alliance 1 are trust between firms and a strategy that is to the mutual 2 benefit of all the participants. For example, a meat processor 3 might reach an agreement with a group of pig producers to obtain 4 finished pigs of a certain quality, providing producers with a list 5 of acceptable breeders. A meat processor might also introduce 6 a high quality packaged pork product jointly developed with a 7 major retailer under a strategic alliance (Sporleder 1992). 8 Under a contract, a firm usually devolves control over various 49111 aspects of the supply chain, i.e. marketing and/or production of

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1111 its product, to a buyer. Contracts can be classified into three 2 broad groups (Mighell and Jones 1963): 3 1. Market specification contracts represent an agreement by a 4 buyer to provide a market for a seller’s output. The seller 5 transfers some risk and the decisions over when the product 6 is sold and how it is marketed to the buyer. Control over the 7 production process, however, remains with the seller. 8 9 2. A production-management contract gives more control to the 1011 buyer than a market-specification contract. The buyer partic- 1 ipates in production management through inspecting produc- 2 tion processes and specifying input usage. 3111 3. Even more control rests with the buyer, in the case of resource- 4 providing contracts, in which the buyer provides a market 5 outlet for the product, supervises its production and supplies 6 key inputs. Often, the buyer may own the product, with 7 the seller paid according to the volume of output. This is the 8 closest contractual arrangement to full vertical integration. 9 For example, a feedstuffs manufacturer might contract with 20111 pig producers, supplying feedstuffs, overseeing production 1 methods and marketing the finished pigs. 2 3 4 Quasi-vertical integration ●●● 5 This refers to a relationship between buyers and sellers that 6 involves a long term contractual obligation where both parties 7 invest resources in the relationship. It differs from full vertical 8 integration because the arrangement ceases at the end of an 9 agreed period of time and the firms remain independent of one 30111 another. A joint venture is one example of quasi-integration. 1 Participants share the costs, risks, profits and losses of the 2 venture. Franchises and licences are other examples of quasi- 3 vertical integration. 4 5 6 Tapered vertical integration ●●● 7 This occurs when a firm obtains a proportion of its inputs 8 through backward integration with a supplier. For example, a 9 beef processing firm integrated backwards into beef production 40111 could obtain a proportion of its beef supplies from its own farms 1 with the remainder procured from auction markets or direct from 2 beef producers. Alternatively, a firm could transfer a proportion 3 of output forward through its own distribution network, with 4 the remainder sold on the open market. 5 6 Full vertical integration ●●● 7 8 This occurs when one firm carries out two or more consecu- 49111 tive stages of the production–distribution chain. A firm can be

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1111 integrated forwards (downstream) into distribution or retail 2 functions or backwards (upstream) into supply functions. 3 4 Horizontally integrated networks ●●● 5 6 Whilst not specified as part of the Mighell and Jones model, hor- 7 izontally integrated networks refer to the relationship between 8 businesses serving similar markets, often serving different mar- 9 kets or locations. Businesses who combine forces more readily 1011 access new markets, develop new products and share purchasing 1 functions, thereby increasing cost and resource efficiencies. 2 3111 ●●● 4 Levels of interdependence 5 An alternative way of viewing supply chain partnerships is pro- 6 posed by Lorange and Roos (1993), who choose to focus on the 7 degree of interdependency between trading partners. At one 8 extreme lie informal co-operative ventures, low on inter-depen- 9 dency and easy to get out of, while at the other extreme we find 20111 mergers and acquisitions, where the parties are highly inter-depen- 1 dent and the relationship is very difficult to reverse. In between we 2 find formal co-operative ventures, strategic alliances, joint ven- 3 tures and joint ownership, representing alternative forms of part- 4 nership arrangement with increasing levels of inter-dependence. 5 6 The main motivation for partnering is to gain competitive 7 advantage (Mohr and Spekman 1994). For example, Ellram (1994) 8 states that successful companies today are those who have 9 developed and are implementing a supply chain philosophy, and 30111 that organizations who continue to operate adversarial rela- 1 tionships with suppliers and customers are eroding their compet- 2 itive advantage. Ellram also argues that the adoption of a supply 3 chain philosophy will increasingly become a critical success factor 4 as market demands of globalization, customer expectations and 5 satisfaction, and technology drive the requirement to co-operate. 6 Numerous other researchers also suggest that the creation of 7 closer relationships can help to improve a firm’s competitive 8 position and create benefits that are not possible using tradi- 9 tional arm’s length (Spekman 1988; Lyons et al. 1989; Ellram 1991; 40111 Munday 1992). Indeed, the number of companies entering into 1 or exploring customer/supplier alliances pays testimony to the 2 extent of the perceived benefits involved. Yet, the quantification 3 of the benefits remains elusive to academic researchers. 4 The potential advantages of partnering from a customer 5 perspective are: 6 7 1. easier management of a reduced supply base; 8 49111 2. less time searching for new suppliers and tendering;

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1111 3. increased mutual dependence creates greater stability and 2 loyalty and may increase supplier attention and service in 3 areas such as lead time reliability, greater attention to common 4 problems and priority in times of scarcity; 5 4. allows for joint planning and information sharing based on 6 mutual trust and benefit; 7 8 5. better quality following from involvement of supplier in 9 design; 1011 1 6. reduced inventory levels; 2 7. more stable supply prices (Ellram 1991, 1994). 3111 4 The general impression of new buyer–supplier relationships is 5 that manufacturing firms accrue significant advantages while 6 their suppliers face significant disadvantages. Referring to inter- 7 views with purchasing managers from firms in a variety of 8 industrial manufacturing industries, Lyons, Krachenberg and 9 Henke (1989) suggest that both parties gain and lose something 20111 from the new arrangements. They suggest that buyers can benefit 1 from: 2 3 1. reduced costs and improved quality; 4 5 2. reduced complexity and cost of buying; 6 3. enhanced support relationships. 7 8 On the other hand, the disadvantages to buyers were identified 9 as: 30111 1 1. increased dependence; 2 3 2. the challenge of a new negotiating style; 4 3. less supplier competition; 5 6 4. new sources of added costs, 7 5. implementation of new reward structure; 8 9 6. new and potentially risky channel interactions. 40111 1 As the degree of partnership increases, the buying firm typically 2 enjoys significantly increased short term productivity improve- 3 ments and long term strategic advantages. The short term 4 benefits, such as reduced downtime and rework, speedier 5 throughput time and inventory reductions, are strongly related 6 to the extent of the supplier partnership. The longer term bene- 7 fits, such as reduced cost structure, product sales gains and 8 improved product quality, show an even stronger relationship 49111 with the degree of partnership formed.

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1111 Suppliers also benefit from adopting a strategy of maintaining 2 long term relationships with their customers compared to 3 employing a transactional approach to servicing customers. 4 Supplier firms in long term relationships are able to achieve a 5 higher level of sales growth, compared to suppliers that use a 6 transactional approach to servicing customers. 7 Furthermore, they achieve higher profitability by differen- 8 tially reducing their discretionary expenses and they are able to 9 reduce inventory holding and control costs through more effi- 1011 cient inventory utilization over time. However, firms in long 1 term relationships often face lower gross margins over time, 2 suggesting that supplier firms are forced to reduce prices to a 3111 greater extent than the reduction in costs, through more efficient 4 inventory utilization. 5 While the majority of researchers have attempted to identify 6 the benefits of supply chain partnerships and the reasons why 7 they are expected to develop further, a number of researchers 8 warn against the doctrine that partnerships are universally desir- 9 able. For example, although collaborative partnerships have been 20111 widely suggested as a source of competitive advantage they may 1 not be appropriate for every trading relationship (Spekman and 2 Salmond 1992). When parties recognize that the current state of 3 their business requires no more than a minimal commitment 4 they should agree not to collaborate, since non-collaborators can 5 enjoy a very long and profitable trading relationship. Similarly, 6 it is unwise to assume that all trading relationships should 7 warrant equal attention. In some instances, establishing close ties 8 may be more costly than beneficial and in other instances, a 9 potentially important relationship may be managed poorly and 30111 a strategic opportunity lost to competitors. Thus, not all trading 1 relationships should be collaborative and, as Spekman, Kamauff 2 and Myhr (1998) stress, it is acceptable to engage in arm’s length 3 transactions provided that such behaviour is appropriate. 4 Researchers generally suggest that the degree to which a 5 partnership can be developed will depend on the nature of the 6 product market (Jackson 1985; Hughes 1996; Spekman 1988; 7 Spekman and Johnston 1986; Spekman and Salmond 1992) and 8 the nature of the power-dependence relationship (Kearney 1994; 9 Frazier 1983; Kumar et al. 1995; Frazier and Antia 1995; Spekman 40111 et al. 1998). For example, while a more co-operative approach is 1 evident, a number of purchasing decisions involve buying 2 commodity-like goods and for these goods a more adversarial 3 approach might be more appropriate. Collaborative relationships 4 are not likely to be suitable for commodity purchases (even in 5 high volume) and low value added goods. Partners involved 6 in the purchase of these type of products may be linked through 7 an inventory management system but the linkages may not 8 pervade any other aspects of their business. Similarly, the 49111 extent of collaboration will be related to which industry they

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1111 operate in and as such the type of product that is produced. 2 For commodity products, long term contracts and ‘just-in-time’ 3 inventory programmes may generally represent the extent of 4 potential collaboration. 5 6 Efficient Consumer Response and the role of the ‘Category Captain’ 7 8 Effective supply chain management requires trading partners to 9 share long term strategic objectives, develop mutual trust and 1011 work together to identify the most efficient and effective way of 1 reaching their objectives. The emergence of Efficient Consumer 2 Responses (ECR) in the US grocery industry in the early 1990s 3111 and its subsequent adoption in Western Europe, gave the process 4 of developing effective supply chain partnerships a major boost 5 (see Chapter 5 and Part 2). 6 The fundamental principle of ECR is that through partnership 7 within the global food supply chain, significant cost reduction 8 (efficiencies) and improved performance (effectiveness) can be 9 achieved through a better allocation of shelf space in the retail 20111 store, fewer wasteful promotions and new product introductions 1 and more efficient physical replenishment. The key to the 2 achievement of these goals is shared information, in particular, 3 information on sales gathered at the checkout and transferred 4 directly to suppliers through Electronic Data Interchange (EDI). 5 Using this shared information, manufacturers and retailers 6 can create more consumer value through the supply chain. 7 Specifically, it is suggested that benefits can be accrued in four 8 key areas: New Product Development; Promotions; Category 9 Management; and Product Replenishment (see Table 4.9). 30111 Whilst ECR brings many potential benefits to both suppliers 1 and retailers, in terms of improvements in efficiency and effec- 2 tiveness, the biggest opportunity it presents is to enable real 3 supply chain collaboration. By sharing information it enables 4 5 6 7 Efficient new product Efficient Efficient range Efficient product 8 introductions promotions and assortment replenishment 9 Improve success rate Improve consumer Match to consumer Improve on-shelf 40111 Reduce time to market targeting and shopper needs availability 1 Improve return on Improve return on Reduce duplication Reduce costs 2 investment investment Improve return on Reduce inventory 3 Improve quality and Co-operation across space 4 reduce costs the supply chain 5 Source: Adapted from Christopher M. (1992) Logistics and Supply Chain Management. London: Pitman 6 Publishing 7 8 49111 Table 4.9 The four pillars of ECR

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1111 supply chains effectively to become demand chains and in so doing 2 to deliver enhanced customer value. For decades, food retailers 3 (buyers) and manufacturers (sellers) have acted more as adver- 4 saries than as partners. Even though commercial realities will 5 prevail so that individual entities in the supply chain will still 6 seek competitive advantage, there now exists a framework in 7 which they can co-operate not only to ‘grow the cake’ but to 8 decide how it will be divided. 9 Within the ECR paradigm, the concept and practice 1011 of Category Management (CM) has created the position of 1 ‘Category Captain’. Retailers may select a ‘Category Captain’ to 2 work with retail staff to create a plan for the entire category, 3111 including competitors’ brands and private label brands. The CM 4 planning process often leads to a reduction in the number of 5 SKUs being carried by the retailer. As a result, it takes signifi- 6 cant objectivity for the Category Captain to resist the temptation 7 to make a case for de-listing its competitors and maximizing 8 shelf space for its company’s own brands. 9 The retailers’ expectations of ‘Category Captains’ in FMCG 20111 product categories are at a higher level than those who are in 1 the fresh food categories – characterized by smaller-scale compa- 2 nies operating on lower margins, with less resources to invest 3 in category research. Overall, however, the more forward- 4 thinking retailers seek, at a minimum, the following from their 5 preferred suppliers and ‘Category Captains’. 6 7 • Increasingly, complete electronic integration is becoming a 8 requirement and, fortunately, as the cost of IT equipment 9 declines, EDI is becoming financially feasible for smaller-scale 30111 companies. 1 2 • Sharing a comprehensive range of information directed at 3 improving existing and building future business. 4 • As identified in the previous section, retailers seek suppliers 5 who show excellence in innovation, in NPD, but also in supply 6 chain management, finance, etc. 7 8 • Suppliers who understand the role and structure of the cate- 9 gory and who can assist the retailer in forecasting its future 40111 development. 1 • Suppliers who show sufficient commitment to each key 2 customer that they are willing to develop customer-specific 3 products and services. 4 5 • Suppliers who have the objectivity and knowledge to develop 6 jointly a strategy for mutual business growth. 7 8 Forging successful partnerships between historic adversaries – 49111 retailers and manufacturers – is a challenge that stands or falls

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1111 on both parties committing to the idea, communicating the 2 purpose within their respective organizations and between them- 3 selves, and showing continuity of effort (the longer the 4 partnership survives, the more likely it is to last, as the two 5 parties and, particularly, the supplier gains the self-confidence 6 to point out problems). In Table 4.10 the major factors that 7 influence successful establishment and sustained operations of 8 partnerships and alliances are identified. Each of the twenty 9 factors are of significance, but, three that should be reiterated 1011 are: clear benefits (although, not necessarily equal benefits) for 1 each partner; partners should share the same long term objec- 2 tives; and aim for leadership in quality as it makes it difficult 3111 for others to follow. 4 5 6 1. Clear benefits for all partnership and alliance members 7 2. Business proposition underpinning the partnership that 8 makes long term commercial sense 9 3. Focus on specific partnerships, products and markets 4. Build upon successful partnerships 20111 5. Apply lessons learnt from the partnership to gain benefits in 1 other business areas 2 6. Partners/alliance members should have a good strategic fit 3 7. The commercial relationship should be based on interdepen- 4 dence 5 8. Companies have similar corporate values and the same 6 commercial ethos 7 9. Mutual trust and respect 8 10. Aim high on quality – make it difficult for others to follow 9 11. For junior partners: pick a senior partner with a long-term 30111 commercial future 12. Build relationships and communication links between all 1 levels of the two businesses 2 13. Gain full endorsement of the venture by the most senior 3 management and strong personal commitment of all staff 4 14. Members should hold a common view on the long-term 5 objectives of the partnership 6 15. Partnership members should hold a common view of what 7 the final consumer wants 8 16. Raise the veil of secrecy and focus on sharing information 9 required to make the partnership a success 40111 17. Investment in physical plant and, for horizontal partnerships, 1 joint investment by members builds commitment to the venture 2 18. Build flexible organizations that meet the specific needs of 3 each partnership 4 19. Fix problems as they arise – delays only serve to disrupt 5 Table 4.10 20. To ensure success, partnerships require their fair share of 6 Major factors that influence commercial good fortune 7 successful establishment and 8 sustained operations of supply Source: Hughes and Ray (1994) 49111 chain partnerships

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1111 Conclusions 2 3 In the 1950s, manufacturers were the pivotal point between many 4 raw material suppliers and the myriad of small shops that 5 comprise the independent grocery trade. In Europe and North 6 America the major retailers have taken over the captaincy. In 7 increasingly concentrated, mature, slow-growth markets, major 8 supermarket companies seek means to differentiate themselves from the competition. One such way is to build unique supply 9 chains – with exclusive commitment from chain members, manu- 1011 facturers and farmers and an exclusive range of products. The 1 premium private label product programs of UK retailers are 2 addressing exactly this issue; building a product offer that is not 3111 directly comparable and, hopefully, discernibly better than 4 immediate competitors. Each retailer wishes to corral the ‘best’ 5 suppliers and, in turn, the ‘best’ raw material producers in their 6 respective supply chains and deny access to these ‘best’ members 7 to the competition. 8 What is emerging is the antithesis of neo-classical perfect 9 competition, indeed, it is supply chain-based competition. The 20111 food industry is not unique in this regard; indeed, co-operation 1 rather than confrontation in the supply chains has underpinned 2 the substantial productivity improvements that have been char- 3 acteristic of the motor car industry, for example. Members of 4 specific supply chains share a common commercial interest, i.e. 5 increasing the market share and profitability of their supply 6 chain. In supply chains where the relationships between the 7 channel captain and other members is adversarial, then, this 8 mutuality of interest collapses. Unfortunately, in many countries, 9 the retailers – as ‘Category Captains – are oriented predomi- 30111 nately towards controlling the supply chain and to doing so 1 through threatening behaviour and engendering fear; the threat 2 of de-listing and the fear of being de-listed. 3 Successful supply chains will be those that embrace the notion 4 of the ‘learning chain’. In his seminal work on building learning 5 organizations, Peter Senge (1990) identified that ‘over the long 6 run, superior performance depends on superior learning’. 7 Further, ‘Leaders engaged in building learning organizations 8 . . . [should seek] to change the way businesses operate . . . From 9 a conviction that their efforts will produce more productive orga- 40111 nizations, capable of achieving higher levels of organizational 1 success and personal satisfaction than more traditional organi- 2 zations’. Senge identifies three critical areas of skills for 3 establishing a learning organization, namely building shared 4 vision, challenging conventional wisdom and current practice 5 without inducing defensiveness and engaging in systems 6 thinking. These three skills are directly relevant to building a 7 ‘learning chain’. Unfortunately, they are not skills that are abun- 8 dantly evident or, indeed, available in the skill set of many senior 49111 retail category managers as we enter a new century.

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1111 References 2 3 Bhote K.R. (1989) Strategic Supply Management. New York: 4 Amacom. 5 Brandenburger A.M. and Nalebuff B.J. (1996) Co-opetiton. New 6 York: Doubleday. 7 Carlisle J. and Parker R. (1989) Beyond Negotiation. Chichester: 8 Wiley. Christopher M. (1992) Logistics and Supply Chain Management. 9 London: Pitman. 1011 Cox A. (1999) Power, value and supply chain management. 1 International Journal of Supply Chain Management, 4 (4), pp. 2 167–75. 3111 Dawson J.A and Shaw S.A. (1987) Management of the retailer– 4 supplier interface. Management Research News, 10 (3). 5 Ellram L.M. (1991) Supply chain management: the industrial 6 organizational perspective. International Journal of Physical 7 Distribution and Logistics Management, 21 (1), pp. 13–22. 8 Ellram L.M. (1994) A taxonomy of total cost of ownership models, 9 Journal of Business Logistics, 15 (1), pp. 171–91. 20111 Frazier G.(1983) On the measurement of interfirm power in 1 channels of distribution. Journal of Marketing Research (May), 2 pp. 158–66. 3 Frazier G. and Antia K. (1995) Exchange relationships and 4 Interfirm power in channels of distribution. Journal of the 5 Academy of Marketing Science, 23 (4), pp. 321–6. 6 Galt J.D.A and Dale B.G. (1991) Supplier development: a British 7 Case study. International Journal of Purchasing and Materials 8 Management, 27 (1), pp. 16–22. 9 Gattorna J.L. and Walters D.W. (1996) Managing the Supply Chain. 30111 Basingstoke: Macmillan. 1 Hamel G., Doz Y. and Prahalad C. (1989) Collaborate with your 2 competitors – and win. Harvard Business Review, Jan–Feb, 3 pp. 133–4. 4 Hamel G. and Prahalad C.K. (1990) The core competence of the 5 corporation. Harvard Business Review, May–June, p. 79. 6 Harrison A. (1993) Just-in-time Manufacturing in Perspective. 7 London: Prentice Hall. 8 Heide J.B. and Stump R.L. (1995) Performance implications 9 of buyer–supplier relationships, industrial markets: a transac- 40111 tion cost explanation. Journal of Business Research, 32, pp. 57–66. 1 Hines P. (1994) Creating World Class Suppliers. London: Pitman. 2 Hobbs J. (1996) A transaction cost approach to supply chain 3 management. International Journal of Supply Chain Management, 4 1 (2), pp. 15–27. 5 Houlihan J. (1988) Exploiting the industrial supply chain, in 6 J. Mortimer (ed.), Logistics in Manufacturing. London: IFS 7 Publications. 8 Hughes D. (1996) Reversing market trends: the challenge for 49111 the UK fresh fruit sector. British Food Journal, 98 (9), pp. 19–25.

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1111 Hughes D. and Ray D. (1994) Factors determining success in 2 partnerships and alliances. In Hughes D. (ed.), Breaking with 3 Tradition: Building Partnerships & Alliances in the European Food 4 Industry. Ashford, Kent: Wye College Press, University of 5 London, ch. 10. 6 Hughes D. and Ray D. (1999) The Global Food Industry in the 21st 7 Century. Food Industry Management, Wye College, University 8 of London. 9 Jackson B. (1985) Build customer relationships that last. Harvard 1011 Business Review, Nov–Dec, pp. 120–8. 1 Kay J. (1993) Foundations of Corporate Success. Oxford: Oxford 2 University Press. 3111 Kearney A.T. (1994 ) Partnership or Power Play? London: AT 4 Kearney. 5 Kumar N., Scheer L.K. and Steenkamp E.M. (1995) The effects 6 of perceived interdependence on dealer attitudes. Journal of 7 Marketing Research, xxxii, pp. 348–56. 8 Lamming R. (1993) Beyond Partnership. New York: Prentice Hall. 9 Landeros R. and Monczka R.M. (1989) Co-operative buyer/ 20111 seller partnerships and a firm’s competitive posture. Journal 1 of Purchasing and Materials Management, 25 (4), pp. 9–17. 2 Lewis, J.D. (1990) Partnerships for Profit. New York: Free Press. 3 Lorange P. and Roos J. (1993) Strategic Alliances: Formation, 4 Implementation and Evolution. Oxford: Blackwell Business. 5 Lyons T.F., Krachenberg A.R. and Henke J.W. (1989) Mixed 6 motive marriages: what’s next for buyer–supplier relations? Sloan Management Review, 31 (3), pp. 29–30. 7 Mighell R.L. and Jones L.A. (1963) Vertical Co-ordination in 8 Agriculture, USDA ERS-19, Washington DC. 9 Mohr J. and Spekman R. (1994) Characteristics of partnership suc- 30111 cess: partnership attributes, communication behaviour and 1 conflict techniques. Strategic Management Journal, 15, pp. 135–52. 2 Moore, J.F. (1996) The Death of Competition. New York: Harper 3 Collins. 4 Mudambi R. and Schrumber C. (1996) Progress towards 5 buyer–supplier partnerships – evidence from small and 6 medium sized manufacturing firms, European Journal of 7 Purchasing and Supply Management, vol. 2/3, pp. 119–27. 8 Munday M. (1992) Buyer–supplier partnerships and cost data 9 disclosure. Management Accounting, June. 40111 O’Keeffe M. (1998) Establishing supply chain partnerships: 1 lessons from Australian agribusiness. International Journal of 2 Supply Chain Management, 3 (1), pp. 5–9. 3 Porter M. (1980) Competitive Strategy. New York: The Free Press, 4 ch. 2, pp. 34–46. 5 Sako M. (1992) Prices, Quality and Trust. Cambridge: CUP. 6 Saunders M. (1994) Strategic Purchasing and Supply Chain 7 Management. London: Pitman. 8 Senge P.M. (1990) The leader’s new work: building learning orga- 49111 nizations. Sloan Management Review, 7 (Autumn).

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1111 Spekman R.E. (1988) Strategic supplier selection, towards an 2 understanding of longer buyer–seller relations. Business 3 Horizons, 31 (4), pp. 24–36. 4 Spekman R. and Johnston V. (1986) Relationship management: 5 managing the selling and the buying interface. Journal of 6 Business Research, 14, pp. 519–31. 7 Spekman R and Salmond D. (1992) A working consensus to 8 collaborate. In A Field Study of Manufacturing-Supplier Dyads. 9 Cambridge, Massachusetts: Marketing Science Institute. 1011 Spekman R.E., Kamauff J.W. and Myhr N. (1998) An empirical 1 investigation into supply chain management: perspective on 2 partnerships. International Journal of Physical Distribution and 3111 Logistics Management, 28 (8), pp. 630–50. 4 Sporleder T.L. (1992) Managerial economics of vertically co- 5 ordinated agricultural firms. American Journal of Agricultural 6 Economics, 74 (5), pp. 1226–31. 7 Turnbull P. Delbridge R., Oliver N. and Wilkinson B. (1993) 8 Winners and losers – the tiering of component suppliers in 9 the UK automotive industry. Journal of General Management, 20111 19 (1), pp. 48–63. 1 Webster F. (1992) The changing role of marketing in the corpo- 2 ration. Journal of Marketing, 56 (October), pp. 1–17. 3 Wileman A. and Jary M. (1997) Retail Power Plays, From Trading 4 to Brand Leadership. London: Macmillan Business Press. 5 Williamson O.E. (1979) Transaction cost economies: the gover- 6 nance of contractual relations. Journal of Law and Economics, 7 22, pp. 232–62. 8 Womack J.P, Jones D.T. and Roos D. (1990) The Machine That 9 Changed the World. New York: Rawson Associates. 30111 1 Questions 2 3 1. Identify the key motivations for the emergence of supply chain 4 management. 5 6 2. What is supply chain management? 7 3. Identify the key characteristics of the following forms of orga- 8 nizational integration 9 40111 (a) Full vertical integration 1 (b) Quasi-vertical integration 2 3 (c) Tapered vertical integration 4 (d) Horizontal integration 5 6 4. Identify the changes to operations resulting from the imple- 7 mentation of a supply chain management strategy. What may 8 be the key barriers to implementation? 49111

●●● 89 1111 CHAPTER 2 ●●●● 5 3 4 5 6 Current practice: 7 8 9 1011 inter-firm 1 2 3111 4 relationships in 5 6 7 8 the food and 9 20111 1 2 drinks supply 3 4 5 6 chain 7 8 9 30111 Colin Bamford 1 2 3 4 5 6 7 Key objectives 8 9 This chapter will provide an understanding of recent devel- 40111 opments in supply chain management and their application 1 to the food supply chain. More particularly, it aims to look at: 2 • The development of vertical and horizontal integration within 3 the retail and catering supply chain. The discussion partic- 4 ularly focuses upon the nature of supply partnerships in 5 the retail sector (quasi-vertical integration/vertically inte- 6 grated networks) and buying groups and marketing 7 consortium in the retail and catering sectors (horizontally 8 integrated networks) 49111 Current practice: inter-firm relationships in the food and drinks supply chain

1111 • The relevance of an integrated approach to supply chain 2 management and the benefits that this can provide for food 3 and drinks manufacturers. These benefits include those of 4 a better service level and cost savings which can result 5 from the application of Efficient Customer Response (ECR) 6 and Efficient Foodservice Response strategies 7 • The ways in which major food retailers have exerted and 8 imposed their own control over food and drinks manufac- 9 turers in the supply chain. The costs and benefits are 1011 discussed with particular emphasis on the challenges posed 1 for these producers and manufacturers 2 3111 • The arguments for contracting out the supply chain manage- 4 ment function to specialist third party operators and in turn, 5 why manufacturers who retain an in-house distribution func- 6 tion should continuously review whether this is appropriate 7 for their future well-being and business development 8 • The external regulatory, environmental and political pres- 9 sures, which have to be addressed by food and drink 20111 manufacturers and their significance in determining how 1 supply changes are controlled and managed 2 3 • The scope for strategic alliances and supply partnerships, 4 in particular between retailers and producers and within the 5 context of a future food retail market, which will see the 6 continued increase in home delivery services 7 • The continued emergence of horizontal partnerships within 8 the catering and retail sectors. 9 30111 1 Introduction 2 3 We all need food and drink! Yet the way in which our food and 4 drinks move through the food chain is not recognized or under- 5 stood by supermarket shoppers and licensed house customers. 6 In some respects this is not surprising. After all, what they want 7 is the right product, at the right time, at the right place, in the 8 right condition and, significantly, at the right cost. How it gets 9 there is of no particular relevance to them except when the supply 40111 chain fails to provide what they are wanting. 1 The customer is the last point in the food chain, whether as a 2 retail/catering consumer, or, as a bulk trade purchaser. When the 3 supply chain malfunctions and customer expectations are not 4 met, the impact on business well-being can be very damaging. 5 The most regular causes of complaint are in the case of ‘stock 6 outs’, or products reaching customers in a damaged state, or 7 where operational delays have meant that products arrive at 8 their point of sale in a poor condition. These can be nightmare 49111 scenarios for food producers, processors and manufacturers.

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1111 Public concern over food hazards cannot be overlooked or 2 underestimated. When health hazards occur, the first reaction 3 may be to blame the manufacturer or supplier. In some cases 4 this is justified; in most cases though the fault has occurred at 5 some stage in the supply chain, once those products have left 6 the manufacturer, en route to their point of sale. This ever- 7 increasing public concern and awareness makes it particularly 8 relevant for all food and drinks manufacturers constantly to 9 monitor and evaluate their supply chain management practices. 1011 As identified in Chapter 4, collaborative relationships designed 1 to generate a more efficient and effective provision of products 2 to the consumer may be found in various structural forms. Two 3111 distinct forms are horizontal or vertical partnerships. The form 4 chosen will, to some extent, depend on the relative size and 5 purchasing power of the businesses involved. In sectors domi- 6 nated by larger multiples (e.g. the retail sector) quasi-vertical 7 integration – supplier– buyer relations – are more apparent. Small 8 and medium-sized enterprises, or even smaller non-market 9 leaders may opt to increase market penetration through hori- 20111 zontal integration – supply chain networks. 1 2 3 Quasi-vertical integration within the supply chain 4 All food and drinks businesses have a supply chain. Figure 5.1 5 shows a typical traditional supply chain for a food manufacturer 6 (DTI 1995). At first glance it looks complex and with the following 7 characteristics: 8 9 1. A large number of businesses act as ‘participants’ in the sense 30111 that they provide a service or input into the supply chain, for 1 example, as suppliers of raw ingredients, processed ingredi- 2 ents, packaging, transport, warehousing or wholesaling of the 3 final product. 4 5 2. Many intermediate stages are involved and as a consequence, 6 the production and sale of the final product requires the 7 smooth flow of information between these participants for the 8 supply chain to function smoothly. 9 3. It is inevitable that lead times are often quite long, with service 40111 levels and targets leaving much to be desired. 1 2 4. Costs tend to be higher than the optimum; each participant act- 3 ing as a profit centre and with their own business objectives. 4 5 For the manufacturer faced with this situation, it is highly 6 likely that from an organizational standpoint the supply chain 7 is managed on a conventional line management basis. This 8 approach splits the operation into identifiable watertight com- 49111 partments whereby:

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1111 • buying is handled by the purchasing department 2 • sales forecasting and promotion by the marketing department 3 4 • inventory is managed by a stock control unit 5 • transport and warehousing by a distribution department 6 7 • sales and customer accounts by a sales team 8 • invoicing and credit control by the accounts team 9 1011 and so on. In short, it is a recipe for confusion and misunder- 1 standing which, if unchecked, could have a detrimental effect 2 on the business. 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 5.1 A traditional food industry supply chain (adapted from DTI 1995)

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1111 The supply chain management approach in business is 2 designed to replace these line management operations, by 3 providing for the strategic management of the supply chain, in 4 order to a take costs out and give businesses a competitive edge. 5 In many respects, as Figure 5.2 shows, it can be regarded as an 6 umbrella management technique, pulling under a single func- 7 tion the many aspects which make up a business’s supply chain 8 (Bamford 1999a). 9 The outcome is that the supply chain represented in Figure 1011 5.1 can be re-drawn. This is shown in Figure 5.3, where the 1 approach shown has been driven by two very significant influ- 2 ences. These are: 3111 4 1. The need for food and drink manufacturers to be in control 5 of their supply chains, particularly where their main cus- 6 tomers are large multiple food retailers. If this is impractical, 7 then as the figure shows, the next best alternative is to enter 8 into partnership with such retail customers. 9 2. The need to integrate the flow of information in the business 20111 into one all-embracing information management system. A 1 particularly good illustration of this has been the way in which 2 Electronic Point of Sale (EPoS) systems, now used by all major 3 retailers, have provided the means for this integration to come 4 about. Through this, up to the minute data can freely flow to 5 all participants in the supply chain. 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 Figure 5.2 8 Logistics – an umbrella 49111 management technique

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 Figure 5.3 Integrated supply chain management for a food manufacturer (adapted from Taylor 1997) 8 9 30111 1 This approach, found within the retail sector, is entirely consis- 2 tent with the strategy of Efficient Consumer Response (ECR), 3 which aims to take costs out of the supply chain and provide 4 improved value for customers. The concept, which, like many 5 supply chain strategies, originated in the USA, has been co-ordi- 6 nated in the UK by an industry steering group, which has a 7 particular focus on the grocery market and of course, includes 8 many types of food and drink product. 9 ECR can be applied to both sides of the market. On the demand 40111 side, it seeks to establish the requirements of customers and to 1 respond effectively and efficiently to their wishes and demands. 2 For example, this might involve better product ranges, customer 3 promotions and new product introductions, all of which have 4 particular relevance in the food industry. On the supply side, 5 ECR is designed to improve the flow of products through the 6 supply chain, as previously suggested. To achieve this, supply 7 chains need to be leaner, responsive and more efficient but with 8 no losses in the service levels which are provided. Accurate 49111 information is therefore essential to its realization.

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1111 ECR is not an easy concept for companies to embrace, partic- 2 ularly if they have been successful. It requires a major cultural 3 change away from a ‘them and us’ attitude to one of partner- 4 ship, whereby the mutual benefits of co-operation are clearly 5 recognized. Companies must also co-operate whilst competing 6 but with the common objective of taking costs out of their supply 7 chains. ECR will not go away – when it has a lower profile, this 8 will be indicative that it has become good business practice. 9 1011 Retailer power and control in the food supply chain 1 2 Looking back to Figure 5.3, at first sight, the power of the 3111 main food retailers could be under-estimated, especially when 4 mapping out the supply chain from a manufacturer’s standpoint. 5 To think in these terms would be a great error of judgement, as 6 over the last ten or fifteen years the major food retailers have 7 exerted tremendous control over the food supply chain (Fernie 8 1999). Table 5.1 shows, in a crude way, the extent to which they 9 control the UK grocery market at the present time. The ‘Big Six’, 20111 i.e. the four in Table 5.1 plus Somerfield and Marks & Spencer, 1 control over 70% of sales in a fiercely competitive market (IGD 2 1999). In structural terms, the market displays many of the char- 3 acteristics of an oligopoly, but in terms of behaviour, price 4 competition is undoubtedly prevalent as the main players battle 5 for market share. 6 Over the past four years, Tesco has replaced Sainsbury in pole 7 position. The former’s image of ‘stack it high and sell it cheap’ 8 has been replaced by a growing reputation for quality products 9 at a fair price to the customer. Fundamental to Tesco’s business 30111 success has been its success in developing effective supply chain 1 management practices. In contrast, Sainsbury and Marks & 2 Spencer have lost market positions for various reasons, one of 3 which has been recognized deficiencies in their supply chains 4 (Wheatley 1999). In many respects, therefore, it is supply chains 5 that compete and, if properly organized, will give retailers a 6 competitive edge in their markets. Whilst similar trends have 7 been predicted for the catering sectors this is relatively under- 8 developed due to level of maturity of the sector. 9 All of the main grocery retailers have restructured their own 40111 supply chains on a centralized basis, which involves suppliers 1 delivering direct to the retailer’s own dedicated regional distri- 2 bution centre. From the retailer’s perspective, this produces 3 important benefits, which include 4 • ECR, with improved stock availability 5 6 • the better and more efficient use of warehouse space 7 • reduced distribution costs 8 49111 • supplier discounts for bulk deliveries

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1111 as well as being in full control of their supply chains. Centraliza- 2 tion in this market is now virtually at 100% saturation, with 3 stock levels having fallen by an estimated 16% since 1996 (IGD 4 1999). 5 The food supply chain is further controlled by the major 6 retailers in other ways such as the ever-increasing number of 7 own label products, store loyalty cards, in-store promotions and 8 more recently, home delivery services. It is easy to see why even 9 the largest food and drink manufacturers have been forced into 1011 complying with the stringent demands of their retail customers. 1 In some respects, it is a clear example of a partnership but where 2 the power, influence and control of the respective partners is by 3111 no means equal. 4 Market forecasts clearly indicate that these trends will 5 continue. The home delivery sector especially is expected to grow 6 substantially over the next few years. Following Iceland’s lead, 7 the major grocery retailers are moving into this in a positive yet 8 selective way, as Internet shopping becomes more commonplace. 9 Further developments in the supply chain are inevitable, the 20111 most likely outcome being that of dedicated structures being 1 further refined to meet an ever-increasing consumer demand. 2 3 Recent development in the catering sector 4 5 Supply strategies and the development of quasi-vertical 6 integration/vertically integrated networks throughout the food- 7 service supply chain is less well advanced than its retail 8 counterpart. There are, however, recent developments, which 9 look set to reverse this trend. 30111 1 Efficient Foodservice Response – the emergence of multiple players 2 3 EFR (Efficient Foodservice Response) is currently being heavily 4 promoted through the Institute of Grocery Distribution (IGD). 5 The term, interestingly, is different to its equivalent in retail. 6 In 1994 the International Foodservice Manufacturers Associa- 7 tion (IFMA) and the International Foodservice Distributors 8 Association (IFDA) instigated the evaluation of the ECR with 9 respect to the foodservice sector. From their initial endeavour, 40111 1 2 Total value of market £80 billion 3 % turnover Tesco 19.6% 4 Sainsbury 17.4% 5 Asda 11.2% 6 Safeway 9.4% 7 Table 5.1 8 The UK grocery market Source: Institute of Grocery Distribution, 1999 49111 in 1999

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1111 representatives from the foodservice manufacturers, brokers, 2 distributors, catering organizations and key industry trade 3 associations produced a report that stated that the foodservice 4 sector differed sufficiently that a total adoption of ECR was not 5 appropriate. 6 The group identified five key strategies: 7 8 • Equitable alliances 9 • Supply chain demand forecasting 1011 1 • Electronic commerce 2 • Logistics optimization 3111 4 • Foodservice Category Management. 5 6 In the UK EFR began to emerge as a recognizable term around 7 the mid/to late 1990s. The IGD report (Haines and Turner 1998) 8 provided evidence to suggest that foodservice organizations 9 were aware of the term and recognized its importance. In 1999 20111 a working group comprised of key foodservice groups and 1 suppliers to that sector was progressed by the IGD (IGD 2000). 2 Key players included: Allied Domecq Leisure, Bass Leisure 3 Retail, Best Foods UK Ltd, Brake Bros Foodservice Ltd, Cearns 4 and Brown, Nestlé UK Ltd, Cuisine Foodservice, DBC 5 Foodservice, E3 United Kingdom Ltd, RHM Food service, Mckey 6 Food service Ltd, Premier Poultry, Procter and Gamble Ltd, 7 Tetley GB Limited, Tricon Restaurant Service, Van Den Bergh, 8 W&P Foodservice Limited, Whitbread. 9 Key problems identified for the catering sector relate to issues 30111 of low tech, fragmented distribution and lack of good forecasting 1 techniques. In the foodservice sector there is limited communi- 2 cation between suppliers, a lack of IT standard, highly distrustful 3 business relationships and complex product ranges. 4 The initial stages of the EFR pilot involved some key players 5 – Whitbread W&P, Cearns and Brown, Brake Bros, 3663, P&G, 6 New Zealand Milk and RHM. The pilot focused on the devel- 7 opment of systems prevalent in the retail sector: Category 8 Management, back-hauling, consolidation and cross docking, 9 with a view to facilitate the process of streamlining. 40111 Estimations of cost savings cannot be given at this stage due 1 to the relatively underdeveloped nature of the UK catering sector 2 in comparison with the US market (Haines and Turner 1998). 3 4 Contracting out – an obvious partnership 5 6 The market for distribution services in the UK has experienced 7 considerable growth since the early 1980s, following the priva- 8 tization of the National Freight Company and the sale of other 49111 smaller companies to new owners. Growth in catering supply

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1111 occurred later in the 1990s with the emergence of catering supply 2 companies who hold a dual role of distribution and wholesale. 3 Overall market growth has been broadly in line with the rate of 4 growth of the economy, but this masks what has undoubtedly 5 been the success story, namely the unprecedented and sustained 6 growth in demand for third party logistics services. The emer- 7 gence of specialist contractors such as Exel, Wincanton Logistics, 8 Christian Salvesen and the Tibbett and Britten Group has 9 undoubtedly been one of the major business successes in this 1011 period. Such companies have emerged, not only as powerful 1 logistics operators, but also as major industrial forces in the 2 service sector as a whole (Bamford 1999b). Interestingly one of 3111 the major catering companies, Whitbreads, has recently run 4 counter to this trend and changed from contracted distribution 5 through Exel to in-house logistics services. Their reasons for this 6 decision related primarily to the difficulties they had experienced 7 in the management of the diversity of their product portfolio 8 within a contracted distribution system. 9 None the less, food and drink companies, along with major 20111 retailers, are now amongst the most important customers of such 1 operators. This is hardly surprising in view of the range of supply 2 chain management services on offer to clients. The services 3 include: 4 5 • transporting finished products from factories to the point of 6 sale 7 8 • the holding and management of stock in warehouses 9 • ‘just-in-time’ methods of stock control and inventory fore- 30111 casting 1 2 • sophisticated information management systems 3 • packaging and labelling 4 5 • supplier collections. 6 7 As the market has grown and become more sophisticated so it 8 has also become segmented. Alongside the major operators, 9 smaller companies have established niche market positions as 40111 specialists in fresh food and vegetable distribution, in frozen and 1 chilled distribution and drinks distribution. Table 5.2 shows some 2 of these, the services they provide and the nature of collabora- 3 tive links. It is evident that in many cases they are involved in 4 vertical and horizontal partnerships. 5 The basic arguments as to why food and drink busi- 6 nesses should enter into a partnership with one or more of the 7 companies shown in Table 5.2 are well documented (Walters 8 1993). These arguments have particular relevance in the food 49111 and drinks sector, with the possible exception of secondary

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1111 Company Temperature-controlled services 2 3 Chilled Frozen Dedicatedb Shared-userc 4 Associated Cold Stores & Transport ✔✔✔ 5 Baylis Distribution ✔✔✔ 6 Bibby Distribution ✔✔✔ 7 BOC Distribution Services ✔✔ 8 Christian Salvesen ✔✔✔✔ 9 Eddie Stobart ✔✔✔✔ 1011 Exel ✔✔✔✔ ✔✔✔✔ 1 Fiege Merlin ✔✔ ✔ 2 Fowler Welch Frigoscandia Distribution ✔✔✔✔ 3111 Fullers Logistics Group ✔✔✔✔ 4 Gregory Distribution ✔✔✔✔ 5 Grocery Logistics ✔✔✔✔ 6 Hays Distribution Services ✔✔✔✔ 7 Initial Transport Services ✔✔✔✔ 8 Langdons ✔✔✔✔ 9 Lloyd Fraser Holdings ✔✔✔✔ 20111 NFT Distribution ✔✔✔✔ 1 Taylor Barnard Group ✔✔✔ ✔✔✔ 2 TDG ✔✔✔✔ 3 Tibbett and Britten Group UCI Logistics ✔✔✔ 4 Wincanton Logistics ✔✔✔✔ 5 6 aExcludes ambient food and drinks operators. 7 bNormally contracted. c 8 Where the operator consolidates and transport loads for more than one customer in the same warehouse or on the same vehicle. 9 Source: Distribution Business, January 2000 30111 1 2 Table 5.2 Specialist contract operatorsa in the food and drinks market in 2000 3 4 5 distribution in the brewing industry where own operation 6 remains strong. They include: 7 8 1. The customer is able to focus on their core business, for 9 example food processing, food manufacturing or drinks 40111 retailing. This is a very important reason for contracting out 1 since supply chain management operations from a strategic 2 standpoint are non-core activities for such businesses. For 3 some types of food activity, say involving home deliveries, 4 distribution is clearly part of the core business. If contracting 5 out gives any business a competitive edge, it should be 6 seriously evaluated. 7 8 2. Capital investment in non-productive assets can be reduced. 49111 Valuable business capital can be tied up in vehicles and

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1111 storage facilities when it might well be better employed in 2 developing the core business. The downside of divesting 3 though, is that annual costs will be higher, although many 4 contractors will be able to share the benefits of economies of 5 scale with their customers. 6 3. Better budgeting control. Costs are known and budgets can 7 be prepared once the terms of a contract have been signed. 8 Operating the supply chain is therefore no longer ‘a step into 9 the unknown’ that it can be for many businesses. 1011 1 4. Leading edge IT systems can be provided and used by the 2 contractor. 3111 5. Labour relations problems are transferred from the customer 4 to the contractor. 5 6 6. Operational efficiency will improve – the expertise of the 7 contractor will bring significant benefits in supply chain 8 management performance. 9 20111 For some types of food and drink operation though the reten- 1 tion of in-house distribution is seen as essential for business 2 well-being. This particularly occurs where customer service and 3 the effective management of customer service levels, is an impor- 4 tant objective. A particularly good example is in the case of van 5 sales, but in any operation where there is immediate interface 6 with the customer, own operation remains strong. Customer 7 interface and communications are rightly seen as an integral part 8 of the core business. 9 There are other reasons why food and drinks businesses may 30111 wish to persist with their own distribution arrangements. Cost 1 is an obvious one but, in addition, it does allow the business to 2 retain greater control over their supply chains. Especially where 3 the product life is short or demand is irregular and volatile, this 4 is an important consideration. So, for some businesses, the supply 5 chain is considered as so vital to their business well-being that 6 they remain unwilling to move from their traditional in-house 7 operation. 8 Notwithstanding, the growth in the use of third party 9 contractors has simultaneously resulted in the development 40111 of partnerships between themselves and their customers. These 1 partnerships are designed to promote quick response, take 2 costs out of the supply chain and provide mutually beneficial out- 3 comes. Open-book accounting, with agreed profit levels, is now 4 commonplace. Such partnerships become strained and under 5 threat when the terms of the contract and the performance levels 6 stipulated in it, are not realized. This more so than any other 7 reason tends to be why companies switch from one provider 8 to another. 49111

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1111 Customer Contractor Details 2 3 Allied Bakeries TNT Logistics Geographical extension of existing contract to 4 north of England 5 Apetito TDG Novacold Storage of Waldens Premier range of ready 6 meals Avebury Taverns Exel Tradeteam Centralized distribution for licensed houses 7 Avon Foods Taylor Barnard National food distribution 8 Birds Eye Walls Christian Salvesen Long term vegetable processing and cold 9 storage 1011 Direct Wine Business Express Home delivery of wine 1 Fresh Fruit Services Salvesen Logistics Capespan (South Africa) fruit distribution 2 Häagen Dazs Café Hays Food Logistics National distribution 3111 KFC Hays Food Logistics National distribution 4 Mackie’s TDG Novacold Ice cream distribution 5 Manor Bakeries Christian Salvesen National distribution 6 Nisa – Today’s Bibby distribution National wines and spirits distribution 7 Signatory Whisky Business Express National distribution Southern Wine Brands McGregory Cory National distribution 8 W T Maynard TDG Novacold Cold storage 9 20111 Source: Distribution, December 1999 1 2 3 Table 5.3 Selected food and drinks contracts completed in 1999 4 5 6 Table 5.3 shows some typical examples of partnerships 7 between food and drinks companies and supply chain manage- 8 ment providers. It indicates a diversity of customer across the 9 full range of food and drinks services. It also shows that would- 30111 be customers have a wide choice of potential contractor, all of 1 whom (except for Business Express, a home delivery specialist) 2 were also shown in Table 5.2. 3 Future prospects for the further development of such partner- 4 ships in the food and drinks industries remain good. They do, of 5 course, depend on the state of the food and drinks market, certain 6 sectors of which are heavily dependent upon the state of the econ- 7 omy. Recent forecasts point clearly to an 8–10% increase over the 8 next few years. For food and drinks manufacturers, there is little 9 purpose in resisting the erosion of the rationale behind the reten- 40111 tion of an in-house operation (Pellow 1998). There is much more 1 to be gained by the business as a whole by improving the core 2 skill of food and drinks manufacturing and processing. 3 4 Contracting out the strategic purchasing function 5 6 In recent years within the catering sector, there has emerged a 7 trend for outsourcing the purchasing/supply function. These 8 developments have emerged as solutions both to the fragmented 49111 nature of (a) the catering sector, (b) the supply base.

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1111 Independent negotiants ●●● 2 3 This development is particularly evident within the branded 4 restaurant sector. Bitz and Pizza, a brand owned by Out of 5 Town Restaurants, a Sheffield based company, currently uses 6 the services of Michael Weaving Associates. Certain hotel 7 groups/hotels are linked to Ivan Schenkman. These ‘negotiants’ 8 operate as independent central purchasing departments taking 9 a percentage of the savings made through collective increased 1011 purchasing power. Although there is limited research into 1 this area, it would appear (Eastham 2000) that the contracting 2 out of the purchasing is largely a practice of small catering and 3111 hotel chains. In essence, they are similar to strategies employed 4 to reduce costs inherent in buying groups such as Landmark 5 and Strategic Alliances. An example of this is EMS (see later 6 sections). They represent horizontal collaboration in reality, 7 however the collaboration between caterers is incidental rather 8 than by design. 9 20111 Outsourced RDCs or umbrella organizations ●●● 1 2 Organizations such as NCB and IDC (Independent Dairy 3 Company) have an essential role in linking the larger scale 4 hotel and catering organizations to smaller scale suppliers. 5 Emerging in fresh produce, NCB, originally an abbreviation for 6 National Catering Butchers, focused on meat. They initiated their 7 role as a central link point for caterers, marketers and managers 8 of depots providing local supply to catering outlets. NCB have 9 more recently expanded to be a single sourcer to caterers for 30111 all fresh produce. IDC, primarily play a similar role in dairy 1 produce, but are looking to expand into a whole range of chilled 2 food. 3 4 Horizontally integrated networks 5 6 Horizontally integrated networks are made up of businesses 7 serving similar markets, often in different locations, may combine 8 forces in order to increase cost and resource efficiencies. These 9 networks have materialized in both the retail and catering sectors 40111 in the form of: 1 • Buying groups 2 3 • Symbol groups 4 • Co-ops 5 6 • Purchasing/marketing alliances 7 • Strategic alliances 8 49111 • Umbrella organizations.

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1111 The retail sector 2 3 Buying groups ●●● 4 5 Buying groups were formed by independent wholesale opera- 6 tors to improve trading terms with suppliers (Mintel 1999). They 7 offer their members significant price benefits achieved through 8 the power of bulk buying. They are described as ‘voluntary non- 9 profit organizations’. In certain cases, e.g. NISA, membership is 1011 not limited to wholesalers but also includes retailers. They offer 1 a number of services: negotiation of overriding discounts, promo- 2 tional programmes, provision of own label ranges and the 3111 dissemination of information and advice (Marchant 1999). There 4 are three main buying groups in the UK: NISA which today has 5 306 depots, Landmark with 84 depots and Lekkerland UK with 6 11 depots (Mintel 1999). 7 8 Symbol groups ●●● 9 20111 At one stage there was a clear distinction between buying groups 1 and symbol groups. Until recently, buying groups did not 2 market their fascia and allowed members to trade under their 3 own (Mintel 1999). Increasingly, buying groups and indeed 4 members of buying groups, are taking a stronger position in the 5 symbol sub-sector, e.g. Today and Bestway. 6 A symbol group is formed when a wholesale firm enters into 7 an arrangement with independent retailers. The terms of the 8 agreement mean that, in return for discounts and other advan- 9 tages, e.g. centralized accounting, software for instore computing 30111 systems, etc. retailers agree to specific terms including a given 1 volume of goods each week and an annual fee for membership. 2 The exact nature of these terms vary between symbol. Spar is 3 the largest symbol group in the UK, considered the most elite 4 and charging the highest fees. It also operates alongside 5 Landmark with whom it shares overrider agreements with 6 Makro. Other good examples are Londis, Costcutter and Key 7 Lekkerland. 8 9 Co-ops ●●● 40111 1 The Co-operative Movement began in Rochdale in England in 2 1844 to protect consumers against unfair trading practices 3 through sharing profits with customers. In essence, the princi- 4 ples under which Co-ops operate have changed little over the 5 157 years, They are based on voluntary and open membership, 6 democratic control, limited interest given to shareholders and, 7 based on the purchases made by members, a pro-rata distribu- 8 tion of profits. The number of Co-ops has declined over time. 49111 In 1998 there were 68 separate societies, by 1999 (IGD 1999)

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1111 these had been reduced to 48 with 1236 outlets. However, the 2 movement has also evolved horizontal linkages. The CWS (Co- 3 operative Wholesale Society), the largest co-operative group, also 4 operates a buying group, CRTG (Co-operative Retail Trading 5 Group). A major ‘competitor’, CRS (Co-operative Retail Society 6 – Co-operative Society) gained membership to the CRTG in 1999; 7 other smaller Co-ops are also members, to the extent that the 8 CRTG accounts for 90% of co-operative sales. 9 1011 ●●● 1 Strategic alliances 2 A strategic alliance is a horizontal co-operation between retailers 3111 who could often be seen as competitors. They can be loose or 4 tight alliances (McGoldrick et al. 1995) Such alliances had tradi- 5 tionally appealed to the SMEs (e.g. Co-ops) within the sector. 6 However, recent years have seen the involvement of major 7 players, in such groups, as a means of either expanding or 8 consolidating their current national position. First emerging in 9 1989, they are, in the main, international alliances that form 20111 together and create a central secretariat for the purpose of co- 1 ordinating operational activities. Buying, branding, expertise 2 exchange and product marketing are just some of the activities 3 (Robinson and Clarke-Hill 1994). They are an alternative to the 4 process of concentration among the grocery retail multiples 5 and a point of contact for multi-national manufacturers (Beard 6 et al. 1999). 7 8 The catering sector 9 30111 ●●● 1 Purchasing and marketing alliances in hotels 2 In the hotel sector there has been a long tradition of alliances. 3 Best Western established a marketing consortium for indepen- 4 dent motels in the US in 1946. It subsequently expanded world 5 6 7 Details Members 8 European Marketing Alternative process of concentration Leclerc, Markant Handels, 9 Distribution amongst grocery retail multiples – Euromadis Iberica, Uniarme, 40111 acts as a point of contact for ZEV, Supervib, Nisa Today’s, 1 multi-national manufacturers Unil, Musgrave, Dagab, Syntrade 2 Associated Marketing Founding members were Ahold, Ahold, Safeway, Casino, 3 Services Safeway and Casino. Aims to create Edeka, ICA, K-group, 4 synergy agreements with around 50 Mercadona, Hakon, 5 core suppliers which represented a Superquinn, JMR 6 reduction of 800~% of supply base 7 8 49111 Table 5.4 The two largest international strategic alliances

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1111 wide and offers a wide range of services including education 2 and training, a central reservation system (telephone and 3 website) and a purchasing alliance. Members range from 4-star 4 hotels to roadside motels. Other alliances such as Relais Chateau 5 and Grandes Etapes are smaller in nature but operate in a similar 6 manner. Members’ benefits include lower purchasing and 7 marketing costs. 8 While hotel consortia are the most common approach, the 9 range of alliances between hotels is much more widespread than 1011 might be presumed. Agreements vary; in some circumstances 1 purchasing is an informal arrangement between individual hotels 2 located in proximity to each other. These alliances may take the 3111 form of hoteliers guaranteeing the use of only one grocery whole- 4 saler, on the basis that, the wholesaler agrees to provide a 5 worthwhile discount. 6 Whilst alliances are evident within the independent hotel 7 sector, they are limited within other commercial food service 8 operations. In contrast, in the cost sector they are a well-estab- 9 lished entity. Organizations such as Yorkshire Purchasing 20111 Organization (YPO) and SNUPI (the Scottish and Northern 1 University Purchasing Initiative, defined as serving the Scottish 2 and Northern England universities and colleges and incorpo- 3 rating Midland University Catering) play a key role in the central 4 purchasing of educational and governmental institutions. 5 6 Internet initiatives 7 8 Small and medium-sized enterprises 9 30111 The Internet could be argued to have equal value for SMEs as 1 for large enterprises. This is particularly so since location and 2 market access are no longer issues. In the following we examine 3 an example of how a network of SMEs have used the Internet 4 to extend their market. 5 6 7 Case study 1 – Club Chef Direct 8 9 The recently launched Club Chef Direct, an dinner party in their home. For a member- 40111 offshoot of Heritage Fine Foods is designed ship fee of £100, plus the cost of the meal, 1 to provide the ‘discerning’ consumer with consumers, on request, are provided with 2 fine food within the home. Heritage the menu, illustrated recipe cards, boxes of 3 Fine Foods, a company providing custom- ingredients for each dish. All the consumer 4 prepared foods to top restaurants in the needs to do is prepare the food, cook, serve 5 UK, has operated for the last ten years. and eat. Chefs who have provided their 6 They operate through a website www. recipes to the scheme include Michel Roux, 7 clubchefdirect.co.uk, providing consumers Pierre Koffmann and Rick Stein (Bateman 8 with all they need to provide a ‘top chef’ 2000). 49111

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1111 Case study 2 – Yorkshire Pantry 2 3 Within the UK there are a number of food base. Bothams is a bakery based in Whitby, 4 and drink networks; designed to promote a seaside town in North Yorkshire. The busi- 5 the food industry and particularly SMEs ness had already extended to include several 6 within a region. One such organization is bakery shops and teashops within Whitby 7 Yorkshire Pantry, a network of farmers, and the surrounding area. Yet the decline of 8 manufacturers, retailers and caterers. As the seaside resort and the shorter duration 9 with all food and drink networks within the of the season had presented particular 1011 UK, this initiative is designed to redress difficulties in retaining good qualified staff. 1 the impact of globalization on the Yorkshire Mike Jarman saw the Internet as a means of 2 food industry. Yorkshire Pantry is adminis- extending the season and retaining his staff 3111 tered by North Yorkshire Country Council, over the winter period. 4 but steered by the 150 or so members. It aims Through his example and guidance 5 to address issues of managerial/technical many other members also established sites, 6 expertise and promote the development enabling them to reach markets worldwide. 7 of customer bases for Yorkshire produce. For many this represented a joint opportu- 8 Much of its value lies in the networking, nity. Relationships developed through net- 9 information sharing and sales opportunities working naturally led to supply partnerships 20111 provided through events such as health and between for example, jam manufacturers 1 hygiene training sessions and produce and teashops, tea suppliers and bakers. The 2 shows. progression towards the production of joint 3 In the mid 1990s one of the members, Mike products for export, i.e. hampers, was 4 Jarman at ‘Bothams’, began to develop an inevitable. 5 Internet site in order to extend his customer 6 7 8 9 Larger scale Internet commerce – e-markets 30111 1 The development of e-markets, where buyers are connected 2 through a website, is considered by many consultants to be very 3 much the direction in which businesses will go (i.e. Druid). In 4 the case below one such e-market is illustrated. 5 6 7 Case study 3 – Efdex.com 8 9 Efdex is a fresh produce e-market. It says that public bars, takeaways, retailers, manufac- 40111 it provides a ‘low cost network that connects turers and farmers/growers. It offers buyers 1 buyers and sellers so that they can commu- and sellers a range of services: 2 nicate and trade efficiently’. Founded by Tim 3 Carron-Brown, Efdex was launched on a trial • Up to date news stories, from press, tele- 4 basis on 17 January 2000. The company has vision and radio broadcasts categorized 5 three main addresses dealing with Europe, according to business sector. 6 the US and East Asia (Singapore) as separate • Information on legislation. 7 markets. It is expected that businesses join- 8 ing this service will span the whole food sec- • Banks of information on suppliers and 49111 tor and include: hotels, restaurants, caterers, buyers.

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1111 • Facilities for ordering direct through the • Reduction of administration costs associ- 2 Internet. ated with purchasing and sales. 3 • Greater information: 4 The e-market site is expected to create 5 greater efficiencies in a number of ways: (a) suppliers on other market prices and 6 potential customers 7 • Enhance current supplier/buyer relation- (b) buyers on the respective availability 8 ships. and price of items across suppliers. 9 1011 1 2 Conclusion 3111 4 The main theme of this chapter is that of partnership, that is, 5 the business relationships between food and drinks manufac- 6 turers and other businesses involved in the food supply chain. 7 These partnerships are between 8 9 • Manufacturers and their raw materials providers. 20111 • Manufacturers and their customers. 1 2 • Manufacturers and their supply chain management service 3 providers. 4 • Wholesalers and their customers. 5 6 • Caterers and caterers. 7 • Wholesalers and wholesalers. 8 9 • Retailers and retailers. 30111 1 In terms of power and control, the dominance of the major food 2 and drinks retailers cannot be ignored. Fifteen to twenty years 3 ago, it was manufacturers who controlled their supply chains. 4 This is no longer the case with the retailers very firmly in control. 5 In a market likely to be increasingly responsive to more home 6 deliveries and Internet shopping, the retailer’s control is likely 7 to be undiminished. It is also inevitable that retailers will 8 continue to rationalize their number of suppliers and continue 9 to search for non-UK sourcing opportunities. It is apparent that 40111 similar trends may emerge in the catering sector. 1 The power of the retailers over the food chain does how- 2 ever present problems, as the on-going investigation by the 3 Competition Commission has indicated. In addition, certain parts 4 of their market are being challenged by ‘discounters’ such as 5 Lidl, Netto and Aldi from the rest of the EU. This in turn presents 6 challenges for UK manufacturers as these retailers tend to source 7 many food products, processed as well as fresh, from outside 8 the UK. Such developments provide for a very challenging future 49111 business environment for our food and drinks manufacturers.

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1111 References 2 3 Bamford C.G. (1999a) Logistics. Business Review, April, pp. 24–5. 4 Bamford C.G. (1999b) The internationalization of logistics in 5 the UK. In Waters D. (ed.), Global Logistics and Distribution 6 Planning. London: Kogan Page, ch. 21. 7 Bateman M. (2000) Special deliveries. The Independent on Sunday, 8 6 August, pp. 24–5. 9 Beard J., Gordon D., Spillard L., Walton J. and Webb S. (1999) 1011 Grocery retailing 1999. The Market Review, May, pp. 72, 1 section 1. 2 Department of Trade and Industry (DTI) (1995) Logistics and 3111 Supply Chain Management. London: DTI. 4 Eastham J.F. (2000) Unpublished research on suppliers’ percep- 5 tion of constraints regarding supply to the retail and catering 6 industry. 7 Fernie J. (1999) Retail logistics. In Waters D. (ed.), Global Logistics 8 and Distribution Planning. London: Kogan Page, ch. 16. 9 Haines D. and Turner D. (1998) Catering 1998, Surveying the 20111 Supply Chain. London: Institute of Grocery Distribution. 1 IGD (1999) Retailer Profiles. London: Institute of Grocery 2 Distribution. 3 IGD (2000) The Future of Foodservice. Executive Briefing, confer- 4 ence proceedings 19 April 2000. 5 Marchant C. (1999) Retail Logistics. London: IGD Business 6 Publications. 7 McGoldrick P.J. and Davis G. (1995) International Retailing, Trends 8 and Strategies. London: Pitman, pp. 135–9. 9 Mintel (1999) Wholesaling and Cash and Carry, 2 October (Mintel 30111 International). 1 Pellow M. (1998) Food logistics – an irresistible force in the 2 supply chain. Distribution Business, Issue 6, p. 18. 3 Robinson T.M. and Clarke-Hill C.M. (1994) Competitive advan- 4 tage through strategic retail alliances: a European Perspective. 5 Presented at Recent Advances in Retailing and Service Science 6 Conference, University of Alberta, Canada, May 1994. Cited 7 in Goldrick P.J. and Davis G. (1995) International Retailing, 8 Trends and Strategies. London: Pitman, pp. 135–9. 9 Taylor D.H. (1997) Global Cases in Supply Chain Management. 40111 Thompson Business Publications. 1 Walters P.J. (1993) In or Out? The Contract Distribution Dilemma. 2 Distribution Dynamics. 3 Wheatley M. (1999) The salvation of St Michael. Logistics Europe, 4 June, pp. 14–20. 5 6 7 8 49111

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1111 Activities 2 3 1. For a food and drinks manufacturer of your choice and using 4 Figures 5.1 and 5.3 as a guide, produce a diagrammatic repre- 5 sentation of their supply chain. How does your representation 6 differ from Figures 5.1 and 5.3? Why is this? 7 8 2. Using the Internet and corporate publicity, investigate how 9 three of the large third party supply chain management oper- 1011 ators market themselves to potential clients. Use this evidence 1 to prepare a short marketing presentation to a client who is 2 a producer of chilled food products for the multiple grocery 3111 market. 4 3. Using Table 5.2 of this chapter as a model identify similar 5 characteristics for two or three catering supply companies. 6 You may like to use information sources such as the Internet 7 and unstructured telephone interviews. 8 9 20111 1 Questions 2 3 1. Discuss the effects on food and drinks manufacturers of the 4 increased control of major retailers on the food chain. 5 2. Evaluate the arguments why 6 7 (a) a food manufacturer 8 (b) a producer of alcoholic drinks 9 30111 should form a supply chain partnership with a third party logis- 1 tics contractor. 2 3. Comment upon the ways in which food and drinks manufac- 3 turers are likely to have to respond to the increase in demand 4 for home shopping. 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 110 1111 CHAPTER 2 ●●●● 6 3 4 5 6 Stakeholders, 7 8 9 1011 ethics and social 1 2 3111 4 responsibility in 5 6 7 8 the food supply 9 20111 1 2 chain 3 4 5 6 Jennifer A. Wade 7 8 9 30111 1 2 3 4 Key objectives 5 6 This chapter examines the wider role of food and hospitality 7 organizations by analysing their broader responsibility with 8 regard to food supply in society. These areas of responsibility 9 include how organizations manage utilities and production 40111 methods, the characteristics of the food purchased and their 1 relationships with their stakeholders. The key objectives of 2 this chapter are: 3 • To explain what is meant by ethical business practice and 4 social responsibility 5 6 • To identify the key stakeholders of food and hospitality 7 organizations and comment on how they may influence the 8 ethics of the organization 49111 Food Supply Chain Management

1111 • To explore the demand for ‘ethical food’ 2 • To determine the characteristics of ‘ethical food’ 3 4 • To analyse the implications for retail food and hospitality 5 organizations 6 7 Introduction 8 9 Corporate social responsibility (CSR) is not a twentieth-century 1011 phenomenon. In 1844, the ‘Rochdale Pioneers’ opened a co-oper- 1 ative shop to sell wholesome food at fair prices at a time when 2 the adulteration of food was common (Co-op 2000). In 1800, 3111 Robert Owen began the set up of the model village and factory 4 of New Lanark in Scotland (Cannon 1994). This philanthropist 5 ensured his workers received education, health care and comfort- 6 able homes. There may have been a touch of paternalism in 7 Victorian ‘model’ institutions but there was a genuine concern 8 that ‘the lot’ of the worker should be improved. As the values 9 of society changed, legislation was introduced that forced orga- 20111 nizations to become more responsible in the way they operated. 1 Today, companies operate in an environment where many 2 aspects are controlled by government policy and legislation. This 3 provides a baseline for conduct. 4 It could be argued that, high standards of conduct are essen- 5 tial to a sound reputation, and, the value of a reputation is 6 realized when conduct is compromised. An example of this is 7 the pensions fund scam initiated by the late Robert Maxwell. 8 The public reaction was profound, as their expectations of good 9 conduct (as well as legal regulations) had been slighted. For 30111 many, the standards of society had been snubbed. 1 Fritzsche (1997) defines business ethics as ‘the process of eval- 2 uating decisions, either pre or post, with respect to the standards 3 of the society’s culture’. What are ‘good’ decisions and what are 4 bad ones? What standards are the right ones? Although orga- 5 nizations are usually legal entities in their own right and can 6 negotiate contracts and so on, it is the people in organizations 7 who have values and morals, act out behaviour and make judge- 8 ments within and on behalf of, the organization. Therefore, 9 business ethics is about relationships, relationships between 40111 organizational members themselves, and, with the organization’s 1 stakeholders. To understand these relationships it is necessary 2 to analyse the wider impact of an organization and the contri- 3 bution it makes to the community. As the ripples from a stone 4 thrown into a pond, expand across the surface of the water so 5 the impact of any organization spreads across its community 6 and environment. To comprehend the significance of this impact, 7 those with an interest or ‘stake’ in the organization must be iden- 8 tified. Webley (1992) lists the stakeholders as the ‘shareholders, 49111 employees, customers, suppliers and society’. Stakeholders are

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1111 not just those with a financial stake in the organization, it seems 2 that everyone (society) has a ‘stake’ in an organization. 3 4 Corporate business ethics and social responsibility 5 6 Webley (1992) also comments: 7 8 there has been a measurable increase in both company 9 awareness of ethical issues and public disquiet about 1011 standards of business practice. 1 2 McDonald and Nijhof (1999, p. 134) suggest an organizational 3111 framework of ethics has three levels. First, a macro or political 4 level that stems from industry power bases, legislation and 5 market mechanisms, that ensure organizations do not act in a 6 morally reprehensible way. This is certainly true of hospitality 7 and retail food organizations which must meet their legal respon- 8 sibilities for the supply of safe food. The second level is the 9 ‘meso’ level that concentrates on the ethics of the organization 20111 itself, arising from the norms and values of that organization. 1 The Co-op Bank, for instance, trades according to an ethical 2 policy, first issued in 1992. The policy covers human rights, 3 environmental issues and social involvement. The policy defines 4 with whom the bank will, and will not, establish commercial 5 relationships. For example, the bank will not invest in armament 6 manufacturers but positively supports organizations that 7 promote the fair trade concept. The third level of ethics is the 8 ‘micro’ level that represents how the individuals behave within 9 and on behalf of their organization. 30111 At the macro level, the ethical performance of an organization 1 will be controlled, to some extent, by external forces such as 2 government legislation and industry codes of practice. Any 3 internal attempt (meso level) to establish a code of ethics must 4 reflect the macro factors and the norms and values of the orga- 5 nization. An internal ethical policy must then seek to influence 6 and, be reflected in, the behaviour of the organization’s members, 7 especially its decision makers. If there is conflict between what 8 the individual thinks is ethical and what the organization 9 purports to consider ethical, then it will become increasingly 40111 difficult for decision makers to act responsibly (McDonald and 1 Nijhof 1999). 2 In poor trading periods for example, organizations can delay 3 the payments of invoices to facilitate their own cash flow. In the 4 short term the purchaser benefits but, to the detriment of their 5 supplier. In the longer term, however, the organization may put 6 at risk the supply of resources that they need. Alternative sources 7 of supply could be found but short term financial advantage 8 may again endanger long term supply continuity and put the 49111 supplier stakeholder at risk.

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1111 Stakeholders all have their own priorities. Webley (1992) 2 comments that a company must ‘seek to keep responsibilities 3 in balance’. Relationships with each of the stakeholders need to 4 be conducted in such a way that each of their particular needs 5 are met without compromising the needs of the others. 6 Organizations need to ensure that the relevant information is 7 available for each stakeholder. For example, environmental 8 health officers will require information about standards of 9 hygiene management whilst shareholders will require honest 1011 statistics on financial performance. 1 Organizations must also be able to prove ethical performance 2 and this requires some definition or interpretation of its ethics 3111 into standards that can be verified. The source of these stan- 4 dards will vary, some may be external, such as the hygiene 5 standards required by environmental health officers, while others 6 will be internal, for instance, the declared relationship an orga- 7 nization has with its suppliers. 8 Organizations can choose to operate to an externally gener- 9 ated set of standards that interpret ethical principles or develop 20111 their own. The advantage of using an external standard is that 1 it may be widely recognized and will therefore have more 2 credence in the wider community. In the past two decades many 3 organizations have identified the need to become ‘environmen- 4 tally responsible’. External verification can lead to accreditation 5 for standards such as the International Standards Organization 6 (ISO) 14000 series. This allows an organization to operate a 7 prescribed environmental quality management system and verify 8 their environmental good practice. The environmental perfor- 9 mance standards they have to define, monitor and attain may 30111 include: energy management, water conservation, emissions 1 control, waste management, staff training, use of transport, 2 health and safety standards and purchasing policy. Staff need 3 training in how to save energy and purchasing specifications 4 should ensure ‘least energy ‘ consumption for electrical goods, 5 or biodegradable contents in cleaning chemicals. 6 Organizations can join a host of special interest or trade 7 bodies that will verify their adherence to a given code of prac- 8 tice or set of guidelines that promote particular ethical standards. 9 These include ‘sustainable’ tourism accreditation schemes such 40111 as Greenglobe, registration for organic food supply with UK 1 Organic Register of Food Standards (UKROFS), or becoming a 2 member of the Ethical Trade Initiative (ETI). 3 4 Consumer issues 5 6 Supermarkets have enormous purchasing power and influence 7 on what food is sold and produced. This is a complex, sophis- 8 ticated market with supply chains that criss-cross the globe. 49111 The demand for fresh food, often seen as more nutritious and

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1111 healthier, means that sources must be found that can plug 2 seasonal gaps in the home market. Interest in new ingredients 3 leads to a rapidly escalated demand and new sources of the 4 produce have to be established. Tiger prawns, for example, are 5 now a common ingredient. They are now farmed in artificial 6 ponds, on tropical coastlines and in 1995, 27% of total world 7 production came from Thailand. Since then, factory farms have 8 spread to South America and other parts of Asia. Research 9 (Christian Aid 1996) has revealed that this farming has caused 1011 ‘social and environmental damage’. This includes the destruc- 1 tion of mangrove forests and the salination of local water and 2 soil, leading to contaminated water for human consumption, 3111 and reduced crop growth. The pollution may lead to sites being 4 abandoned and the need for new ones. Christian Aid calls for 5 supermarkets (and, by implication, caterers as well) to encourage 6 importers and supermarkets to be more responsible and to 7 ensure their demands are sustainable. 8 Ethical consumerism allows the consumer to influence the 9 food chain, by purchasing goods based on critieria additional 20111 to price and quality. This forces the food retailer or caterer to 1 look at their source of supply. There is an ‘ethical’ consumer 2 movement, as evidenced by the Ethical Consumer Research 3 Association (ECRA). They publish a magazine, the Ethical 4 Consumer, which gives ‘Which?-style’ reports on consumer 5 goods and the companies behind them. They describe ethical 6 consumerism as ‘in its truest sense it means without harm or 7 exploitation of humans, animals and the environment’ (ECRA 8 2000). They suggest various tactics to pressurize shops to 9 stock more ethical food. One tactic they suggest is the ‘positive 30111 purchasing’ of fair trade goods, organic food and ‘cruelty free’ 1 food. 2 3 4 Case study 1 – the Fairtrade mark 5 6 The Fairtrade Foundation in the UK was set The Foundation commissioned a MORI 7 up by charities well known for their beliefs poll in March 1999 to survey consumer 8 and ‘ethics’, including CAFOD, Oxfam, demand for ethical goods. They found that 9 Traidcraft and Christian Aid. The Founda- overall 11% of the general public recognized 40111 tion also belongs to an international body the Fairtrade mark: in the AB socio-economic 1 called the Fairtrade Labelling Organizations group this rose to 15% and to 20% of those 2 International (FLO). The Foundation exists with higher education qualifications. Some 3 to ‘improve the position of poor and margin- 12% of the general public associated the 4 alized producers in the developing world, Fairtrade mark with a better deal for third 5 by encouraging industry and consumers to world suppliers and 3% of the population 6 support fairer trade’. The Fairtrade mark were committed to buying Fairtrade goods. 7 products include coffee, loose tea and tea The Fairtrade consumer profile is someone 8 bags, chocolate, cocoa, honey and in some who is well educated, over 55 years, from 49111 countries, orange juice and even wine. the professional classes, in full-time work.

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1111 This information helps the caterer or although the produce list is limited it does 2 food retailer to focus on which customers provide a starting point for the ethically 3 will appreciate the supply of Fairtrade minded purchasing manager. 4 mark food (coffee and tea in particular). (Source: The Fairtrade Foundation on 5 There is a Fairtrade Catering Directory on www.fairtrade.org.uk, 26 November 1999) 6 www.Fairtrade.org.uk/Catering.htm, and 7 8 9 1011 A series of food crises over the past decade has highlighted to 1 consumers that the issue of how food is produced can be as 2 significant as the taste or the price. The media exposure of a 3111 series of food related health scares experienced in the UK, 4 including the 1988 salmonella outbreak in eggs, the 1989 outbreak 5 of listeria found soft cheeses, the BSE controversy starting in 6 1988, the 1996–7 E. coli 125 outbreaks, the disputed effects of 7 food additives, the safety of irradiated food and the debate 8 around genetically modified food, has compounded consumer 9 awareness. This is in addition to the demand for ‘healthy eating’ 20111 and concerns over food allergies and animal welfare. Consumers 1 are now sensitized to food issues. Organizations such as 2 McDonald’s have responded by making information available 3 to their customers, For example, McDonald’s (2000) comment on 4 their animal welfare policy, declaring that: 5 6 McDonald’s cares about the treatment of animals . . . 7 McDonald’s believes that the humane treatment of 8 animals is an integral part of our world class supplier sys- 9 tem. Therefore we buy all our beef . . . from suppliers who 30111 maintain the highest standards and share McDonald’s 1 commitment to animal welfare. 2 3 They also make available, information on the content of their 4 products, for those with food allergies. 5 The characteristics of the food are becoming so important that 6 consumers demand more information about how and where food 7 is grown and how it is processed. The labelling of food has 8 become much more sophisticated as consumers’ rights are 9 enforced and consumers are given the information they need to 40111 make choices. Humphries (1998) reports on a CWS 1997 ‘label’ 1 survey that found that whilst 89% of consumers believed the 2 law protected them, consumers were also realistic and accepted 3 a ‘degree of creative licence’. However, words such as ‘tradi- 4 tional’ and ‘natural’ were found to be confusing, so if consumers 5 are to make ‘real’ choices the information must be clear and 6 trustworthy. Some words and standards have a legal status. For 7 example, UK grown organic food labelling is controlled by the 8 UKROFS who allow organizations such as the Soil Association 49111 and the Organic Farmers and Growers Ltd to verify and certify

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1111 organic growers and suppliers. Only permitted labels are allowed 2 on food supplied as ‘organic’. The European Commission has 3 adopted a European Union logo to label organically produced 4 foodstuffs. The logo will act as a guarantee for all European 5 consumers and will be useful for importers. The logo can only 6 be used on agricultural crop products and on foodstuffs 7 containing 95% organic ingredients. The products must have 8 been submitted to the inspection system throughout the entire 9 production and preparation process including processing, pack- 1011 aging and labelling (EU 2000). Other descriptions have some 1 legal recognition, for instance the ‘Freedom Food’ label means 2 animals are reared in conditions prescribed by the Royal Society 3111 for the Prevention of Cruelty to Animals (RSPCA), but the words 4 ‘traditional’ or ‘heritage’ have no legal status. 5 Under the Food Labelling Regulations 1996, since September 6 1999, catering establishments in the UK must provide informa- 7 tion for their customers on the use of genetically modified soya 8 and maize in the food on their menus. This conforms to the prin- 9 ciple that ‘the public has a right to know’. Customers can be 20111 told by staff which dish contains GM ingredients or it can 1 be written on the menu for each individual dish. A general state- 2 ment or disclaimer is not permitted. Relying on staff to tell 3 customers could be problematic in an industry where staff 4 turnover is significant, the training implications are onerous. For 5 the purchasing manager it means that they must read the 6 contents specification thoroughly and must have confidence in 7 their suppliers’ labels. 8 9 Ethical food 30111 1 Towards a definition 2 3 Consumers have sought to reduce health risks, environmental 4 risks and the perceived risks of GMOs (Kerr 1999) by buying 5 food they perceive to be safer and healthier. Organic food is seen 6 to be ‘more natural’ as its production avoids the use of artificial 7 herbicides and pesticides, fertilizers and genetically modified 8 seed. 9 Expenditure on organic food has doubled in three years and 40111 the Soil Association believes that by 2001 it will account for 7–8% 1 of the total food market in the UK (CateringNet 2000). Ethical 2 food however is more than organic food, not all organic food 3 would fulfil the criteria of ethical food. It may not have been 4 traded ‘fairly’ or could have compromised food security. The 5 food supply chain traces food from source to consumption and 6 there will be factors at each stage that will determine the ethi- 7 cality of the produce. 8 Any definition of ‘ethical’ will be defined by the priorities of 49111 the stakeholder. To a vegan consumer the eating of any animal

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1111 produce is unethical but, to an omnivorous consumer, albeit with 2 high ethical principles, meat may be perfectly acceptable, as long 3 as it comes from an animal that is reared in a natural way and 4 has not been ‘factory farmed’. The characteristics of ‘ethical’ food 5 will embrace all parts of the food chain from production methods 6 to consumption and overarching these are political and manage- 7 ment issues. Figure 6.1 summarizes these. 8 The impact of society in general and of government legisla- 9 tion has already been alluded to and, in the following sections 1011 other factors will be considered. 1 2 Management issues 3111 4 From a management perspective CSR means that organizations 5 must deal with suppliers, customers and their own members 6 ethically. They will not trade with organizations who exploit 7 workers and do not pay minimum wages, or companies with 8 unethical investment sources, or compromise the health and 9 safety of their workers. 20111 Environmental policy implementation has already been estab- 1 lished as a prerequisite for an ethical organization and this quote 2 from one of the world’s most successful fast food restaurant 3 chains emphasizes this. McDonald’s declare, ‘We realize we 4 are a business leader, we must be an environmental leader’ 5 (McDonald’s 2000). Organizations must introduce policies that 6 demonstrate a commitment to more than dealing in ethical food 7 and introduce policies that address the ethical management of 8 all resources. 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 Figure 6.1 49111 Characteristics of ethical food

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1111 Case study 2 – the Ethical Trading Initiative 2 3 The Fairtrade Foundation also helped to set buy have not been to the detriment of a third 4 up the ETI, an initiative to help organiza- world economy. As the ‘ethical’ consumer 5 tions develop a shared approach to sourcing movement grows so these labels will give 6 policies. Their ‘base code’ covers labour rela- ‘value added’ to the products and the orga- 7 tions, working conditions, working hours nizations who use them. The labelling also 8 and discrimination. They claim super- demonstrates to any stakeholder the ethical 9 markets such as Asda, Tesco, Sainsbury, the purchasing policy of the organization. 1011 Co-op and Somerfield as members (ETI On 17 January 2000 Fairtrade bananas 1 1999). With these members they hope to set were on sale in the UK in Co-op stores for 2 up an initiative with Costa Rica banana the first time, at £1.30 per kilo as against 99p 3111 growers, associated government depart- per kilo for conventional bananas. 4 ments and NGOs to audit the labour condi- (Source: ETI (1999a) 5 tions of the growers to establish whether http://www.eti.org.uk/about/ 6 they are of an ‘acceptable international level’. basecpde.shtml; ETI (1999b) 7 The supermarkets can then give their cus- http://www.eti.org.uk/resources/ 8 tomers the assurance that the bananas they costarica01.shtml accessed 26 January 2000) 9 20111 1 2 Socio-political issues 3 4 Local suppliers may be unable to meet fully the demands of a 5 market now used to buying ‘out of season’ produce all the year 6 round. However, by searching for supplies in other world regions 7 a business may be compromising the food security of that region. 8 Food security (Committee for World Food Security 1996) requires 9 ‘the right of everyone to have access to safe and nutritious food, 30111 consistent with the right to adequate nutrition and fundamental 1 right of everyone to be free from hunger’. It is argued that in 2 some regions, in order to supply other world regions with out 3 of season supplies, agriculture is directed towards export cash 4 crops, rather than producing staple foodstuffs to feed the local 5 population, thus compromising local food security (Paxton 1994). 6 Put simply, food security means that each area of the world 7 should be able to feed itself adequately. Potentially, this means 8 that disaster in one region will not compromise the nutrition of 9 the population in another area. This is an emotive subject and 40111 the economics complex, but it raises the question that ‘where 1 food comes from’ can be an ethical consideration. For many 2 managers the supply chain only starts with their wholesaler. To 3 buy produce, that does not compromise the food security of a 4 region, would demand informed and co-operative partnerships 5 between suppliers and businesses. The implication is that to 6 adopt a policy that incorporates food security could restrict the 7 produce available, increase costs and restrict what can be offered 8 to the consumer at any one time. Food security is also as much 49111 about fair pricing as nutrition (see Fairtrade case study).

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1111 Agricultural issues 2 3 Concerns over the long term impact of GMOs range from reli- 4 gious objections (playing God!) to possible allergic and toxic 5 reactions to their impact on the biodiversity of the countryside. 6 Over time, such technological innovations may become more 7 acceptable but the issue is that when consumers are worried 8 about an ingredient it will influence their choice of food in the 9 supermarket and, on the menu. Consumer uncertainty and wari- 1011 ness has so far been more evident in Europe than in North 1 America. The EU want all GMO imported produce labelled 2 whereas the USA, do not think this is necessary (Bunting 1999). 3111 4 Case study 3 – the soya bean 5 6 The UK imports around 2 000 000 tonnes of health risks there has been much media inter- 7 soya beans a year. It is cheaper to import est in ‘Frankenstein foods’. There are con- 8 than to grow high protein feed alternatives at cerns about the toxic potential and allergy 9 home for meat production. Over half the properties of these foods. Many supermar- 20111 soya is used for food processing and it is kets now declare that their own brands are 1 found in many of the familiar foods we ‘GMO free’ and thus seek alternative sources. 2 purchase every week, from biscuits to There have been international trade power 3 sausages to instant desserts to meat pies. struggles taking place as the companies try 4 Soya imported from the USA and Argentina to ensure a global market for their expen- 5 may be genetically modified (for instance sively developed GMO seed. 6 the Round-up Soya Bean developed by (Source: Sustain (1999) 7 Monsanto), and although there are no known www.sustainweb.org/foodfact/soya.htm) 8 9 30111 1 Organic farmers are particularly concerned about potential cross 2 pollination by GM crops and organic crops. If organic crops are 3 contaminated they can no longer be certified organic and the 4 farmer loses valuable revenue. The UK produces insufficient 5 organic food and about 70% of organic food for retail sale in 6 the UK is imported (Sustain 1999). It is therefore important to 7 increase the land available in the UK for organic production. 8 This will help to safeguard supply, decrease the cost of organic 9 produce and make it more affordable to consumers and the cost 40111 conscious catering market sectors, in particular the ‘not for profit’ 1 sectors such as education, health and residential institutions. An 2 increase will also contribute to environmental improvement 3 (such as increasing biodiversity, minimizing water pollution by 4 artificial fertilizers). The UK Government is looking to increase 5 land under organic production by offering incentives. 6 It is argued that although organic yields are sometimes lower 7 than conventional agricultural methods, the reintroduction of 8 ‘set aside’ land and the reduction in costs of treating polluted 49111 water would make organic production economically viable.

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1111 There will always be a balance between organic and conventional 2 methods but the demand for food that is seen to be healthier, 3 safer, and grown in a more environmentally responsible way, is 4 growing. Market forces may yet prove irresistible. 5 6 Distribution issues 7 8 The ‘Food Miles Report’ (Paxton 1994) identifies the environ- 9 mental costs of importing or transporting food over long 1011 distances. The report states that pollutants and climate change 1 gases are released into the atmosphere as fossil fuels are used 2 for production, transportation and packaging. The report also 3111 proposes that a hierarchy of purchasing priorities should be 4 established. This hierarchy, although indicating that food can be 5 sourced locally, regionally, or nationally, stresses the benefits 6 that can be gained if food is purchased from local or regional 7 suppliers in order to minimize transportation pollution and 8 energy consumption. The key is to buy local produce where 9 possible. Fresh food is preferable as there are no energy costs 20111 required for processing or long term storage, although there is 1 transport pollution from intercontinental distribution. 2 The Food Miles Report (Paxton 1994) recognizes that pack- 3 aging is needed to protect food in transit and storage. Therefore, 4 a reduction in packaging is not a viable concept, as this would 5 lead to damaged products that would in turn have implications 6 for food safety, quality and cost. Paxton states that the issue of 7 food packaging must be addressed from a recycling and reuse 8 policy incorporated into purchasing practices, for instance 9 buying in bulk rather than pre-packaged individual portions. 30111 1 Conclusions – implications for the food retail and 2 hospitality industries 3 4 Ethics must be interpreted into standards and standards into 5 good practice. This must be demonstrable to convince stake- 6 holders. Evidence of good practice could include: 7 8 • A food purchasing policy based on fair trade principles. 9 • An environmental policy. 40111 1 • A consumer code of good practice. 2 • Open and honest codes of conduct in accounting, marketing, 3 public relations and human resources. 4 5 A catering organization could demonstrate an ‘ethical menu’ by 6 purchasing local, fresh, seasonal food and buying fairly traded 7 food. More than 20 suppliers in the UK supply Fairtrade coffee 8 and teas to the catering industry (Fairtrade 2001). Retail food 49111 outlets could respond in a similar manner. This is not practicable

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1111 for all industry sectors, especially fast food, but a start is to 2 review the food purchased in the light of the issues discussed 3 in this chapter. Realistically, all organizations must look at the 4 price of food and while organic food remains at a premium its 5 use will not be economic for cost conscious market sectors. 6 Customer choice is related to their disposable income and it is 7 only the value driven ‘ethical’ consumer who will put the ethi- 8 cality of food as a top priority while prices compare unfavourably 9 with conventional food. Changes in agricultural policy to support 1011 conversion to organic production and improved animal welfare 1 may facilitate price reductions. There is a view that conventional 2 food is unrealistically priced, as Brenman (2000) comments: 3111 4 The higher prices often charged for organic food actu- 5 ally represent the true cost of healthy food production. 6 Consumers are applying indirectly for industrialized 7 farming though higher water bills (to remove nitrates and 8 pesticides) and precious tax revenues spent on the BSE 9 disaster (£4.5 billion) . . . 20111 1 If agricultural policy changes and conventional food is not 2 subsidised, as inferred by the quote, the price comparison 3 between organic and conventional food could be less dramatic. 4 For the food retailer and caterer the adoption of an ethical policy 5 means more effort has to be put into sourcing and purchasing. 6 Evidence has to be available of the ‘life story’ of the produce. 7 The constraints to ethical food supply are: 8 9 • the need for the purchasing hierarchy (as implied by the Food 30111 Miles concept); 1 • the restrictions imposed by seasonal nature and perishability 2 of fresh produce; 3 4 • the need for skilled staff and frequent changes in produce 5 range or menus; 6 • the premium pricing of organic food and the willingness of 7 consumers to pay this. 8 9 At one end of the spectrum is conventional factory farmed food 40111 and at the other fairly traded organic food. It is likely that all 1 parts of the spectrum will be represented for some time to come 2 but, that, in developed post-modernist economies, there will be 3 an increased demand for ‘ethical’ food, whose characteristics will 4 be determined by the particular priorities of the individual 5 consumer. It is likely that there will be more organic food avail- 6 able which will satisfy the needs for most consumers but the 7 other issues identified in this chapter may also develop a higher, 8 and thus more influential, profile. Both consumers and profes- 49111 sionals will have to be more informed and discriminating.

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1111 References 2 3 Brenman S. (2000) Organic food for everyone at a fair price. 4 Soil Association Press Release on www.soilassociation.org; 5 accessed 26 January. 6 Bunting M.(1999) The battle over trade; what the talks mean to 7 you. Guardian, 26 November, p. 16. 8 Cannon T. (1994) Corporate Responsibility. London: Pitman. CateringNet (2000) News – Organic food demand doubles. www. 9 cateringnet.co.uk/monthly/month05599/news06059901.htm; 1011 accessed 10 February. 1 Christian Aid (1996) The Global Supermarket – Britain’s Biggest 2 Shops and Food from the Third World. Christian Aid. 3111 Committee on World Food Security (1996) Rome Declaration on 4 World Food Security and World Food Summit Plan of Action, 5 approved by the committee at the conclusion of its 22nd 6 Session on 31 October 1996, FAO Conference Resolution 7 2/95, Food and Agriculture Organization of the United 8 Nations, Rome, http://www.fao.org/wfs/policy/english/96- 9 3eng.htm. 20111 Co-op (2000) Co-operative Union – outline of the Co-operative 1 Movement. www.co-op.co.uk; accessed 7 January. 2 ECRA (2000) Ethical consumerism – what is it? www.ethical- 3 consumer.org/whatsethcons.htm; accessed 7 February. 4 ETI (1999) http://www.eti.org.uk/resources/costariaO1.shtml; 5 accessed 26 January 2000. 6 European Union (20009) ‘EU approval for logo on organic food’ 7 on www.organicinfo.ndirect.co.uk/news/1999/19991222.htm; 8 accessed 7 February. 9 Fairtrade (2001) www.fairtrade.org.uk/catering.htm; accessed 12 30111 March 2001. 1 Fritzsche D.J. (1997) Business Ethics: a Global and Managerial 2 Perspective. New York, McGraw-Hill. 3 Humphries C. (1998) A code of practice for food labelling. 4 Nutrition and Food Science, 98 (4), pp. 193–7. 5 Kerr W.A. (1999) Genetically modified organisms, consumer 6 scepticism and trade law. Supply Chain Magazine, 4 (2), pp. 7 67–74. 8 Mcdonald G. and Nijhof A. (1999) Beyond codes of ethics: an 9 integrated framework for stimulating responsible behaviour 40111 in organizations. Leadership and Organizational Development 1 Journal, 20 (3). 2 McDonald’s (2000) McDonald’s FAQs on http://www.mcdon- 3 alds.com/corporate/info/faq/faq.html; accessed 10 February. 4 Paxton A. (1994) The Food Miles Report: The Dangers of Long 5 Distance Transport. London: Safe Alliance. 6 Sustain (1999) European indicators. www.sustainweb.org/indi- 7 cators,fir3.htm; accessed 26 January 2000. 8 Webley S. (1992) Business Ethics and Company Codes. London: 49111 Institute of Business Ethics.

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1111 Activities 2 3 • Carry out a survey of two different groups, for example 4 teenagers and mothers with young children, to establish if 5 they buy food that is organic, GMO free, or has a ‘Fairtrade’ 6 logo. Compare the results and identify the differences. 7 8 • Visit a local supermarket and a local greengrocer to find out 9 what organic supplies they carry, and compare the prices. Also, 1011 establish if there are any specialist organic suppliers locally 1 and compare their prices to the other suppliers. Establish what 2 implications the price comparison has for local consumers. 3111 • Design an organic restaurant and see whether you can source 4 all the ingredients from local suppliers or shops. 5 6 7 8 Questions 9 20111 • Does ‘ethical food’ mean expensive food? 1 • Is it inevitable that consumers will want increasing variety and 2 choice all the year round? 3 4 • Will social responsibility values influence the real choice of 5 consumers and diners in the future? 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 124 1111 PART 2 ●●●● 2 3 4 5 6 The Management 7 8 9 1011 of the Supply 1 2 3111 4 Chain 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 CHAPTER 2 ●●●● 7 3 4 5 6 Strategic supply 7 8 9 1011 and the 1 2 3111 4 management of 5 6 7 8 relationships 9 20111 1 2 Paul D. Cousins 3 4 5 6 7 8 9 30111 Key objectives 1 2 It is clear from the literature written on purchasing and from a 3 range of personal research with a large number of companies, 4 across different industrial sectors, that purchasing is develop- 5 ing from a predominantly service/clerical, tactical function 6 towards an integrated strategic process. This chapter will 7 examine the reasons for this change and explore the benefits 8 and problems that various firms have experienced with this 9 transition. This chapter introduces a model to help students 40111 think about analysing the strategic nature of supply within firms. 1 After reading the chapter students should be able: 2 3 • To understand the difference between purchasing and 4 supply management 5 • To have an understanding of the different relationship 6 typologies that fit with each strategy 7 8 • To understand the integrated nature of supply management 49111 Food Supply Chain Management

1111 • To appreciate the difficulties with operating such a strategic 2 approach 3 4 Introduction: a new strategic focus 5 6 Traditionally, purchasing has long been thought of as being 7 responsible for the management of a firm’s inputs, i.e. raw mate- 8 rials, services and sub-assemblies into the organization. This is 9 generally illustrated in most operations management textbooks 1011 by using a simple input–transformation–output model (see 1 Figure 7.1). 2 Purchasing’s role was to buy these goods and services from 3111 approved sources of supply. The skill of the buyer was seen in 4 obtaining a good ‘deal’ whilst maintaining the required levels 5 of quality and delivery performance; but this view of purchasing 6 as a clerical service department is rapidly changing. 7 Purchasing in today’s organizations is often viewed as a 8 dynamic high profile role with a professional career path 9 (Cousins 1992). Firms are no longer simply focusing on the acqui- 20111 sition of goods and services into the organization. Their focus 1 is now much more strategic and holistic, taking a view of the 2 entire supply process. There is a major distinction to be drawn 3 between the purchasing, which is the organization and acquisi- 4 tion of goods and services and the supply process, which 5 permeates the entire organization, as opposed to stopping when 6 the goods are received. Managing supply strategically focuses 7 on understanding and manipulating which resources are held 8 within the firm and which are moved outside of the boundaries 9 of the firm. These strategic approaches are often known as 30111 Outsourcing or Supply Delegation strategies. 1 2 3 4 Definition 5 Purchasing is the acquisition of inputs into the firm. Strategic 6 supply is the management of inputs and the transformation 7 process, which includes the structuring of the supply activity 8 of the firm. 9 40111 1 2 3 4 5 6 7 8 Figure 7.1 49111 Input–output model

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1111 Strategic supply will also develop and implement a variety of 2 supply structure approaches that are designed to sustain the 3 competitive position of the firm, such as improving cycle times, 4 reducing time-to-market and the acquisition of new technology 5 into the firm. For example, many firms in a variety of industries 6 have decided that they are no longer assemblers, rather they are 7 design houses. For example, the automotive, aerospace and retail 8 industries have all moved towards this delegated sourcing struc- 9 ture. These include Rover, Rolls-Royce, Westland Helicopters 1011 and, in the food sector, Marks & Spencer. This strategy involves 1 allocating the build responsibility to a ‘first tier’ supplier. 2 3111 4 Telfer Foods – sandwiches for Marks & Spencer plc 5 6 Marks & Spencer (M&S), a major global sandwich fill concept. By 1998 they were 7 retailer, has close collaborative links with solely supplying to M&S and now operate 8 suppliers and indeed suppliers of suppliers. a £40 million concern. 9 This is particularly evident in the areas of This level of commitment is reflected in 20111 food produce. Marks & Spencer offer a the M&S strategy. Telfer Foods is one of 1 number of formats in food retail including three suppliers of sandwiches to M&S, along 2 grocery sales, deli-counters, coffee shops and with Gunstones, a part of Northern Foods 3 the still growing market of sandwiches. In and Heinz. M&S draws upon the particular 4 busy locations it has upgraded its provision strengths of each company, whilst creating 5 of lunch time snacks with the development the opportunities for each to continue to 6 of sandwich shops, featuring a wide choice meet the M&S standards, through providing 7 of filled rolls and sandwiches. additional purchasing power, the inspection 8 In 1980, M&S started a range of ‘to go’ of second tier supplier premises and market 9 sandwiches which, in the early years, were research. 30111 produced in-house, with bought-in fillings. Telfer Foods currently operate two 1 In one store in Croydon a team of seven production plants: Sandwiches and Deli- 2 were required to make 500 sandwiches in catessen. They supply M&S with five prod- 3 less than four hours every day. As the uct types: tortilla wraps, fish sandwiches, 4 demand grew, Marks & Spencer looked to meat sandwiches and one-third of the M&S 5 outsource sandwich production. Healthy Choice range. They also supply plat- 6 One of their sources was Telfer Foods ters for corporate entertainment into the four 7 Terranova, now a subsidiary to UNIQ, for- distinct categories within M&S. These oper- 8 mally known as Unigate. Whilst the origins ate under the ‘to go’ banner which emerged 9 of Telfer foods date back to 1926 as ‘Ticky from their original sandwich filling business. 40111 Foods’, a producer of meat pies, Telfer Foods In 1996, they moved into Party Foods and 1 diversified into sandwich related products in have expanded into coffee shops and deli- 2 1981. In 1989 the company disposed of the catessens in line with M&S developments. 3 meat pie side of the business and moved into Each area of the M&S business is managed 4 a new purpose-built building, used totally as a category with designated category 5 for the production of sandwiches. In 1996 the teams who include technologists, buyers and 6 company began to supply part foods to M&S. merchandisers to ensure the continual 7 Their position with M&S has been further upgrading of their products. These teams 8 consolidated through the successful devel- work extremely closely with 500/600 desig- 49111 opment of Deli fillers, a standardized fresh nated first and second tier suppliers.

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1111 New product development Telfer Foods and M&S. In traditional adver- 2 It is evident that the M&S approach to new sarial relationships suppliers often had little 3 product development is keenly focused on understanding about what was expected of 4 the increase of efficiencies within the supply them and likewise were unaware of the oper- 5 chain. In traditional scenarios, whilst first ating constraints that the purchaser was 6 tier suppliers had a significant role in new working under. 7 product development, briefs were often This is not the case with Telfer Foods 8 vague or non-existent. Market research and and M&S. Telfer indicate that M&S are very 9 analysis was very much in the hands of keen that new products should not be 1011 the first tier suppliers. Products would be developed which would result in continual 1 developed with little information provided cuts in supplier margins as they see this as 2 as to the customers long term strategies, not being conducive to long term relation- 3111 resulting in the rejection of a high propor- ships. Telfer likewise understand M&S 4 tion of protocol products. Today nine-tenths margins and therefore are clear regarding 5 of new product development projects are acceptable ingredient cost parameters, which 6 based on a clear brief provided by M&S. further eliminates unnecessary costs of 7 This results in a significant reduction in the a new product development. Over the past 8 number of products rejected, and, thus clear year to 18 months Telfer and M&S have 9 cost savings for the first tier suppliers and worked towards a greater understanding. 20111 the supply chain as a whole. The development of a team ‘Away-Day’ in 1 which information and criticisms are shared, 2 Trust and long term relationships builds up further understanding between 3 The understanding of their mutual operating the parties. 4 constraints is key to the relationship between 5 6 7 8 The first tier supplier becomes responsible for the delivery of a 9 complete assembly such as a gearbox, wing, suit or sandwich! 30111 It is the responsibility of supply to decide how the sourcing 1 should be delegated and to work internally to make sure that 2 the required knowledge is passed to the supplier to enable the 3 delivery of the completed assembly. Figure 7.2 illustrates this 4 sourcing process. 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 Figure 7.2 49111 Delegated sourcing strategies

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1111 Strategic supply management is concerned not only with the 2 efficient management of inputs into the firm, but also the tran- 3 sition and management process of goods and services through 4 the organization; its aim is to make the firm more competitive. 5 This involves not only purchasing goods and services at compet- 6 itive prices, but also focusing on cost reduction techniques, 7 improving cycle times and reducing time-to-market. 8 None the less, as companies attempt to shed old habits and 9 begin to view procurement as a strategic resource, from which 1011 competitive advantages may be gained, there remains a good 1 deal of corporate baggage to shed. More importantly there is a 2 new mind-set to be instilled both in procurement and across the 3111 firm. Barriers to the development of long term interdependent 4 relationships generally relate to the continued existence of oppor- 5 tunist approaches by buyers within the food sector as in others 6 (Cousins and Spekman 2000); seeing short-term price cuts 7 against long term cost reductions. The traditional model of price 8 driven procurement, however, is hard to change. Change it must 9 if procurement is to take its rightful place among the influencers 20111 of corporate strategy. 1 2 Pressures for change 3 4 Whilst it is clear that purchasing is changing from a clerical 5 function to a strategic process, it is important to understand 6 why this change has taken place. This is because it is the drivers 7 for change that will affect how strategy is formulated and 8 implemented. 9 Purchasing has had a range of pressures upon it that have 30111 forced it to change. A simple PEST (Political, Economic, 1 Social and Technological) model can be used to illustrate this 2 point. 3 Political pressures have caused changes in both the focus of 4 supply, i.e. the move from price to cost focus and the structure 5 of industries, i.e. government policy on privatization of public 6 services. These major policy changes have meant that within 7 certain industrial economic sectors, the focus of the organization 8 as a whole, has had to change. Generally this has been away 9 from defining the ‘best’ specification possible towards finding 40111 the lowest cost solution. For example, defence spending reduc- 1 tions, combined with a policy change away from sourcing, not 2 only from domestic manufacturers, caused a massive shock wave 3 throughout the industry. Aerospace had to move away from its 4 traditional ‘cost plus’ focus and concentrate on ‘value-for- 5 money’, i.e. move towards a cost focused approach. 6 It is important to recognize that cost and price are not used 7 interchangeably here. Price refers to the process of driving down 8 the quoted price of a good. This will often have the net effect 49111 of reducing the supplier’s margin. Cost is a more sophisticated

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1111 approach, which focuses on understanding the entire cost of the 2 product (including process) and then jointly finding ways to 3 reduce this (see Chapter 11). 4 Further policy changes, such as privatization, moved public 5 sector services into the private sector, where the pressures of 6 competition and cost competitiveness are much higher. 7 Economic pressures also forced organizations to examine the 8 way that they managed supply. Recessions and depressions, 9 plus competition on a global, as opposed to domestic, level, i.e. 1011 global village, meant that increased costs could not be passed 1 onto the final consumer. These costs had to either be absorbed, 2 resulting in lower profits, or passed back, which often meant 3111 that suppliers would go out of business or otherwise these 4 costs had to be eliminated. This era of the late 1980s and early 5 1990s, spurned the development of concepts such as lean manu- 6 facturing and lean supply management. The focus with all of 7 these approaches was primarily on improving efficiency and 8 reducing waste, both within the organization and, within the 9 firm’s supply chain, thus resulting in overall cost reductions to 20111 the firm. 1 Social pressures have also forced purchasing to change. If 2 purchasing wanted to develop it would need to utilize profes- 3 sional and well-qualified personnel. In order to attract these types 4 of people into the area it would need to present a professional 5 profile similar to that of finance or marketing. Purchasing’s 6 main problem was that it was not seen as ‘sexy’. This view is 7 now beginning to change as purchasing achieves higher strategic 8 status within the organization. In addition, purchasing now has 9 a professionally chartered institute, as does marketing, finance 30111 etc. All of these elements help in the raising of the profile of 1 purchasing. Further social pressure on the firm by other stake- 2 holders, to save money, and therefore jobs, was exerted by trade 3 union groups and various pressure groups both within and 4 external to the firms. 5 Finally, the development of new and innovative technologies 6 has meant that purchasing can communicate and involve a much 7 wider range of the organization in the supply process. For 8 example, it is now possible, via the Internet to allow anyone to 9 purchase (authorized budget holders) against an E-Catalogue. 40111 Purchase cards (credit cards for managers) are also revolution- 1 izing the way that we do business. In addition to technologies 2 that facilitate the purchasing process, firms are also requiring 3 improved times-to-market of their own products. This can only 4 be achieved if the supply structure is able to deliver quality 5 suppliers that can work with the buyer (black box engineering) 6 as opposed to the specification. 7 Figure 7.3 illustrates the PEST analysis, showing the forces of 8 change on purchasing that have acted as a catalyst to move it 49111 from a clerical function to a strategic process.

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 Figure 7.3 9 Pressures for change 20111 1 2 In summary, the need to be increasingly competitive, flexible 3 and efficient has been exacerbated by the global village phenom- 4 enon, with domestic firms having to benchmark with the best 5 in the world. 6 7 The evolution from purchasing to supply management 8 9 It was clear in the late 1980s that inefficiencies in production 30111 and the management of supply could not be passed onto the 1 customer in the form of increased prices. Firms had to absorb 2 these costs (usually within their own margin), or find ways of 3 migrating or reducing these costs through efficiency savings. 4 Organizations realized that if they were going to manage them 5 efficiently they had to manage the inputs into the organization. 6 As consulting companies constantly remind firms savings of 7 10–20% are not uncommon with a focused strategic sourcing 8 initiative. Strategic sourcing bookings for one large consulting 9 company in 1998 amounted to $750 million (Kearney 1999). 40111 ‘Strategic sourcing is big business!’ (Lopez 1993). The realiza- 1 tion that with managing supply strategically firms can save huge 2 amounts of money (typically a 1% cost saving by purchasing 3 equates to a 10% increase in sales), has led firms to begin to 4 invest in this area of management. The creation of strategic 5 purchasing departments has given purchasing a ‘new lease 6 of life’. They are no longer seen as a clerical function, rather 7 a strategic business process. This rise to fame is not without a 8 price. There is a distinct difference between purchasing imple- 49111 menting strategies and purchasing being strategic.

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1111 As Ellram and Carr (1994) succinctly put it: ‘. . . it is critical 2 to understand that there is a difference between purchasing 3 strategy and purchasing performing as a strategic function. 4 When purchasing is viewed as a strategic function, it is 5 included as a key decision maker and participant in the 6 firm’s strategic planning process . . .’ 7 8 9 1011 1 Case study – Bass plc 2 3111 Bass plc is an international hospitality Bass traditionally specialized in unbranded 4 and leisure group with a strong focus on pubs they are emerging as active players 5 brands. Bass traditionally was one of the in a number of market sectors. Growth for 6 major players in the brewing sector, with a the main has been through acquisition of 7 substantial estate of managed and tenanted existing brands. Bass Leisure brands include 8 public houses whose wet sales were largely Vintage Pubs, Toby Carverys, Harvester, All 9 internally sourced. In their compliance Bar One, It’s A Scream, Edwards, O’Neills, 20111 with the 1989 MMC report, there was some Browns, Barcoast, Dave and Busters and 1 considerable consolidation of their managed Hollywood Bowls, with a broad format 2 estate. In the long run, however, as with range from traditional pubs, stylistic restau- 3 other UK brewers their strategy was to rants, student bars, bars for young profes- 4 define the organization, invest into the sionals and ten pin bowling alleys. 5 hospitality sector and redraw their interest In the event of the organizations shift 6 from the brewing sector. Bass plc finally sold towards the hospitality catering sector, Bass 7 the last of their brewing division to have been innovative in their sourcing. 8 Interbrew in 1999. Interests in the catering Supply, traditionally a key area of activity 9 business are largely concentrated in Bass within Bass became a strategic function once 30111 Leisure Retail, including the 550 outlets the repositioning of the organization had 1 acquired from Allied Domecq at the end of taken place. The issues of establishing brand 2 1999. Bass Leisure retail was formed in 1998 identities and purchasing efficiencies, given 3 from Bass Taverns and selected brands from the dispersion of Bass outlets, became key 4 Bass Leisure. to an organization functioning in the highly 5 With a portfolio of 30 000 branded and competitive marketplace of hospitality. 6 unbranded pubs and restaurants and leisure In the late 1990s a supply chain manage- 7 venues, it is a key player within the UK ment role and department were established 8 hospitality sector and an active player in the with the aim of developing single sourcing 9 promotion of the pub catering sector. Whilst strategies. 40111 1 2 3 The evolution of purchasing from a clerical function to a strategic 4 process is well noted in the literature. However, the way that 5 we think about the management of supply has also changed. 6 The unit of analysis of how we think about supply is important 7 and has also changed in both complexity and strategic nature. 8 Figure 7.4 shows a model (Harland, Lamming et al. 1999) that 49111 is helpful in illustrating how supply thinking has changed.

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 Figure 7.4 4 Supply structure (model taken 5 from Harland, Lamming et al. 6 1999) 7 8 9 Initially, academics and practitioners concentrated on the 20111 dyadic linkage. The dyad refers to the relationship between 1 the buyer and supplier, i.e. two. This thinking was extended in 2 the late 1980s to thinking of supply as a chain or pipeline. This 3 added increased complexity to the study of supply management 4 as it took into account the buyer, supplier and final customer 5 relationships. The final stage in the evolution of this thinking is 6 viewing supply structure as a network. This involves examining 7 the inter-relationships across an entire industry sector, where 8 frequently buyer and supplier roles can be reversed several times 9 throughout the network structure. The Industrial Marketing and 30111 Purchasing (IMP) Group first conducted the pioneering work for 1 this type of thinking. 2 The IMP’s work has been succinctly summarized by Ford 3 (1990). He explains that the work of the IMP can be traced to 4 two distinct areas: inter-organizational theory and the new insti- 5 tutional economic theory. 6 7 8 Ford (1990, p. 11) explains: ‘. . . [the] relationship between 9 buyer and seller is frequently long term, close and involving 40111 a complex pattern of interaction between and within each 1 company. The marketer’s and buyer’s task in this case may 2 have more to do with maintaining these relationships than 3 with making a straightforward sale or purchase . . .’ 4 5 6 7 The IMP group went on to develop the ‘interaction’ model 8 (Hakansson, 1982) that conceptually indicates the effect of rela- 49111 tionships within the context of the entire network system.

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1111 Writers within the IMP group clearly recognize the impor- 2 tance of business relationships and it is their view that the entire 3 system needs to be considered in a holistic and systematic way, 4 mapping the various relationships and types of relationships in 5 a pseudo mathematical manner. Whilst this process is indeed very 6 useful in determining the type and quantity of relationships 7 within a given network, the measurement and management of 8 the process is again ignored. 9 The work of the IMP has had a growing effect on how acad- 1011 emics view relationship strategy by indicating that relationships 1 between firms are highly complex and inter-related through 2 many levels of the supply hierarchy. 3111 4 How can we manage supply strategically? 5 6 The management of the supply chain is an extremely difficult 7 task as it relies heavily on cross-functional co-operation. As 8 previously suggested, the buying firm will often not consider 9 the ramifications of managing the entire supply chain and its 20111 interfaces, i.e. the supplier/buyer, buyer/customer and internal 1 buyer/buyer linkages. 2 The first question to ask is what is the difference between 3 implementing a strategy and acting strategically? Authors 4 have been writing on the development of purchasing from a 5 tactically focused service role to a strategic process since the 6 early 1970s. Table 7.1 summarizes some of the main literature 7 in the field. 8 The topic of strategic supply has been developed by a great 9 many authors, some thinking conceptually and others using 30111 empirical research methods to measure the development process. 1 There have also been several tools and frameworks developed 2 to measure the strategic extent of purchasing itself. Reck and 3 Long in 1988 developed a four-phase positioning tool (see Table 4 7.2). They categorized the level of purchasing capability ranging 5 from ‘passive’ through to ‘integrative’, they also went on to 6 produce a more detailed benchmarking mechanism to allow 7 firms to position themselves and to see what needed to be done, 8 in order to extend and develop their current position. 9 For supply to be strategic, it needs to be clearly understood 40111 what pressures are on the organization and how it will react to 1 these pressures. The key question here is how can supply design 2 the supply structure to meet the competitive needs and demands 3 that face the firm. These issues go far beyond the purchasing of 4 goods and materials; they embody the entire process of inputs 5 and then the translation of those inputs into outputs. In other 6 words, supply will be involved in developing outsourcing strate- 7 gies, examining the amount and types of suppliers, moving 8 towards delegated supplier tier and/or the development of 49111 supplier associations.

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1111 Author Type of study Description of study and findings 2 3 Farmer (1973) Empirical Linking of purchasing to the strategic mechanism of the 4 firm 5 Caddick and Dale Empirical – Purchasing must develop strategies and link purchasing 6 (1987) case study and corporate strategy 7 8 Spekman (1989) Conceptual Purchasing needs to be integrated into corporate 9 strategy. First, purchasing must think and develop 1011 strategically 1 Browning et al. Conceptual Purchasing is linked to corporate strategy because it 2 (1983) supports corporate strategy in terms of monitoring and 3111 interpreting supply trends, identifying ways to support 4 strategy and developing supply options 5 6 Burt and Soukup Conceptual Purchasing can have an impact on achieving success in 7 (1985) new product development if purchasing is involved early 8 in the new product development process 9 Landeros and Empirical – Purchasing can support the firm’s strategic positioning 20111 Monczki (1989) interviews using co-operative buyer-seller relationships 1 2 Ellram (1994) Empirical Level of strategic competence of supply 3 4 Saunders (1994) Conceptual Purchasing is no longer a service function. A discussion 5 of practical approaches for strategic purchasing 6 MacBeth and Empirical – Strategic relationship assessment and implementation. 7 Ferguson (1994) case study Development of internal and external relationships 8 9 Burt and Doyle Conceptual Purchasing should become part of the keiretsu culture. 30111 (1994) Implementation of the Japanese keiretsu approach to the 1 supply chain activities of firms 2 Hines (1994) Empirical – Strategic rationalization of the supply chain – Particularly 3 case study and concerned with the development and application of 4 interview Japanese supplier association management techniques 5 on UK supply chains 6 7 Nishiguchi (1994) Empirical – Study of Japanese co-ordination of the supply chain for 8 case study and competitive advantage 9 interview 40111 1 2 Table 7.1 Key authors on the development of supply strategy 3 4 5 6 7 8 49111

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1111 STAGE I In the passive stage, purchasing normally begins 2 as a reactor to requests from the other depart- 3 ments. Many of purchasing’s legitimate activities are 4 handled by other functions outside of purchasing 5 STAGE II In the independent stage, purchasing departments 6 spend considerable time attempting to profession- 7 alize the purchasing function by introducing such 8 things as computerized information systems, 9 formalized supplier programmes and communication 1011 links with the technical function 1 STAGE III In the supportive stage, top management views purchasing departments as essential business 2 functions. Purchasing is expected to support and 3111 strengthen the firm’s competitive advantage by 4 providing timely information to all departments in 5 the firm about potential changes in the price and 6 availability of materials, which may impact the firm’s 7 strategic goals 8 STAGE IV In the integrative stage, the firm’s competitive 9 success rests significantly on the capabilities of the 20111 purchasing department’s personnel. Purchasing’s 1 role within the firm changes from facilitator to 2 functional peer. This development process must be implemented and guided by management over a 3 Table 7.2 period of time 4 Reck and Long’s strategic 5 positioning tool 6 7 8 The issue then is about strategic alignment. It is essential for 9 the functions within the firm to have a clear understanding of the 30111 value process within the organization, how this is being commu- 1 nicated and utilized. The concept of strategic alignment makes 2 common sense to most people. The problem comes when trying 3 to apply it in practice. As the level of information that the pur- 4 chasing function receives will depend on the level of strategic 5 maturity that it is viewed as having within the organization. 6 The strategic alignment model (see Figure 7.5) shows how 7 important it is to align strategies. However, it is also equally 8 important to develop these approaches by aligning both the per- 9 formance measurement systems and the skills and competencies 40111 of the individuals involved within procurement. As the model 1 argues you are only as good as the bottom box, i.e. the skills and 2 competencies of the individuals within your organization. 3 4 The development of a strategic positioning model 5 6 In Improving Purchase Performance (1992), Syson suggested that 7 the most fundamental factor to influence the purchasing strategy 8 is the focus of the department. He believes it is from this starting 49111 point that the manager can then begin to evaluate the purchasing

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 Figure 7.5 5 The strategic alignment model 6 7 department. Similar to Reck and Long’s development stages, 8 Syson believes that by having a different organizational view 9 (or focus), the purchasing department will develop according to 20111 criticality of materials and the attitude of top management 1 towards purchasing (see Figure 7.6 for stages of development). 2 Syson suggests that the role of purchasing is changing due to 3 the changing business environment. With the move from large- 4 scale production to differentiation becoming the principal 5 competitive thrust, must the purchasing department be moulded 6 according to the strategy of the business? 7 It is important to note that such strategic changes also 8 cause distinct managerial problems. As Quinn et al. (1998) note, 9 strategic movements take place in a step by step manner or, as 30111 they term it, ‘logical incrementalism’. These stages take a good 1 deal of time and must be managed carefully. It is therefore vitally 2 important, when considering the implementation of any new 3 strategy, that the internal infrastructure is firmly in place. 4 This concerns both the internal resources, such as the correctly 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 7.6 Purchase focus (Syson 1992, xi)

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1111 qualified personnel and also the relevant management systems 2 and philosophies. 3 This thinking led Cousins to develop the four-phase approach 4 to supply strategy formulation, as seen in Figure 7.5. The objec- 5 tive of the model is a firm must have alignment of the four 6 main mechanisms, that is: Corporate Strategy, Supply Strategy, 7 Performance Measures (both internal and external) and finally 8 Skill and Competence Sets. Without alignment, firms will not 9 manage to effect any change. 1011 The principal driver in the model is the level of skills and com- 1 petencies of the individuals. If the appropriate skills are not in 2 place the organization will not be able to move forward. In turn, 3111 these must be motivated with the appropriate measurement 4 systems, which should align with the supply and corporate strate- 5 gies. While this sounds conceptually very simple, the reality of 6 the situation is that a great many purchasing functions have little 7 perception of the overall corporate strategy, little to no develop- 8 ment of supply strategy, unitary performance measures and a 9 haphazard approach to skill and competence development. With 20111 these findings in mind, this research project went on to generate 1 a strategic transition model for the development of purchasing. 2 3 The strategic transition model 4 5 The transition model was based on research with ten of the 6 Supply Chain Development Programme’s sponsor companies. 7 These companies were chosen from a wide range of sectors 8 covering utilities, public sector, retail, engineering and chemi- 9 cals. A series of focus groups and individual interview sessions 30111 was organized. The purpose of these was to support the find- 1 ings from the literature, test, iterate and validate the transition 2 model so that a usable and realistic framework could be devel- 3 oped. Figure 7.7 shows the overview of the transition model, 4 which consists of five phases. 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 7.7 The transition model

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1111 The model shows the movement from a purchasing focus on 2 ‘Flat Pricing’ at one extreme towards ‘Network and Relationship 3 Management’ at the other end of the spectrum. The research 4 clearly indicated that there were five distinct phases: Flat Pricing, 5 Total Cost Focus, Supply-side Management, Strategic Sourcing 6 and Network and Relationship Management. Each of these 7 phases has a given output and set of characteristics that defines 8 it. There were also nine key elements involved in purchasing 9 strategy: Key Objectives, Supply Mechanism, Supply Structure, 1011 Strategic Approach, Why Fails, Key Issues, Network Structure, 1 Performance Measurement and Purchasing’s Perception within 2 the organization (see Table 7.3). 3111 The factors were then mapped against the overall ‘transition 4 model’. This produced a matrix, which allows firms to see their 5 relative positioning; the matrix is shown in Table 7.4. 6 7 Factor Definition 8 9 Key Objectives Refers to the main goal of the purchasing functions, i.e. price reduction, cost 20111 improvement, relationship development etc. 1 Supply Shows how the purchasing function uses its position within the supply chain 2 Mechanism to achieve the key objectives, such as price leverage, cost transparency, 3 benchmarking etc. 4 Supply Refers to the structure of the supply market, for example is it 5 Structure multi-sourced, single sourced, dominant supplier, buyer’s market etc? 6 Strategic This is the focus of the purchasing organization, is it predominantly short- 7 Approach term, fire-fighting and tactical or longer term, proactive and strategic 8 Why Fails This category was placed in the model as respondents felt that in order to 9 move on to the next phase they needed to understand why their current 30111 approach was not sustainable. Reasons for failure could be the focus of the 1 approach was more on price than on cost, less on quality than on service and so on 2 3 Key Issues Refers to common problem areas realized with these strategies, such as skill base requirements, resource development, technology infrastructure etc. 4 5 Network This category was used to show the type of interfaces that are most Structure prevalent, i.e. buyer–supplier, one-way, or two-way, customer–supplier– 6 customer or indeed, network structure 7 8 Relationship Refers to the dominant relationships within the model such as traditional/ Type adversarial through to long term, close collaborative 9 40111 Performance This is a key characteristic; it is essential to have the correct measurement Measurement systems in place. Measurement systems refer to internal as well as external 1 measures 2 Purchasing’s The final characteristic refers to how the rest of the firm sees purchasing. 3 Organization This is an extremely important factor and one which will directly influence 4 Perception the way in purchasing can and does interact with the rest of the firm. The 5 higher the perception within the organization, the greater the resource 6 allocation and ability to effect change within the firm 7 8 49111 Table 7.3 Purchasing assessment factors

●●● 141 1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 Focus on competition not co-operation expertise and skills value in supply chain development Management Relationship Management Supplier development to strategic service with suppliers dependency total product life their specialist suppliers to increase Mutual network Flat Pricing Total Cost Focus Supply-side Strategic Sourcing Network and Low skillsLow information Information-basedLow level decision greater ‘management’ Relatively low skilled Less purchasing but making flow between firms Buyer-competitive Buyer-selected High level of information suppliers Highly skilled Complete information Buyer and first suppliers Supply chain skills required Greater information second tier suppliers Network of relationships flow between firms commitment High level of openness High level/complex decision making Volume leverage Cost leverage Total service leverage Leverage through Network leverage Benchmarking co-operation AdversarialTacticalFocus on price Focus on total costTransactional with suppliers Focus on supply serviceContain price Co-operative Distant relationship package Develop closer Contain cost over To gain from suppliers Work jointly with Focus on supply, demand Commitment to Strategic focus on supply Improve total understanding and mutual development relationships with supliers single/ few suppliers Total commitment Multi-supplyMulti-relationship Multi-relationshipTactical Multi-supplyFocus on price Focus on cost not not cost Fewer suppliers Tactical Resistance or failure to Focus on co-operation on quality and Too expensive Single/few key suppliers Network of key single Moving from tactical share relevant information not involvement Strategic Need high level of trust/ Strategic supplier Transition positioning matrix Stages ofexcellence Stage 1Approach: Stage 2 Stage 3 Stage 4 Stage 5 Key Issues: Network Structure: Supply Mechanism: Description: Key Objectives: Supply Structure: Strategic Approach: Why Fails: Table 7.4 1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 Supportive Independent Integrative Differentiator 7 analysis4 Cost transparency deployment purchasing 8 9 40111 1 2 3 Passive AdversarialBasic Distantmeasurements mappingbased on price 2 Production variety 2 Supplier development differences from matrix 2 Quality filter mapping year before 1 Process activity communications analysis 1 Communications Involved analysis 3 Decision point 3 Quality function 1 Supply chain response 1 Value stream mapping matrix measurement of Committed Trust matrix 3 Performance Advanced 2 4 5 continued 6 7 8 Organization Perception: Purchasing’s Stages ofexcellence Stage 1Relationship Stage 2 Stage 3 Stage 4 Stage 5 Type: Performance Measures: 49111 Table 7.4 Food Supply Chain Management

1111 Application of the transition model 2 3 In designing the model three clear implementation stages, were 4 identified, Assessment, Strategy development and Benchmark- 5 ing, which are shown in Table 7.5. 6 Our research clearly showed that a generic benchmarking 7 approach for the purchasing function would have been impos- 8 sible. We found that the level of strategic focus was contingent 9 upon the types of goods or services being purchased, i.e. 1011 commodity versus specialized; and the relationship strategy 1 being followed, i.e. traditional versus collaborative. Therefore, 2 in order for firms to be able to focus on strategic development 3111 they must first assess the types of goods that they purchase. 4 This can be achieved by using the Kraljic matrix (1983), which 5 positions against value/cost and market exposure. Each of these 6 quadrants will require a level of strategic focus. For example, 7 ‘Tactical Acquisition’ will need a stage 1 level of maturity, 8 whereas ‘Strategic Critical’, will require stage 4 or 5 in our five- 9 stage transition model. The various quadrants and stages are 20111 mapped (see Figure 7.8). 1 2 Stage 1: Assessment 3 4 Stage 1 requires an assessment of the current resource capabil- 5 ities and the strategic profile of the purchasing function within 6 the organization against the commodity or service grouping. The 7 purchasing function will need systematically to examine each 8 of the assessment criteria and position themselves against them. 9 This process will produce a profile effect, as shown in the 30111 example in Figure 7.9. 1 The respondents from this company said that they believed, 2 according to the Kraljic matrix, that the IT purchasing activity 3 would be positioned in the bottom right quadrant, with a low 4 5 6 Stage Purpose Description 7 8 1 Assessment The purchasing organization should benchmark where it currently sees itself 9 against the characteristics and criteria 40111 listed within the model 1 2 Strategy Purchasing should consider where it 2 Development wants to be and examine the gaps in its 3 approach vis-à-vis what the model is 4 telling them. They should then develop a 5 strategy to take the function forward 6 3 Benchmarking The final stage is to use the model to 7 Table 7.5 review current progress and see how 8 Stages of implementation of the function is developing 49111 the transition model

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1111 2 3 4 5 6 7 8 9 1011 1 2 Figure 7.8 3111 Strategic positioning 4 matrix: purchase portfolio 5 strategic deconstruction 6 (*from the transition model) 7 (after Kraljic 1983) 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 7.9 Example of purchasing profile for IT purchasing at a UK pharmaceutical company

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1111 supply market complexity but a high impact on value added. 2 Therefore, they should be aiming for a focus of stage 3 moving to 3 stage 4. The majority of factors were located in stage 3 with 4 notable exceptions, supply mechanism which was located in stage 5 2 and performance measurement which was located in stage 1. 6 The profile gave the respondents a sense that the purchasing of 7 IT had to be changed and adapted to reach the required level. 8 Also, it was agreed that stage 4 would be the optimal level to be 9 reached and those factors which were situated in stage 3 could 1011 be improved upon in order to reach the stage where IT products 1 and services would be strategically sourced. 2 3111 Stage 2: Strategy development 4 5 The purchasing function needs to understand the overall goals 6 and objectives of the organization, which can then be fed into 7 the overall supply strategy. The strategy is then broken down 8 into the various sourcing groups within the Kraljic matrix. For 9 example, if the overall view of the purchasing activity is of a 20111 strategic sourcing focus, the factors which are not stage 3 or 1 above need to be improved. There has to be a clear strategy, 2 with resources allocated against the factor that needs the most 3 attention. In the case of the pharmaceutical company, it was 4 decided that performance measurement was in need of the most 5 improvement, therefore the management of this activity could 6 deal with it effectively and did not waste time and energy on 7 the factors that had achieved the desired level. 8 9 Stage 3: Benchmarking 30111 1 The tool that was developed had to be uniform enough to enable 2 the benchmarking of all activities within the purchasing depart- 3 ment. This enables managers to focus their attention on the 4 activities that are out of alignment with the strategic focus and 5 provides a method for reaching a desired state for each of the 6 activities. It could also provide a tool for persuading senior 7 management of more efficient allocation of resources where it 8 was needed most. 9 40111 Conclusion 1 2 This chapter has discussed the strategic evolution from purchas- 3 ing to strategic supply management. Whilst it is possible to give 4 an overall strategic viewpoint, it is vital to remember that this 5 is dependent upon the product or service being purchased. 6 Although the current trend is towards increased dependency on 7 fewer suppliers, which implies that sourcing groups (delegated 8 sourcing) will tend towards a strategic role, it was found that 49111 certain purchasing activities will never be perceived as strategic.

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1111 Activities which have low added value and have low market 2 uncertainty would therefore be better off competitively supplied 3 as time would be wasted on the management and building of 4 closer supplier relationships. 5 Positioning purchasing on the ‘transition model’ provided 6 motivation for change, as was shown in Figure 7.9. This type of 7 benchmarking creates a tool for managers to improve the effec- 8 tiveness of purchasing activities. This leads to the improvement 9 of the overall focus of the purchasing department and also can 1011 improve the organization’s perception of the function. Once 1 activities have been positioned and assessed against the ‘transi- 2 tion model,’ managers are then able to allocate time and resources 3111 most effectively to the activities under his/her control. 4 The use of the ‘transition model’ allows purchasing managers 5 to understand clearly how the management of the purchasing 6 activities needs to be changed, how resources can be distributed 7 most effectively and can adjust the profile of the department 8 within the organization. 9 20111 References 1 Browning J.S., Zabriskie N.B. et al. (1983) Strategic purchasing 2 planning. Journal of Purchasing and Material Management, 19 3 (1), pp. 591–605 4 Burt D. and Doyle M. (1994) The American Keiretsu: A Strategic 5 Weapon for Global Competitiveness. Homewood, IL: Richard D. 6 Irwin. 7 Burt D. and Soukup W.R. (1985) Purchasing’s role in new product 8 development. Harvard Business Review, Sept–Oct, pp. 90–6. 9 Caddick J.R. and Dale B.G. (1987) The determination of 30111 purchasing objectives and strategies: some key influences. 1 International Journal of Physical Distribution and Materials 2 Management, 17 (3), pp. 5–16. 3 Cousins P. (1992) Purchasing: a professional approach. Purchasing 4 and Supply Management September, pp. 20–3. 5 Cousins P.D. (1998) The Snake and the Old Women: A Study of 6 Inter-Firm Relationships. World-Wide Purchasing Symposium, 7 London, UK, Chartered Institute of Purchasing and Supply. 8 Cousins, P.D. (1999) An investigation into supply base restruc- 9 turing. European Journal of Purchasing and Supply Management, 40111 Summer. 1 Cousins, P.D. (1999) Strategic Supply: Report on Trends and Develop- 2 ments in Supply Management. Bath, University of Bath, pp. 1–63. 3 Cousins, P.D. (1999) Supply base rationalisation: myth or reality. 4 European Journal of Purchasing and Supply Management 5 (1). 5 Cousins P. and Spekman R. (2000) Strategic Supply and the 6 Management of Inter- and Intra-organisational Relationships. 7 IMP Conference. 8 Ellram, L. (1994) A taxonomy of total cost of ownership. Journal 49111 of Business Logistics, 15 (1), pp. 171–91.

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1111 Ellram L. and Carr A. (1994) Strategic purchasing: a history and 2 review of the literature. International Journal and Purchasing 3 Materials Management, Spring, pp. 10–19. 4 Farmer D. (1973) The impact of supply markets on corporate 5 planning. Long Range Planning, 5 (1), pp. 10–15. 6 Ford D. (ed.) (1990) Understanding Business Markets. London, 7 Academic Press. 8 Håkansson, H. (ed.)/IMP Group (1982) International Marketing 9 and Purchasing of Industrial Goods: An Interaction Approach. 1011 Chichester: John Wiley & Sons. 1 Harland C., Lamming R. et al. (1999) Developing the concept 2 of supply strategy. International Journal of Operations and 3111 Production Management 19 (7), pp. 650–73. 4 Hines P. (1994) Creating World Class Suppliers: Unlocking Mutual 5 Competitive Advantage. London: Pitman. 6 Kearney A.T. (1999) Report on the Strategic Sourcing Market 7 Place. White Paper. 8 Kraljic P. (1983) Purchasing must become supply management. 9 Havard Business Review, Sept–Oct, pp. 109–17. 20111 Landeros R. and Monczki R.M. (1989) D0 operative buyer/seller 1 relationships and a firm’s competitive position. Journal of 2 Purchasing and Materials Management, Fall, pp. 9–19. 3 Lopez K.C. (1993) Breaking new frontiers, Video. 4 MacBeth D. and Ferguson N. (1994) Partnership Sourcing: An 5 Integrated Supply Chain Approach. London: Pitman. 6 Nishiguchi, T. (1994) Strategic Industrial Sourcing: The Japanese 7 Advantage. Oxford: Oxford University Press. 8 Quinn J.B., Mintzberg H. and James M. (1988) The Strategy Process: 9 Concepts, Contexts. Englewood Cliffs, NJ: Prentice Hall. 30111 Reck R. and Long B. (1988) Purchasing: a competitive weapon. 1 Journal of Purchasing and Materials Management, Fall. 2 Saunders M. (1994) Strategic Purchasing and Supply Chain 3 Management. London: Pitman. 4 Spekman R. (1989) A strategic approach to procurement plan- 5 ning. Journal of Purchasing and Materials Management, Spring. 6 Syson R. (1992) Improving Purchase Performance. London: Pitman. 7 8 Questions 9 40111 1. Why has purchasing become strategic? 1 2 2. Define what you understand to be ‘strategic supply manage- 3 ment’. 4 3. What problems might a Purchasing Director face when trying 5 to develop his or her department from a clerical to a strate- 6 gically focused organization? 7 4. How would you go about developing a strategic plan for re- 8 engineering purchasing within an organization? 49111

●●● 148 1111 CHAPTER 2 ●●●● 8 3 4 5 6 Logistics and 7 8 9 1011 information 1 2 3111 4 management 5 6 7 8 Denis Towill 9 20111 1 2 3 4 5 6 Key objectives 7 8 • To describe how effective logistics integrate material flow, 9 information flow and the flow of orders throughout the 30111 supply chain 1 • To illustrate how the underlying principles have been 2 applied to such diverse supply chains as BhS, Domino’s 3 Pizza and the ‘Warren Buckley’ Hotel 4 5 • To show that a recommended route to customer satisfac- 6 tion at reasonable cost is via just-in-time (JIT) logistics. 7 This is targeted at delivery of the right products, available 8 at the right time, at the right price and of the right quality. 9 Such an outcome retains existing customers and also 40111 attracts new ones 1 • ‘Best practice’ supply chain logistics and requirements for 2 E-shopping are further discussed in the Peapod case study 3 which appears in Part 3 of the book (Perspective 10) 4 5 6 7 8 49111 Food Supply Chain Management

1111 Introduction 2 3 A supply chain consists of a number of echelons (business units) 4 operating sequentially. A simple supply chain can consist of 5 just four echelons (raw materials supplier; manufacturer; distrib- 6 utor; retailer) and thus on to the end customer. Typically there 7 will be many more echelons or levels (i.e. a number of discrete busi- 8 nesses each adding value during their specialist activities) and 9 at each echelon there are usually a variety of businesses oper- 1011 ating in parallel with each other e.g. multiple sourcing, multiple 1 manufacturers and multiple customers. It is customary to refer 2 to various businesses as supply chain ‘players’. Partnering is an 3111 example of a particular supply chain philosophy in which the 4 players regard effective supply chain management as a team 5 activity in which the whole is bigger than the sum of the parts. 6 Thus, the acceptance by all parties of the present day axiom that 7 it is supply chains that compete, and not individual businesses 8 (Christopher 1997). 9 As shown in Figure 8.1, material flows downstream and orders 20111 traditionally flow upstream from echelon to echelon. Hence the 1 frequent reference to the supply chain as a pipeline (Farmer and 2 Van Amstel 1991). Depending on the type of supply chain, goods 3 may be stored at any combination of these echelons. Note that 4 our definition of supply chain applies right across the business 5 spectrum, ranging from global enterprises down to a number of 6 related sequential activities undertaken under one roof but 7 covering a number of independent cost centres. So proposals for 8 improving supply chain performance based on material flow 9 control are equally applicable to internal re-engineering as much 30111 as to global networking. Streamlined flow enables seamless oper- 1 ation of the supply chain. Here ‘seamless’ is defined as a supply 2 chain in which all ‘players’ think and act as one (Towill, 1997a) and 3 which is a necessary condition for agile, i.e. ‘nimble’ supply. 4 Each echelon within a supply chain embraces the following 5 constituents: 6 7 8 9 40111 1 2 3 4 5 6 7 Figure 8.1 8 Flows within a simple 49111 supply chain

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1111 1. perceived demand for products, which may be firm customer 2 orders already placed or just sales department forecasts of 3 what might happen; 4 2. at least one ‘production’ or added value process which the customer 5 is prepared to pay for; 6 7 3. information on current performance, which may be ‘stale’ or alter- 8 natively ‘distorted’ or both; 9 4. ‘disturbances’ affecting performance and due to machine/ 1011 equipment/transport breakdowns etc; 1 2 5. ‘interference’ between products in different supply chains 3111 competing for the same resources and leading to queuing 4 and/or non-delivery; 5 6. decision points where information on material flow, orders and 6 stock levels is brought together and acted upon; 7 8 7. transmission lags (or lead times), which occur for both material 9 flow and information flow; 20111 8. decision rules (based on company procedures) for changing 1 stock levels, placing new orders, etc., in the light of available 2 internal and external information and forecasting mechanisms. 3 4 The potentially complex operation of supply chains implied 5 above is made worse because there is uncertainty associated with 6 perceived demand, with the quality of information and with the 7 time associated with the many transmission lags (both for mate- 8 rial flow and information flow). As we shall see later, there are 9 enormous benefits to be obtained by improving information and 30111 material flow throughout the supply chain. Both flows are much 1 enhanced via time compression of value added, i.e. essential 2 activities and the total elimination of non-value added activities 3 (Towill 1996). Process flow charting is essential in enabling time 4 5 6 7 Elemental supply chain process Cycle time 8 Traditional Best practice Achievable via 9 operation target EDI transfer 40111 Communicate order, retailer to supplier 3 ± 2 days 1 day 0 days 1 Supplier processing of order 2 ± 1 day 1 day 0 days 2 Order picking (or production) 5 ± 4 days 1 day 1 day 3 Transport goods to retailer 3 ± 2 days 1 day 1 day 4 Retailer goods-in receiving 2 ± 1 day 1 day 0 days 5 Total order cycle time (place 15 ± 10 days 5 days 2 days 6 order to goods being available) 7 8 49111 Table 8. 1 Total order cycle times in the retail sector

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1111 compression. Johansson et al. (1993) contains a number of 2 detailed examples. Time compression dramatically reduces 3 uncertainty; typically halving the forecasting horizon reducing 4 the forecasting error by a factor of four. However, these improved 5 forecasts must additionally be made transparent and transmitted 6 without distortion or delay throughout the supply chain, hence 7 the importance of utilizing Electronic Data Interchange (EDI) 8 (Mason-Jones and Towill 1997). 9 1011 Supply chain logistics 1 2 Logistics is all about managing the flow of materials and infor- 3111 mation from source to customer across the entire range of 4 materials-handling and movement functions and throughout 5 an organization and its supply channels (Hughes et al. 1998). 6 Unfortunately, there is an enormous gap between best practice 7 and the average performers in this area, as typified by the data 8 in Table 8.1. For example, the mean total order cycle time is 15 9 days but there is a minimum of 5 days if everything is done on 20111 time and consistently (Stock and Lambert 1987). 1 Also shown in the table are the current targets achievable by 2 the use of EDI and JIT logistics. Thus via EDI the communica- 3 tion to the supplier plus the processing of the order can be 4 undertaken instantaneously. Furthermore, both order picking 5 and order transportation to the retailer can be undertaken within 6 a one-day time slot. 7 Finally, JIT logistics enable us to deliver straight to retailers 8 shelves, thus eliminating the goods-inward receiving process. 9 Hence by good supply chain re-engineering the inconsistent 30111 15 days total cycle time has been reduced to a consistent 2-day 1 cycle. 2 In many companies there is still a need to shift from a ware- 3 housing approach centred around storage, to a much greater 4 emphasis on managing and accelerating material flow. This 5 forces the necessary focus on customer responsiveness, speed of 6 operation and streamlining the total process. Indeed, it can 7 prompt a complete redefinition of the supply chain so that the 8 needs of the end-customer are made transparent throughout 9 the chain. 40111 It is manifest therefore that the concept of integration of logis- 1 tics across entire regions is rapidly taking hold. This includes 2 determining the optimum number and location of warehouses, 3 the design of warehouse handling systems for rapid picking of 4 orders and an intelligent policy on where and how much inven- 5 tory is to be carried. Not enough items in stock means turning 6 custom away; too much stock means holding costs are incurred 7 and wastage and write-offs occur all too frequently. 8 An example of a best practice supply chain is Campbells Soups, 49111 as shown below.

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1111 Case study – Campbells Soups 2 3 Background to Campbell operations • Alignment of delivery strategies. Orders 4 The Campbell Soup Company is a house- used to originate in all sales regions yet 5 hold word for brands that astute advertising transportation was managed at each of 6 persuades customers they cannot do the manufacturing plants. Furthermore 7 without. The present product range includes the supply chain was unnecessarily com- 8 much more than the original soups, with plicated because the associated tasks of 9 numerous items such as vegetable juice, cash control and credit collection were 1011 frozen dinners, pickles, chocolates, bakery done back at headquarters. Since the 1 goods and canned pastas. An extensive establishment of a centralized customer 2 management audit survey showed that on- service centre each customer now works 3111 time delivery was already at 98% but this with a specified contact person responsi- 4 simple statistic masked ineffectiveness in ble for ‘one-stop shopping’. Using the 5 the supply chain. Fortunately the audit addi- new system, a customer can check on 6 tionally identified the opportunity to make the status of an order, change an order, or 7 major improvements to the distribution reschedule a delivery time by making just 8 system. These enhancements were aimed at a single telephone call to their nominated 9 reducing paperwork, preventing damage to contact. 20111 goods and helping many customers save • Integration of delivery operations. Using elec- 1 money by ordering products directly from tronic transmission, the central customer 2 a manufacturing plant, rather than through service centre monitors the progress of 3 a multi-tiered procurement process. Prior goods from distribution points to the final 4 to the changes, the company was awash destination. This system avoids ‘dead 5 with paperwork generated by dealing with time’, both at the point of origin and at the 6 more than 300 carriers, servicing 24 autono- destination when the schedule for loading 7 mous shipping locations, adding up to over and unloading trucks was liable to be 8 197 000 shipments per year. The operation interrupted. Rather than loading a truck at 9 was so outdated that to check on the status 9.00 a.m., waiting several hours and then 30111 of a delivery, people at each manufacturing driving it away at 4.00 p.m., the new sys- 1 plant would have to call each individual tem utilizes paperless EDI technology to 2 customer. But communications within this ensure that the shipping department will 3 vast network were so unwieldy that on-time begin loading precisely on schedule with 4 deliveries suffered badly when third-party the truck’s departure, hence eliminating 5 trucks broke down or drivers failed to secure such dead time and associated costly 6 a delivery time window. Hence the need for delays. The system then continues to 7 streamlining the material flow system and track that particular shipment and reports 8 making it transparent to all ‘players’ in the any surpluses, shortages and damages 9 system resulting in a supply chain reckoned observed at the customer’s unloading site. 40111 by Andersen Consulting as typical ‘best By noting any damaged or unfulfilled 1 practice’. orders and automatically taking compen- 2 satory action the system creates a stream- 3 Action programmes undertaken to lined and efficient network for integrating 4 streamline the supply chain the delivery process with customers. 5 Following the operations audit the company 6 initiated numerous improvements in its • Core carrier concept. Statistical process 7 distribution system which may be grouped control (SPC) is employed continuously 8 under the following six major programme to maintain top performance from this 49111 areas: already highly efficient delivery system.

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1111 A turn-key four-module product delivery • Direct plant shipping programme. This 2 management system, purchased from allows the company to further reduce 3 Westinghouse, streamlines the process manufacturing costs by concentrating 4 from the receipt of order right through to production on one or more items at a 5 the choice of carriers. If a truck is only specific plant. Under normal conditions, 6 partially full, the system looks for other products are shipped to a distribution 7 orders to complete the load. Then it selects centre, then reloaded for shipment to 8 the best carrier in terms of overall costs, customers. This is a process which costs 9 service, equipment and supply. The new money but adds no value to the product. 1011 system, first introduced in January 1997, With direct plant shipping, however, 1 has reduced costs at the pilot site by 16% the company can offer its customers 2 and is now fully integrated throughout reduced costs if they buy directly from 3111 the organization. The consequent route the manufacturing plant itself. Hence by 4 streamlining has reduced the number of bypassing the distribution centre and thus 5 carriers needed to support the system. saving time and money, the company 6 shares those savings with its customers, • Pallet standardization programme. With the 7 thus benefiting several ‘players’ in the old distribution system, goods sometimes 8 chain. arrived in poor condition at customers’ 9 warehouses. This was traced back to pal- 20111 Observations on the re-engineered lets not being standardized, or not being 1 Campbell supply chain of a sufficient build standard. To solve this 2 This case study clearly demonstrates appli- problem a third party rental company was 3 cation of the five well-established supply contracted to provide standardized pallets 4 chain principles which enable streamlined measuring 48 by 40 by 5 inches which 5 material flow. These are synchronization of would then be used for all deliveries. This 6 events; information transparency; cycle time programme resulted in more efficient 7 reduction; choice of appropriate DSS; and arrangement of pallets on trucks, reduced 8 finally echelon elimination/interface mana- damage to goods and increased the possi- 9 gement. So although most customers think ble payload on each truck. 30111 of Campbell’s as a company famous for 1 • Continuous Replenishment Programme To its stable, traditional products, many are 2 ensure continual integration of its vast unaware of the vast changes that have 3 delivery system, Campbell logistics man- recently occurred behind the scenes. The 4 agers now meet regularly with logistics familiar labels are still in place, but how 5 experts from customers’ sites. Working those cans get to the shelves of the local 6 alongside salespeople, these teams co- supermarket is no longer simply a matter of 7 ordinate every step of the delivery providing trucks and issuing purchase 8 process, from taking orders to issuing orders. Electronic commerce has streamlined 9 invoices. Campbell’s began its version of Campbell’s delivery chain, creating a seam- 40111 a Continuous Replenishment Programme less communication system with customers. 1 in 1992 whereby the company takes over This eliminates delays and provides infor- 2 the ordering process for its major mation transparency throughout the system. 3 customers and thereby becomes respon- Products are pulled through the distribution 4 sible for keeping their shelves full. chain via a synchronized logistics system 5 Today, approximately 20% of Campbell’s incorporating Continuous Replenishment 6 total volume is handled by the continuous DSS concepts (sometimes called Vendor 7 product replenishment system, thus Managed Inventory). Here Campbell’s are 8 avoiding delays, unnecessary paperwork directly responsible for keeping the super- 49111 and damaged goods. market shelves topped up, thus cutting out

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1111 a layer in both information and material flow Schuster, New York; plus D.R. Towill and 2 channels. P. McCullen (1999) The impact of an agile 3 (Source: Author based on T. Hiebeler, manufacturing programme on supply 4 T.B. Kelly and C. Ketteman (1998) chain dynamics, International Journal of 5 Best Practices: Building Your Business with Logistics Management, 10 (1), pp. 83–96) 6 Customer-Focused Solutions, Simon and 7 8 9 Market qualifiers and market winners 1011 1 What makes one supply chain more effective than another? To 2 answer this question we need to consider the factors that affect 3111 the customer’s decision to use our supply chain in preference 4 to our competitors. Five key performance indicators related to 5 customer choice are as follows: 6 7 • Cost (which can be purchase price, or in some cases total 8 ownership costs). 9 • Quality (the ability of the product to meet the expectations of 20111 the purchaser). 1 2 • Lead time (how long must we wait to acquire the product). 3 • Service level (how consistently is the lead time target met). 4 5 • Stock turns (how many times a year do we rotate our stock). 6 7 Whilst all of these indicators are important, at any given moment 8 they are not equally important. To illustrate the point Terry Hill 9 (1993) has introduced the concept of ‘market qualifiers’ and 30111 ‘market winners’. He argues that for a given type of supply 1 chain, only one of our five attributes will be the instant account 2 market winner. However, the other four indicators are market 3 qualifiers which require us to meet stringent standards in 4 order to be considered ‘in the race’. If the product is a commodity, 5 i.e. corn flakes, then cost will be the market winner, always 6 provided adequate standards are achieved in the other four 7 criteria (who wants corn flakes which have been around for 8 months?). 9 It is part of the competitive nature of supply chain logistics 40111 that the market winner/market qualifier scenario is dynamic and 1 continually changing. Hence this year’s market qualifier may 2 become next year’s market winner (Johansson et al. 1993). 3 For example, in 1970 Japanese TV manufacturers exploited 4 quality as the market winner and even commanded a price 5 premium whilst increasing market penetration. By the time the 6 competition had improved their quality some years later, 7 Japanese producers, aided partly by economies of scale, could 8 retaliate by reducing prices and turning this to their advantage 49111 as the new market winner.

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1111 It is important to emphasize that nothing is gained (and much 2 may be lost) by improving one performance metric at the expense 3 of another. We must be at least as good as the competition with 4 the market qualifiers and be better than them with the market 5 winners. 6 7 8 Case study – the ‘Warren Buckley’ Hotel 9 1011 Background objective it is essential to be able to order 1 Just-in-time (JIT) logistics is a technique that replenishments frequently and to receive 2 can be profitably applied to the food and small quantities. This is in line with the defi- 3111 drinks supply chain. This case study is nition of JIT according to Schonberger (1990), 4 concerned with the provision of alcoholic who likens it to the behaviour of the 5 and related beverages to the restaurant water beetle, i.e. ‘travel frequently carrying 6 and bar complex within a medium-sized small loads’. A supplier specification was 7 London establishment with the pseudonym thus drawn up by Warren Buckley seeking 8 Warren Buckley Hotel. The initial problems vendor capability to deliver spirits, wines 9 identified during an analysis of material flow and fortified wines and minerals five or 20111 included excessive stock, obsolescent stock six times per week and beer three times per 1 and stock-outs. Hence, despite the average week. Also to supply these goods at a price 2 stock being 108 days of sales, the percentage premium no greater than +5%. 3 of items ordered from the cellar, but not An important condition was laid down 4 delivered to the cocktail bar, due to being that the successful suppliers should be 5 out-of-stock, was as high as 17% and rarely prepared to enter into meaningful partner- 6 dropped below 10%. Hence we have a classic ship arrangements necessary to enable seam- 7 logistics problem in that carrying large less operations. The two selected suppliers 8 stocks does not in itself offer any guarantee then became part of the hotel team, attend- 9 of satisfying customer need. The total cost ing JIT familiarization and related training 30111 resulting from such poor logistics is consid- sessions. This included exposure to the new 1 erable and includes lost revenue, stock EPoS system and an understanding that 2 carrying costs, wastage, write-offs and suppliers are responsible for both quality 3 storage costs. and quantity conformance, in maintaining 4 agreed minimum stock levels, for all items, 5 Actions as an integral part of the Vendor Managed 6 To help stay competitive, the hotel intro- Inventory (VMI) agreement. Typical benefits 7 duced JIT logistics to the acquisition and to Warren Buckley include reduction in total 8 control of drinks items. This application has stock holding from 108 days to approxi- 9 to be seen against a market sector back- mately 22 days plus redeployment of saved 40111 ground of a low degree of technology, low storage space, reduction in paperwork and 1 levels of investment, both in materials and saving of staff time. In the first six months 2 human resource training, and the expectancy of operation of the new JIT logistics system, 3 of quick and sustainable results. Hence average unfilled cocktail bar orders to the 4 the need for the implementation of simple cellar of less than 2% were recorded. This is 5 robust solutions to the material flow a reduction of over 8:1 following JIT instal- 6 problem. Central to the concept of lean logis- lation and it is also worth noting that in three 7 tics is the matching of supply to customer months out of the six there were zero stock- 8 demand simultaneously with reducing outs. So the hotel has engineered a solution 49111 storage costs and space. To achieve this twin incorporating the best of many worlds,

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1111 including stock-turns improved by 5:1 plus Successful application of JIT depends on 2 better use of all resources. identifying and attacking fundamental prob- 3 lems aimed at elimination of any form of 4 Observations waste including duplicate activities (Scott 5 This is an excellent example of JIT applica- and Westbrook 1991). In the hotel sector the 6 tion in the service sector. An essential feature JIT system needs to be as simple as possible, 7 of the method is frequent deliveries essen- with proper involvement and training of 8 tial to maintain minimum stock levels. The staff encouraged (‘empowered’) to control 9 latter are selected on the basis of usage of their own area and take responsibility to 1011 individual stock holding units (SKUs) and solve problems as they arise. 1 not on global averages. Implementation of (Source: Author based on G.L. Barlow 2 EPoS also means that both stock and usage (1995) ‘JIT Implementation within a Service 3111 data may be rapidly updated and used as Industry: A Case Study’, Proceedings of 4 the basis of VMI with the associated supplier the 2nd International Symposium on 5 responsibility for keeping shelves full. Logistics, Nottingham, 1995, pp. 197–207) 6 7 8 Modern material flow systems 9 20111 In logistics circles a number of approaches embracing ideas on 1 lean production and JIT delivery (Womack and Jones 1996) have 2 been well publicized and associated with particular market sec- 3 tors and/or management consultants. These approaches, namely 4 Quick Response (QR), Efficient Consumer Response (ECR), 5 Vender Managed Inventory (VMI) and Continuous Replenish- 6 ment Programme (CRP) are covered in more detail in the glossary. 7 There are a number of important supply chain design princi- 8 ples running through the foregoing initiatives. They have been 9 confirmed by theoretical analyses, simulation experiments and 30111 industrial case studies covering various market sectors (Towill 1 1997b). All of these simulation experiments were based on 2 synchronous control, i.e. constant ‘time buckets’ for decision 3 making, since this had already been shown to reduce ‘interfer- 4 ence’ between various value streams competing for the same 5 resources. Hence the synchronization principle is a key enabler 6 in modern logistics. The remaining principles of total cycle time 7 compression, echelon elimination, information transparency and 8 use of appropriate simple robust decision support systems (DSS) 9 have been evaluated on a wide range of supply chain models 40111 so can be recommended with confidence (Wikner et al. 1991). 1 2 Setting stock levels in the supply chain 3 The requirement here is to make sure that we have enough stock 4 within the supply chain to satisfy customer need but not so much 5 that we will lose on the cost downside due to holding costs, 6 damage and obsolescence. The fundamental equation for setting 7 stock levels is: 8 49111 Target stock level = Safety stock + Buffer stock

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1111 (a) where safety stock is selected to cope with any problems on 2 the supply side of our operations. It is how much we feel 3 we need to keep in stock in case our supplies do not arrive 4 on time, or are the wrong goods, or are faulty. This is usually 5 expressed as (cover × average usage), where the cover factor 6 is related to the acquisition lead-time. So reducing the latter 7 is highly beneficial in minimizing stock levels. 8 (b) where buffer stock is required to cope with unexpected vari- 9 ation in the demand side of our operations. It usually 1011 includes a multiple of the forecast error so as to protect us 1 against unforeseeable fluctuations. For example, if the fore- 2 cast errors form a bell-shaped distribution, then setting the 3111 buffer stock at (Average usage + k × Forecast error) where 4 k = 2 will result in stock-outs occurring on about two occa- 5 sions in a hundred. Increasing k will reduce the chance of 6 stock-outs still further; k = 3 decreases the chance of stock- 7 out to one in a thousand. 8 To lower our stock levels we need to look at the key drivers 9 of Equation 1 in turn. These are the acquisition lead time and 20111 the forecasting error. As we shall see, the time span over which 1 we operate is a dominant force in both cases. 2 Acquisition lead time has many component parts. These 3 include the time taken to make the decision, the time taken to 4 transmit the order, the time taken to pick or produce the goods, 5 the time taken to physically deliver the goods, plus any checking 6 time. 7 Forecast errors depend on many factors including our knowl- 8 edge of special events, seasonality, the weather and the state of 9 the ‘feel good’ factor. However a key determinant is the time 30111 horizon over which the forecast is made. As a rule of thumb, 1 forecast errors increase as the square of the time interval. So, if 2 we need to look ahead for a two-week period, the forecast error 3 may be as high as four times the one-week ahead forecast error. 4 So, again, reducing time span is highly beneficial to the smooth 5 running of the business. 6 In recent years it has become increasingly recognized that 7 achieving the best balance between stock holding costs and 8 customer service level is an important factor in business compet- 9 itiveness. So much so, that when comparing businesses, ‘stock 40111 turnover’ is now commonly benchmarked as a key performance 1 indicator. Accountants use complicated formulae to calculate 2 stock turnover. A simple estimator is the annual usage divided 3 by average stock level. Hence if an item has a usage rate valued 4 at £K150 p.a. and the average stock level is valued at £K5, then 5 our stockturn will be 30 times p.a. The consensus view is that 6 if we can increase the stockturns, whilst at least preserving our 7 competitiveness in other areas, then our business performance 8 is improving. A consequence of this belief is the move towards 49111 stockless operations, which will now be explored.

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1111 Moving towards stockless operation (or Minimum Reason- 2 able Inventory, the latter title more clearly retains the notion of 3 still serving the customer: Grunwald and Fortuin 1992). All the 4 available evidence suggests that ‘time compression’ is a major 5 lever in reducing stocks. The objective is to remove the neces- 6 sity of storing goods ‘just-in-case’ by moving to ‘just-in-time’ 7 operations. For example, by using EPoS data we can download 8 information for automatic decision making and order placements 9 so that this process is literally undertaken at the speed of 1011 light. Automatic stock picking can also further reduce the 1 acquisition lead time, setting up local distribution centres reduces 2 the transport time and production engineering expertise is used 3111 to compress manufacturing lead times and reduce minimum 4 batch sizes, preferably to one. The overall aim is to be able to 5 move small quantities reliably, quickly and frequently, thus 6 allowing us to operate in narrow time slots, which in turn 7 enable us to avoid queues and to reduce both safety stocks and 8 buffer stocks. 9 20111 Deciding how much to order 1 2 To place an order to replenish our stocks the following general 3 formula is used: 4 5 Orders placed on our suppliers = 6 Constant + Forecast usage + Fraction of stock deficit 7 – Fraction of orders in pipeline 8 9 If we make orders equal to a constant (usually average usage) 30111 and ignore the other terms, we are operating in the level sched- 1 uling mode (Suzaki 1987). This buffers the production or delivery 2 process from demand volatility and requires more or less 3 constant capacity. However, if the usage varies by more than 4 about ± 10% this rule can easily cause the system to break down 5 either by generating excess stocks (if demand dries up) or causing 6 stockouts (if sales are on the up). Another simple formula is to 7 make orders equal to most recent usage. This is termed passing 8 on orders mode. But this has the twin disadvantages of requiring 9 high capacity flexibility and short lead times if we similarly wish 40111 to avoid stockouts and lost business. Hence the compromise 1 modification to Equation 2 which takes into account any current 2 stock deficit (or surplus) and any current orders in the pipeline 3 (orders placed but goods still in transit). The object here is to 4 balance stock levels against fluctuations in capacity so as to give 5 good service at least total cost. 6 This is best done by making the fractional components of 7 Equation 2 a function of average lead time. For example, if the 8 orders are placed daily and the acquisition lead time is 3 days, 49111 then a typical ‘good’ set of parameters for this purpose would

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1111 be stock deficit fraction = 1/3; orders in pipeline fraction = 1/6; 2 and forecast usage is actual demand exponentially smoothed 3 over 6 days (Mason-Jones et al. 1997). (The constant term would 4 then be set at zero.) 5 The stock deficit in Equation 2 is the difference between the 6 target stock level and goods actually in store. Hence, the need 7 for accurate and fast stock monitoring, via satellite communica- 8 tion if necessary. It is important to note that the algorithmic 9 (computer software) form of Equation 2 is modified depending 1011 on the particular SKU, i.e. the individual item in question. The 1 ordering rule is selected according to the shelf life, acquisition 2 lead time, value and substitutability of the item. For example 3111 will the customer accept an alternative soft drink or an alterna- 4 tive whisky? It is the subject of a special promotional campaign, 5 or is it shortly to be replaced by a new product? Can we get 6 emergency supplies if necessary? Is it a critical item where a 7 stock-out can lose us that particular customer permanently? Is 8 it vintage wine or ‘plonk’ that needs a rapid turnover? So by 9 answering these questions intelligently we would expect our 20111 SKUs to be categorized according to their marketing character- 1 istics. The computer software used is properly called a Decision 2 Support System (DSS). This is because it advises the manager 3 on what should be ordered, but he/she normally has the 4 authority to override the numbers on the basis of local knowl- 5 edge. Under these circumstances they must perform at least as 6 well as the DSS! Unfortunately many managers do not, as the 7 MIT Beer Game ably demonstrates (Dornier et al. 1998). 8 9 Exchanging information for supply chain inventory 30111 1 Supply chain management is ultimately about meeting customer 2 demand as effectively as possible. Consequently, communi- 3 cating end customer demand throughout the chain is critical 4 (Mason-Jones and Towill 1997; Charaton 1999). Typically, 5 demand is communicated in two ways, via forecasts and via 6 firm purchases. Both start with sales data, but forecasts mask 7 true demand because of judgements on the future, projected 8 sales targets and current inventory. If each echelon in the chain 9 similarly distorts the picture of end-customer behaviour, the 40111 consequence will be that upstream suppliers are subject to 1 an amplified demand pattern, or ‘bullwhip effect’ (Fransoo and 2 Wouters 2000). This is a very costly phenomenon, leading to 3 cyclical over- and under-stocking and wild swings in capacity 4 requirements. Thus ± 10% changes in the marketplace can 5 become ± 50% at the factory. 6 Best practice is to simplify the flow of orders and make the 7 information transparent throughout the chain (Mason-Jones and 8 Towill, 1997; Charaton 1999). One recommended procedure is 49111 for orders placed on a supplier to be clearly indicated as to which

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1111 are needed to satisfy end-purchase firm demand (i.e. the Passing 2 Orders On element) and those which are required to build-up 3 depleted stocks (Wikner et al. 1991). This information sharing 4 means that the bullwhip effect is much reduced provided only 5 one ‘player’ takes responsibility for controlling orders for buffer 6 stock. Note that information sharing requires both stock and 7 goods-in-transit to be continuously monitored if full benefit is 8 to be obtained. 9 As an example of the exchange of information for inventory 1011 consider the case of the UK retailer, BhS. They have worked 1 continuously to refine their replenishment systems to the point 2 where the effective use of information has all but eliminated the 3111 need to hold inventory (Christopher 1997). BhS decided to 4 concentrate on its core competencies of buying and selling, 5 outsourcing all other aspects of its operations to specialist 6 contractors. With their help BhS went on to overhaul its stock 7 management systems and hence embrace the principles of Quick 8 Response. A radical rework of the retailer’s supply chain 9 followed, leading to the abandonment of over half of its 800 20111 suppliers. Only those that were willing and able to adapt to the 1 demanding requirement of a long term retailer–supplier rela- 2 tionship were retained. An upgraded EPoS system and improved 3 co-ordination of the buying function has led to a more coherent 4 and harmonious product range. Almost all stock is now held by 5 suppliers. EDI links give BhS’s vendors access to data on how 6 their own lines are selling in the stores, allowing them to detect 7 emerging sales trends and anticipate replenishment orders. 8 Goods are now prepared and ready to ship in JIT mode by the 9 time BhS pulls them through the pipeline. 30111 A single specialist contractor, Exel Logistics, has been 1 appointed to handle the distribution of all of BhS’s 8000 non- 2 food and 350 food lines. Exel transports the merchandise – ready 3 bar-coded for its final destination – from suppliers to a single 4 dedicated warehouse at Atherstone, Warwickshire, where it is 5 sorted and despatched within 24 hours to BhS’s UK stores. The 6 daily deliveries arrive at the shops between 6am and 10am each 7 morning, just in time to meet the lunch-time shopping rush. 8 Thus by re-engineering the supply chain and enabling informa- 9 tion to flow upstream, inventory has been considerably reduced. 40111 It is an excellent example of the improvement in performance 1 made possible by the adoption of the seamless supply chain 2 concept via time compression and transparency of informa- 3 tion flow (Mason-Jones and Towill 1997). In five years BhS’s 4 replenishment cycles have been reduced to the point where 60% 5 of all orders arrive the next day and the full 100% are released 6 within 48 hours. Furthermore the daily deliveries have reduced 7 storage space requirements on BhS retail sites from 20% to 10% 8 which leads to much more effective use of resources via larger 49111 sales areas.

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1111 Case study – Domino’s pizza High Street franchise 2 3 Background be taken to achieve the best balance between 4 Domino’s are a leading pizza supplier in having sufficient perishable items available 5 which the high-street outlets operate on the and wastage due to ingredients passing their 6 franchise system. The supply chain has three use-by date. Fortunately there are distinctive 7 main echelons; the fast food outlets, the patterns describing day-to-day variations. 8 Domino Distribution Business (Commissary Hence the outlet can make use of standard 9 in the UK) and the ingredient suppliers computer software to suggest re-order quan- 1011 including farmers, producers, etc. At the tities needed to provide sufficient top-up of 1 Commissary level the function is to supply individual stocks. The recommended orders 2 on a regular ‘milk-round’ basis everything can then be fine-tuned by the local manager 3111 needed by the franchise. Each Commissary in the light of extraneous circumstances such 4 distribution centre has a private fleet of as changes in the weather, festival days, 5 trucks and is the recommended supply and pop concerts etc. The immediate entering of 6 support channel to the outlets for all its individual sales onto the PC and logged 7 services. This includes provision of best store according to detailed pizza specification, 8 equipment, delivery of fresh, ready-to-use makes materials management in the outlet 9 dough and best ingredients and installation transparent. 20111 of the individual store management and A typical high street outlet will need about 1 order software. The chain is not complex in 60 SKUs of which about 80% relate directly 2 terms of numbers of SKUs. Also the outlets to pizzas, about 10% to other direct sales 3 are well known, accessible and the distribu- items, such as soft drinks, and about 10% to 4 tion entres (DCs) are relatively small. The non-consumable stocks, such as packaging 5 complexity arises from the high-velocity, etc. The useful shelf-life of the SKUs vary 6 high volume of orders that need processing, widely. Both dough and vegetables must be 7 the acquisition of goods, routing of trucks used within days, cheeses within weeks, but 8 and picking and delivering items to the tinned sauces may last for months. Also, 9 outlets. goods that have lengthy shelf life when 30111 Currently over 98% of orders placed on unopened must be used quickly once the 1 Commissary are met 100% correct, an impor- seal is broken. All SKUs are delivered in 2 tant statistic when a stock-out of key items standard containers with trays used wher- 3 can temporarily close the outlet. In practice ever possible to simplify handling and 4 this latter situation would be addressed by stacking. With just 60 items, manual stock- 5 sending a member of outlet staff to Commis- taking is possible and is undertaken every 6 sary to make an emergency collection. evening. The information is fed into the PC 7 and is taken into account when the DSS 8 Actions recommends order quantities. It is also used 9 Pizza outlets have to cope with highly vari- to monitor the current utilization of ingre- 40111 able demand patterns according to both dients. Orders to Commissary are placed 1 hour of the day and day of the week typi- during the late evening and will be deliv- 2 cally by factors of three to one in each case. ered about 36 hours later. Since dough has 3 Hence the maximum hourly throughput a shelf-life in total of 5 days, including the 4 can be of the order of nine times the first two days after manufacture when it is 5 minimum off-peak sales. These two factors unusable, and deliveries are only made 6 mean that available capacity is controlled by every 2/3 days, maintaining optimum stock 7 adjusting the number of operatives on duty levels is very much a juggling act. To aid 8 at any particular time. The daily variation in the local manager, the facility does exist to 49111 demand means that considerable care must make emergency collections by sending a

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1111 van to Commissary HQ, or to another fran- of the Domino supply chain is the stan- 2 chise-holder, who has spare stock. However, dardization of the product, the standardiza- 3 the operating principle over the 4-day cycle tion of operating procedures and the stan- 4 is clear: the local manager expects to satisfy dardization and frequency of SKU deliveries. 5 demand for days 1–2 from existing stock: By providing good training and support, 6 and orders on day 0 for a delivery on day including computer software, coupled with 7 2 which is sufficient to cover forecast simplified material flow, the local manager 8 demand for days 3–4. can concentrate on matching pizza supply 9 to local demand. This includes taking 1011 Observations responsibility for the recruitment, training 1 Domino regard their franchisees as principal and performance of operatives and delivery 2 stakeholders and aim to provide the best personnel. 3111 return to them via striking a balance between (Source: Author based on J.D. Krasner and 4 value added service and least-cost distribu- M. Soignet (1999) Strategic vision drives 5 tion. This in turn provides the franchisees Domino’s pizza distribution, Logistics 6 with the opportunity to provide excellent Management Homeplace/Manufacturing 7 service from their outlets. A major feature Marketplace, May 1999) 8 9 20111 1 Conclusions 2 3 We have seen that in every kind of supply chain there is a need 4 to totally integrate material flow and information flow. Also the 5 effectiveness of the supply chain is greatly increased if the speed 6 of material flow can be increased. One measure of this is the 7 number of stockturns per annum. The way to achieve this is to 8 compress time in the necessary value added activities and to 9 eliminate wherever possible the non-value added activities from 30111 the chain. As the ‘Warren Buckley’ case study shows, there are 1 occasions when better control of supplies justifies payment of a 2 small cost premium. The result is greatly increased material flow, 3 more reliable deliveries, better customer service and more effec- 4 tive use of space. 5 Flow synchronization, transparency of information and usage 6 of simple DSS are a feature of Domino’s pizzas. Here the fran- 7 chise is provided with an effective supply chain infrastructure 8 but is very much left to control operations in the light of local 9 knowledge. BhS are a good example of supplier integration and 40111 show that speeding up material flow coupled with information 1 transparency very much reduces the need to carry inventory. 2 Finally, modern logistics requires the removal of redundant 3 processes wherever possible. Thus VMI, as incorporated within 4 the ‘best practice’ Campbells Soups supply chain, eliminates an 5 information handling delay, via sales data transparency, demand 6 distortion is avoided thus improving quality of decision-making. 7 Furthermore such agile logistics is imperative in enabling E- 8 shopping, as explained by the Peapod example described in Part 49111 3 of the book.

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1111 References 2 3 Charaton A. (1999) Retail supply chain integration, in Donald 4 Walters (ed.), Global Logistics and Distribution Planning 5 Strategies for Management, London: CRC Press/Kogan- 6 Page. 7 Christopher M. (1997) Marketing Logistics. Oxford: Butterworth– 8 Heinemann. 9 Dornier P-P. Ernst R., Fender M. and Kourvelis P. (1998) Global 1011 Operations and Logistics. New York: John Wiley and Sons. 1 Farmer D. and Van Amstel R.P. (1991) Effective Pipeline 2 Management – How to Manage Integrated Logistics. London: 3111 Gower Press. 4 Fransoo, J.C. and Wouters, M.J.F. (2000) Measuring the bullwhip 5 effect in the supply chain. SCM Journal, 5 (2), pp. 78–89. 6 Grunwald H.T. and Fortuin L. (1992) Many steps towards 7 zero inventory. European Journal of Operations Research, 59, pp. 8 359–69. 9 Hill T. (1993) Manufacturing Strategy: Text and Cases, 2nd edn. 20111 London: Macmillan Press. 1 Hughes J., Ralf M. and Michels W. (1998) Transform Your Supply 2 Chain in Releasing Value in Business. London: International 3 Business Press. 4 Johansson H.J., McHugh P., Pendlebury A.J. and Wheeler W.A. 5 (1993) Business Process Reengineering: Breakpoint Strategies for 6 Market Dominance. Chichester: John Wiley and Sons. 7 Mason-Jones R. and Towill D.R. (1997) Information enrichment: 8 designing the supply chain for competitive advantage. SCM 9 Journal, 2 (4), pp. 137–48. 30111 Mason-Jones R., Towill D.R. and Naim M.M. (1997) The impact 1 of pipeline control on supply chain dynamics. International 2 Journal of Logistics Management, 8, pp. 47–62. 3 Schonberger R.J. (1990) Building a Chain of Customers. New York: 4 The Free Press. 5 Scott C. and Westbrook R. (1991) New strategic tools for supply 6 chain management. International Journal of Physical Distribution 7 and Logistics Management, 21 (1), pp. 23–33. 8 Stock J.R. and Lambert D.M. (1987) Strategic Logistics Management, 9 2nd edn. Homewood, IL: Irwin. 40111 Suzaki K. (1987) The New Manufacturing Challenge. New York: 1 The Free Press. 2 Towill D.R. (1997a) The seamless supply chain – the predators’ 3 strategic advantage. International Journal of Technical Manage- 4 ment, 13 (1), pp. 37–56. 5 Towill D.R. (1997b) Forridge – principles of good practice in 6 material flow. International Journal of Production Planning and 7 Control, 8 (7), pp. 622–32. 8 Towill D.R. (1996) Time compression and supply chain manage- 49111 ment – a guided tour. SCM Journal, 1 (1), pp. 15–27.

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1111 Wikner J., Towill D.R. and Naim M.M. (1991) Smoothing supply 2 chain dynamics. International Journal of Production Economics, 3 22, pp. 231–48. 4 Womack J.P. and Jones D.T. (1996) Lean Thinking. New York: 5 Simon and Schuster. 6 7 Questions 8 9 1. Discuss the five performance criteria usually used to measure 1011 supply chain effectiveness. Explain how at any time, one of 1 these criteria is the market winner, whilst the other four are 2 important market qualifiers. Why is it that this year’s market 3111 qualifier may become next year’s market winner? Illustrate 4 your arguments by reference to a real-world supply chain in 5 which there have been three different market winner attrib- 6 utes covering competition over the past decade. 7 8 2. Time is money! This old adage is highly applicable to supply 9 chain logistics. Discuss the many ways in which Total 20111 Cycle Time Compression can improve business profitability. 1 How would you investigate the opportunities present for time 2 compression in a supply chain delivering pre-packed meals 3 to the marketplace? 4 3. How far can we go in eliminating stock throughout the supply 5 chain? Explain carefully how our stockturns may be improved 6 via (a) time compression, (b) information transparency (c) 7 order synchronization (d) using simple robust DSS. What are 8 the dangers inherent in trying to operate a completely stock- 9 less supply chain? 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 165 1111 CHAPTER 2 ●●●● 9 3 4 5 6 Relationship 7 8 9 1011 marketing 1 2 3111 4 Terry Robinson 5 6 7 8 9 20111 1 2 Key objectives 3 4 • To trace the development of the concept called ‘relation- 5 ship marketing’ 6 • To attempt to define relationship marketing and to summa- 7 rize the key criticisms of the transactional four Ps approach 8 to marketing 9 30111 • To examine the concept of the primacy of the customer 1 • To outline the key models of relationship marketing 2 3 • To attempt to devise a general framework for the under- 4 standing of relationship marketing 5 • To contrast the key elements of the transactional approach 6 to marketing with relationship marketing 7 8 • To outline the key stages in the relationship 9 40111 1 2 Introduction 3 4 The development of relationship marketing 5 Although marketing practices can be traced back as far as 6 7000 BC (Carratu 1987), marketing as a distinct discipline 7 originated from economic thought around the beginning of 8 the last century. As the discipline gained momentum and 49111 Relationship marketing

1111 developed through the first three-quarters of the twentieth 2 century, the primary focus was on transactions and exchange 3 (Sheth and Parvatiyar 1995). The traditional view of marketing 4 expressed in most textbooks today focuses around the marketing 5 mix concept and the four Ps of price, product, place and promo- 6 tion. This concept was first introduced into the marketing 7 literature by Neil Borden in the 1950s although many organiza- 8 tions had been using elements of his marketing mix for many 9 years (Grönroos 1994). It quickly developed into an almost 1011 unchallenged basic model of marketing, so much so it totally 1 overpowered previous models and approaches (Grönroos 1994). 2 3111 Criticisms of the four Ps approach to marketing 4 5 Its theoretical basis ●●● 6 7 The development of the four Ps as a general marketing theory 8 stems from lists of marketing functions from the functional 9 school of marketing (McGarry 1950), largely developed under 20111 the influence of micro economic theory. However, Grönroos 1 (1994) believes that the usefulness of the four Ps as a general 2 marketing theory for practical purposes is highly questionable 3 as the link between micro-economic theory and the marketing 4 mix has diminished over time. He suggests that the marketing 5 mix has become just a list of Ps without theoretical roots. It is 6 not just the theoretical links that have diminished, but so have 7 elements of the original marketing mix. The four Ps represent a 8 significant oversimplification of Borden’s original concept 9 (Borden 1964), which was a list of 12 elements and not intended 30111 to be a definition at all. 1 Grönroos (1994) suggested that a paradigm such as the 2 marketing mix should be well founded by theoretical deduction 3 and empirical research. He argued that the four Ps and the whole 4 marketing mix management paradigm is theoretically based on 5 a loose foundation. 6 Gummesson (1987) called for the old marketing concept to be 7 replaced, stating that, although it may be rich in research and 8 data, it is poor in theory. The theories and models that consti- 9 tute the present concept are too limited in scope, exaggerating 40111 some aspects, namely advertising and competition and suppres- 1 sing other aspects, such as interrelationships and co-operation. 2 3 Its generalizability ●●● 4 5 The four Ps model of marketing can be criticized for its suit- 6 ability across all fields of marketing including consumer, 7 industrial and services markets. It is primarily built on research 8 in the area of packaged consumer goods and consumer durables. 49111 The marketing theories developed for consumer goods marketing

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1111 emanate almost exclusively from the United States and are based 2 on unique conditions there, among them a huge domestic market, 3 extensive media coverage by commercial television, radio and 4 press and a large number of competitive distribution solutions 5 (Gummesson 1987; Grönroos 1994). 6 Gummesson (1987) suggested that the application of the 7 marketing mix concept to areas other than consumer goods can 8 be destructive, as it fails to recognize the unique features of, 9 for example, services marketing and industrial marketing. Ford 1011 (1990) and the IMP Group have a similar view; they criticize the 1 four Ps approach for trying to transfer its analysis to industrial 2 markets, where the only differences between approaches occur 3111 through greater emphasis on the sales force than on advertising 4 and the occasional inclusion of a service function. 5 Furthermore, companies are seldom in a single category of 6 goods; they tend to be hybrids of consumer, services and indus- 7 trial goods. Gummesson (1996a) acknowledges that the theories 8 around the four Ps approach hold a lot of important messages 9 and knowledge for the issues to which they are appropriate. The 20111 four Ps are appropriate for the marketing of consumer durables 1 where the concept originated, however they cannot claim to be 2 applicable to services and industrial goods. Gummesson (1996a) 3 believes they have thus contributed to moulding an ‘unreal 4 reality’. 5 6 Its orientation ●●● 7 8 This is based on the belief (Grönroos 1989, 1990, 1994, 1996) 9 that the marketing mix and its four Ps approach constitutes a 30111 production-orientated definition of marketing and not a market- 1 orientated or customer-orientated view. The simplicity of the 2 marketing mix has made marketing seem too easy to handle and 3 delegate, resulting in the creation of marketing departments. The 4 separation of marketing departments from the other activities of 5 the firm may be a trigger that makes everyone else lose what- 6 ever interest in customers they may have had. This may lead to 7 the elimination of Gummesson’s (1987) ‘part-time marketers’ that 8 are often essential in influencing customer purchases. 9 40111 Its transactional basis ●●● 1 2 The present model of marketing has evolved during the advent 3 of mass production, the emergence of middlemen and the sepa- 4 ration of the producer from the consumer, all of which have led 5 to a transactional focus of marketing (Sheth and Parvatiyar 1995). 6 This model of marketing suggests that the marketer makes deci- 7 sions about the marketing mix variables on a single transaction 8 basis with customers who are normally characterized as an 49111 anonymous mass. This approach, centring on the marketing mix,

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1111 is called transaction marketing, where the seller is active and the 2 buyer is passive (Grönroos 1991). The IMP group have viewed 3 this approach as inappropriate in industrial marketing where the 4 roles of seller and buyer may vary between passive and active. 5 6 What is relationship marketing? 7 8 Some definitions of relationship marketing? 9 1011 Over the past 20 years a contrasting approach to marketing has 1 emerged based on the development of long term, interactive rela- 2 tionships with customers and other parties such as suppliers, 3111 distributors and financial institutions. Given the title of ‘rela- 4 tionship marketing’, it has developed an increasing body of 5 literature by authors from both Europe and North America. 6 Although, in the literature to date, there is no agreement 7 as to a single definition of relationship marketing, most defini- 8 tions have many common denominators (Grönroos 1996). 9 Arguably no definition of relationship marketing will ever be 20111 precise – it cannot be, because social phenomena are not in them- 1 selves precise (Gummesson 1993, 1996b). Since markets are 2 dynamic, definitions of relationship marketing will constantly 3 evolve as we develop our understanding of them. However, 4 there is enough consistency between alternative definitions of 5 relationship marketing to help us understand the phenomena. 6 Gummesson (1996b) has expressed that: 7 8 I don’t perceive my ‘definition’ of relationship marketing 9 (is marketing seen as relationships, networks and inter- 30111 action) as a description. It is a perspective or a short- 1 listing of the core variables that have emerged out of 2 real world studies and those theories that have so far 3 given theoretical contributions to the current efforts of 4 identifying the content of relationship marketing. These 5 core variables provide a focus for our search for a mean- 6 ingful content of relationship marketing, unfortunately 7 not a precise one, but one that captures the essence of 8 relationship marketing enough to guide a reader into the 9 subject. 40111 1 The primacy of the customer 2 3 Customer primacy is at the very heart of marketing itself. The 4 concept of customer satisfaction is present in all definitions of 5 marketing but relationship marketing takes customer primacy to 6 even greater levels of importance. Customer profitability is the 7 very basis of relationship marketing insofar as profits are 8 seen not to be derived from products but from customers. It 49111 is retained customers that are inevitably the most profitable.

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1111 Customer profitability is not the result of a single transaction, 2 nor even the result of multiple transactions. Profitability is the 3 result of sustained transactions, over time, within the framework 4 of a relationship. Thus we can begin to see what is often termed 5 as the ‘lifetime value’ of a customer, that is how much does 6 a customer spend with a supplier over a period of 10, 20 or 7 30 years. 8 The relationship marketing concept has become of even greater 9 significance in the millennium world of electronic commerce 1011 through the Internet. Opportunities for customers to defect 1 are now even more available and when these opportunities are 2 combined with a profit break-even point, that only comes about 3111 after numerous purchase episodes, then the management of 4 the relationship assumes even greater levels of importance. 5 Whereas the customer has always assumed primacy in the mind 6 of the marketer, it assumes even greater primacy in the mind of 7 the relationship marketer. 8 The customer primacy issue is not confined to relationships 9 along the supply chain. As more and more businesses subject 20111 their various divisions and departments to a competitive process 1 and internal business is no longer deemed to be a right, the 2 concept of internal marketing and internal relationships comes 3 to the forefront of thinking. In reality, supply chain relationships 4 are now often as much internal as external to the firm and, over 5 time, the distinction that is often made between internal and 6 external customers may erode. 7 Nor is customer primacy confined to the supply chain, internal 8 or external. The management of relationships with the external 9 environment assumes greater significance as the firm’s ‘publics’ 30111 – its geographic neighbours, its adversarial pressure groups, its 1 local, national and supra-national governments – become better 2 informed through electronic communication. Thus external rela- 3 tionship management becomes even more complex as the firm’s 4 publics become more powerful. 5 6 Some key relationship marketing theories 7 8 Despite the many definitions of relationship marketing, the 9 current literature referring to relationship marketing frameworks 40111 remains fragmented. It is lacking in the convergence of ideas 1 and theory generation. Gummesson (1996a) believes that: 2 3 Much of what is currently written about relationship 4 marketing is theory-less, a stack of fragmented philoso- 5 phies and observations which do not converge in the 6 direction of an emerging theory. Efforts to contribute to 7 theory are found in Christopher, Payne and Ballantyne 8 (1991) (other work that has contributed to this view 49111 include Millman 1993, Christopher, Payne and Ballantyne

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1111 1994, Cravens and Piercy 1994, Payne et al. 1995 and 2 Peck 1996); in Kotler (1992); and in Hunt and Morgan 3 (1994). (Gummesson 1996a) 4 5 In addition to the above authors highlighted by Gummesson, 6 the recent work of Doyle (1995) and Gummesson’s (1996a, 1996c) 7 30 Rs have arguably provided a contribution to relationship 8 marketing theory. 9 While traditionally marketing has been seen from the perspec- 1011 tive of managing relationships with customers, the theories of 1 relationship marketing put forward by Christopher, Payne and 2 Ballantyne (1991, 1994), Kotler (1992), Millman (1993), Hunt 3111 and Morgan (1994), Doyle (1995), (Peck 1996) and Gummesson 4 (1996c) view the management of customer relationships as 5 only part of relationship marketing. Their theories take a broader 6 view of marketing. They suggest that, in addition to formu- 7 lating marketing activities directly at customers, a company 8 should consider a range of parties including suppliers, internal 9 customers, institutions and intermediaries. These theories are 20111 thus redefining the scope and nature of relationship marketing. 1 This section now examines some of the key theories of rela- 2 tionship marketing. 3 4 The six markets model 5 6 The six markets model consists of six role-related domains 7 or ‘markets’ each representing dimensions of relationship 8 marketing and involving relationships with a number of parties 9 – organizations or individuals – who can potentially contribute, 30111 directly or indirectly, to an organization’s marketing effective- 1 ness (Peck 1996). In its first inception, the six markets model of 2 Christopher, Payne and Ballantyne (1991), centred on the 3 ‘internal market’. Peck (1996) explains that the six markets 4 model configuration with the internal market as the centre (see 5 Figure 9.1), emphasizes internal marketing’s role as an inte- 6 grator and facilitator, supporting the management of relation- 7 ships with parties within other ‘markets’. However, placing 8 ‘internal markets’ at the centre of relationship marketing moves 9 the emphasis away from the main issue in marketing – the 40111 ‘customer’. 1 This has led to a reshuffling of the six markets model, placing 2 the ‘customer’ at the centre of the model. Later versions of the 3 model by Millman (1993), Payne et al. (1995) and Peck (1996) 4 (Figure 9.3) have all placed customers rather than the focal 5 organization at the centre of the six markets model. In fact, 6 Christopher, Payne and Ballantyne have subsequently incorpo- 7 rated a customer focus into the paperback edition of their 1994 8 book entitled Relationship Marketing: Bring Quality, Customer 49111 Service and Marketing Together (see Figure 9.2).

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 Figure 9.1 8 Six markets model 9 (Christopher et al. 1991) 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 Figure 9.2 9 Six markets model 40111 (Christopher et al. 1994) 1 2 3 Since its reshuffle, the six markets model has been revised 4 again, by Peck (1996). Peck (1996) highlights three aspects of the 5 model that she believes would benefit from further considera- 6 tion. First, its current treatment of the ‘customer market’ does 7 not adequately distinguish between intermediaries as customers 8 and end users as customers. Secondly, it is limited in scope. 49111 According to Peck (1996) the Christopher, Payne and Ballantyne

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 Figure 9.3 6 A redrafting of the six markets 7 models (Peck 1996) 8 9 20111 (1994) version of the six markets model makes inadequate provi- 1 sion for some of the more sophisticated forms of strategic 2 alliance. That is those alliances that go beyond the realms of 3 ‘supplier’ relationships – including joint development of projects 4 between competitors and equity sharing joint ventures (Cravens 5 and Piercy 1994). 6 Thirdly, the model aims to provide a strategic overview of 7 relationship marketing, yet it encompasses tactical rather than 8 strategic elements to ‘recruitment’ and ‘referral’ markets. Peck 9 (1996) argues that although these are both important opportu- 30111 nities they should be referred to on a tactical rather than strategic 1 level. She addressed these limitations in her redrafting of the six 2 markets model in Figure 9.3. 3 It is essential that academics and practitioners realize the 4 purpose of the six markets model. It provides the basis of a 5 simple framework to convey the complex reality of relationship 6 marketing. Unlike Gummesson’s (1996c) 30Rs approach, it does 7 not attempt a detailed identification of individual relationship 8 forms or parties. Peck (1996) argued that these are time- and 9 situation-specific. The model aims to provide a strategic overview 40111 of relationship marketing’s scope, nature and purpose. 1 2 Relational exchanges in relationship marketing 3 4 Morgan and Hunt (1994) define the scope of relationship market- 5 ing through their ‘relational exchange’ approach to relationship 6 marketing. They make a positive distinction between relational 7 exchange (relationship marketing) which ‘traces to previous 8 agreements [and] . . . is longer in duration, reflecting an ongoing 49111 process’ (Dwyer, Schurr and Oh 1987) in contrast to discrete

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1111 transactions (transactional marketing) which have a ‘distinct 2 beginning, short duration and sharp ending by performance’. 3 In their conceptualization of relationship marketing, Morgan 4 and Hunt (1994) place the focal firm at the centre of relational 5 exchanges. They identify four categories of relational exchange 6 that occur with the firm. These are supplier, lateral, internal and 7 buyer partnerships. In addition, Morgan and Hunt (1994) have 8 broken down their conceptualization of relationship marketing 9 further, identifying ten specific types of relationships. The above 1011 are shown in Figure 9.4. 1 2 The core firm and its partnerships 3111 4 Doyle (1995) suggested a general framework for relationship 5 marketing which integrates what he believes are the key concepts 6 in relationship marketing; core capabilities, strategic intent and 7 value creation. Doyle’s model describes four types of networks. 8 The first two types of network relationships are ‘supplier partner- 9 ships’ and ‘customer relationships’, which together comprise the 20111 firm’s supply chain. These include relationships with suppliers of 1 raw materials, components, services, final customers and channel 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 9.4 The relational exchanges in relationship marketing (Morgan and Hunt 1994)

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1111 partners. There are two types of relationships that Doyle (1995) 2 suggests occur outside the supply chain; these are ‘external part- 3 nerships’ and ‘internal partnerships’. External partnerships occur 4 with competitors, governments and through strategic alliances. 5 Internal partnerships occur with stakeholders including employ- 6 ees, functional departments and other SBUs within an organiza- 7 tion. Doyle’s framework is shown in Figure 9.5. 8 9 The 30Rs approach to relationship marketing 1011 1 At the core of Gummesson’s (1996a, 1996c, 1996d) 30Rs approach 2 to relationship marketing is the identification of 30 tangible 3111 relationships that he claims exist in businesses and other organi- 4 zations. 5 Gummesson’s (1996c) 30 relationships are grouped into four 6 categories of relationships: classic market relationships; special 7 market relationships; mega relationships; and nano relation- 8 ships. Gummesson (1996c) describes the first two categories as 9 market relationships. These are relationships between suppliers, 20111 customers, competitors and others who operate in the market. 1 He believes that they constitute the basis for marketing; they are 2 externally orientated and apply to the market proper. 3 Some relationships are concerned with both consumers and 4 other organizations, while others focus on either consumers or 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 9.5 The core firm and its partnerships (Doyle 1995)

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1111 they are interorganizational relationships. The latter two cate- 2 gories are non-market relationships that indirectly influence the 3 efficiency of the market relationships. 4 Figure 6 shows how Gummesson’s relationships are connected 5 and the dependencies that should be considered when a 6 company organizes its marketing. In Figure 9.6 the special market 7 relationships and classic market relationships constitute the 8 market relationships. 9 The inner and outer sections represent the non-market rela- 1011 tionships. Gummesson (1996c) suggests that the nano relation- 1 ships are the nucleus and together with mega relationships they 2 constitute the necessary conditions for the market relationships. 3111 The argument for the 30Rs approach is that ‘the philosophy 4 of relationship marketing has to be converted into more tangible 5 and systematically defined relationships that can become part of 6 a company’s marketing planning’ (Gummesson 1993). In this 7 approach, the identification of individual relationship forms is 8 not only based on specific parties, it also takes into account 9 the content, form and conduct of relationships, which makes 20111 Gummesson’s approach unique. However, Peck (1996) argues 1 that a detailed identification of individual relationship forms or 2 parties is not possible, as they are time- and situation-specific. 3 A criticism made by Grönroos (1994) regarding the marketing 4 mix is that ‘a list never includes all relevant elements, it does 5 not fit every situation and it becomes obsolete’. It is question- 6 able whether Gummesson’s list of 30 relationships includes all 7 relevant elements, whether it fits every situation and whether it 8 will become obsolete. In Gummesson’s (1996c) defence he does 9 not claim that the 30Rs are the ‘final classification’. Welcoming 30111 further research, he argues for the identification of more rela- 1 tionships, the condensing of them into fewer classifications, or 2 the finding of more pertinent classifications. 3 4 5 6 7 8 9 40111 1 2 3 4 5 Figure 9.6 6 Connections and dependencies 7 between Gummesson’s 30Rs 8 (adapted from Gummesson 49111 1996c)

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1111 In fairness, Gummesson’s 30Rs approach provides manage- 2 ment with a list of relationship forms that can aid managerial 3 decision-making. It brings forward several forms of relationships 4 to which managers can relate. It must be borne in mind that it 5 is not a definitive list of relationship forms but provides a useful 6 insight into relationship marketing’s nature and scope. 7 8 A general framework for relationship marketing 9 1011 The new theories of relationship marketing discussed have some 1 interesting similarities. They acknowledge four main categories 2 of relationships in which a firm is involved. First, a firm has 3111 relationships with its customers; called ‘customer markets’ in 4 Christopher, Payne and Ballantyne’s (1994) and Millman’s (1993) 5 versions of the six markets model and simply ‘customers’ in 6 Peck’s 1996 version; called ‘buyer partnerships’ in Hunt and 7 Morgan’s work; called ‘customer partnerships’ in Doyle’s frame- 8 work; is part of the ‘immediate environment’ in Kotler’s (1992) 9 total marketing approach and; is closely related to Gummesson’s 20111 ‘classic market relationships’ in the 30Rs approach. 1 Secondly, a firm has relationships with its suppliers, and 2 again there are similarities between the authors’ frameworks. 3 Christopher, Payne and Ballantyne (1994) and Millman’s (1993) 4 versions of the six markets model have ‘supplier markets’, while 5 Peck has ‘suppliers’; in both Doyle’s and Hunt and Morgan’s 6 frameworks they have ‘supplier partnerships’; suppliers are part 7 of Kotler’s (1992) ‘immediate environment’ and are closely 8 related to Gummesson’s ‘special market relationships’. Both 9 customer and supplier relationships are within the supply chain 30111 (Doyle 1995) or are what Gummesson (1996c) calls market rela- 1 tionships and Kotler (1992) calls the ‘immediate environment’. 2 Thirdly, a firm has external relationships, relationships 3 with parties outside the supply chain (Doyle 1996) or what 4 Gummesson (1996c) describes as non-market relationships. The 5 six markets model has three categories of external relationships: 6 Christopher, Payne and Ballantyne (1994) and Millman’s (1993) 7 have ‘influence markets’, ‘referral markets’ and ‘employee 8 markets’ (‘recruitment market’ in Millman’s case) while Peck 9 differs again with ‘alliance’, ‘influencer’ and ‘intermediary’. 40111 External relationships are part of Kotler’s (1992) ‘macroenviron- 1 ment’ and called ‘lateral partnerships’, ‘external partnerships’ 2 and ‘mega relationships’ in Hunt and Morgan’s (1994), Doyle’s 3 (1995) and Gummesson’s (1996c) frameworks, respectively. 4 Finally, a firm has internal relationships, relationships within 5 its employee groups, departments and SBUs. Christopher, Payne 6 and Ballantyne (1994) and Millman (1993) have ‘internal markets’ 7 while Peck has just ‘internal’. Kotler (1992) includes relation- 8 ships with employees in his approach. Hunt and Morgan 49111 (1994) and Doyle (1995) both look at ‘internal partnerships’ and

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1111 Gummesson’s (1996) frameworks includes ‘nano relationships’. 2 Internal relationships are also outside the supply chain (Doyle 3 1996) or are what Gummesson (1996c) describes as non-market 4 relationships. Non-market relationships (external and internal) 5 are believed to indirectly influence the supply chain/market rela- 6 tionships (Doyle 1995; Gummesson 1996c; Peck 1996). 7 This comparison of the frameworks developed by each of the 8 authors above can be summarized in tabular form and this is 9 shown in Table 9.1 below. 1011 It can be seen that the theories and ideas for a relationship 1 marketing framework appear to be converging towards some 2 consensus and thus a general theory of relationship marketing. 3111 The four categories of relationships that have emerged from the 4 literature that either directly or indirectly influence the success 5 of a firm are: 6 7 • Customer relationships 8 • Supplier relationships 9 20111 • External relationships 1 • Internal relationships. 2 3 4 Transactional versus relationship marketing 5 The relationship marketing approach is concerned with interac- 6 tion, collaboration, customer service, processes and quality rather 7 than just simply price, place, promotion and the product. The 8 foci of these two approaches are summarized in Table 9.2 below 9 (adapted from Christopher et al. 1994). 30111 It is in the context of this comparison that the essential link 1 between relationship marketing and quality management can be 2 seen. Strong buyer–supplier relationships are an essential prereq- 3 uisite for such systems as total quality management and just in 4 time. Quite simply, they would be virtually impossible to operate 5 in a totally transactional approach. 6 7 8 Stages in the relationship 9 The stages that a relationship passes through can be viewed from 40111 two similar perspectives. Ford (1990) suggests that a relation- 1 ship goes through a series of five stages: 2 3 • The pre-relationships stage 4 • The early stage 5 6 • The development stage 7 • The long term stage 8 49111 • The final stage.

●●● 178 1111 2 3 4 5 6 7 Gummesson relationship marketing’ 8 a 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 Hunt (1994) ‘The firm (1996c) 6 7 8 a 9 30111 1 2 3 4 5 6 7 8 9 40111 1 a 2 (1991 and 1994) partnerships’ approach to 3 Referralmarkets environmentEmployee markets (recruitment) Macro-markets Referral Recruitment markets Influencer Intermediary 4 5 6 A comparison of approaches/frameworks which define the scope relationship marketing 7 8 These are all variations of the Christopher, Payne and Ballantyne (1991, 1994) six markets model Author/ Christopher, Kotler (1992) Millman Morgan and Doyle (1995) Peck (1996) a categories Ballantyne and its ‘The 30Rs ‘The its categories Ballantyne and relationship Payne and Customerrelationships markets CustomerSupplierrelationships (1993) markets ImmediateExternal Supplier environmentrelationships markets Customer markets ‘Influence’ Buyer partnerships partnerships markets Customer Supplier Influence markets Customer partnerships Supplier partnerships Classic market Lateral partnerships relationships Supplier partnerships External Suppliers Alliance Special market relationships relationships Mega Internalrelationships markets Internal markets Internal partnerships Internal partnerships Internal Internal relationships Nano

49111 Table 9.1 Food Supply Chain Management

1111 Transactional marketing Relationship marketing 2 Focus on a single sale Focus on customer retention 3 Orientation on product features Orientation on product benefits 4 Short time scale Long time scale 5 Little emphasis on customer service High customer service emphasis 6 Limited customer commitment High customer commitment 7 Moderate customer contact High customer contact 8 Quality is primarily the concern of production Quality the concern of all 9 Orders tend to be placed on a volume basis Orders tend to be placed on a time basis 1011 Source: Adapted from Christopher et al. 1994 1 2 3111 Table 9.2 Transactional versus relationship marketing 4 5 6 As the relationship passes from the initial stages of ‘courtship’ 7 to the final stage of ‘institutionalization’, the experience of the par- 8 ties increases along with levels of trust, commitment and promise. 9 There is a parallel reduction in the levels of uncertainty, ‘distance’ 20111 in terms of social, geographical, time and technological factors. 1 A similar perspective on the stages of the relationship is 2 provided by Payne (2000) with his ‘relationship ladder’. This is 3 essentially a series of six stages of customer loyalty as follows: 4 5 • Prospect 6 • Customer 7 8 • Client 9 • Supporter 30111 1 • Advocate 2 • Partner. 3 4 The early stages have an emphasis on new customers, e.g. 5 customer catching, whereas the later stages emphasize the devel- 6 opment and enhancement of relationships, e.g. customer keeping. 7 8 Conclusion 9 40111 This chapter has traced the development of what is known as 1 relationship marketing and how it challenges the previously 2 almost unassailable four Ps view of marketing developed since 3 the 1950s. Relationships between the firm, its suppliers (internal 4 and external) and its public are becoming increasingly less adver- 5 sarial as all parties derive benefits. It is the mutual benefit of the 6 parties that provide the environment for relationships to flourish. 7 All parties increasingly become mutually interdependent as exit 8 barriers induce costs and diseconomies. The more complex the 49111 relationships then the more complex they are to disentangle.

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1111 As the importance of relationship marketing and relationship 2 management becomes paramount with the concept of lifetime 3 value becoming more and more understood, it is becoming clear 4 that relationship marketing, which is increasingly developing its 5 own theoretical constructs, is here to stay and will eventually 6 supersede many of the historical theories of the marketing 7 concept. 8 Nevertheless, relationship marketing is founded on the very 9 bedrock of marketing itself – namely the primacy of the customer. 1011 Perhaps in traditional marketing the customer is king: in rela- 1 tionship marketing the customer is God. 2 The following (fictional) case study of ‘Manse Foods’ empha- 3111 sizes the importance of establishing and developing sound 4 relationships with the customer base. 5 6 7 Case study: Manse Foods plc 8 9 Manse Foods plc is a large dairy products Manse operates on a very autonomous basis 20111 division of a major European food proces- from its parent company. 1 sing company. Manse’s parent company Manse Foods believes that focusing on 2 Cowlersley Brands plc is domiciled in the customer needs is a crucial part of its busi- 3 UK where it is listed on the UK stock ness so much so that it is a matter of policy 4 exchange. Cowlersley Brands has a world- to forge stronger and closer relationships. 5 wide turnover in excess of £600 million with Manse has been monitoring its interaction 6 the UK and Central and Western Europe with its customers as part of the company’s 7 accounting for some 73% of turnover. Manse, customer process improvement scheme and 8 with a turnover of some £200 million, is a it classifies its customers into three types 9 major player in the dairy products market namely: 30111 producing products in various forms for sale 1 to food processors for use in both consumer • key customers 2 and catering market dairy products. • regular customers 3 The vast majority of Manse’s assets are 4 based in Europe with processing plants in the • spot customers. 5 UK, France, Germany, Spain, Italy, Austria, 6 Denmark, Finland and the Netherlands. In Key customers are the most important, 7 addition it operates in a series of joint ven- followed by regular customers, with spot 8 tures with local dairy foods processors in customers (typically serviced by telesales) 9 the USA, Canada, Brazil and South Africa. having the least importance. Such a classifi- 40111 Manse has customer relationships in most cation illustrates a continuum between 1 Central and Western European countries and relationship marketing for the key customers 2 it services its markets from the countries and transactional marketing for the spot 3 listed above. For example, Portugal is ser- customers, the regular customers being posi- 4 viced from Spain, Czech Republic, Slovakia tioned as some kind of hybrid of the two 5 and Hungary from Austria, Poland from approaches. All key customers for Europe 6 Germany, Norway from Denmark and so on. are dealt with from the corporate head- 7 The operations of Manse Foods are highly quarters in the UK. Outside of Europe all 8 integrated and controlled in most cases from customers are dealt with by the joint venture 49111 a large corporate headquarters in the UK. companies in various parts of the world.

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1111 The exception to this is where there is a operating division in each of the European 2 global customer relationship, that crosses all countries where Manse operates. Spot 3 international boundaries, and thus, those customers are serviced locally in each 4 customers are effectively serviced from the European country, often through a national 5 UK corporate headquarters for strategic telesales operation. 6 customer decisions. The main characteristics of each of these 7 Regular customers are serviced either types is shown in Figure 9.7. 8 from the UK headquarters or from the 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 9.7 Manse Foods’ three main customer types

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1111 To illustrate the differences in the inter- type in Figure 9.7 with key customers being 2 action between departments and customers, involved in the highest levels of interaction 3 Figures 9.8 to 9.10 show the mapping out of and spot customers involved in the lowest. 4 the relationships according to the customer 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 Figure 9.8 5 Buyer–supplier interaction. 6 Manse Foods and Customer 7 One (a key customer 8 accounting for £24m of 9 Manse’s sales) 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 Figure 9.9 Customer Two: 8 regular customer accounting 49111 for £1m of Manse’s sales

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1111 2 3 4 5 6 7 8 Figure 9.10 9 Telesales customer accounting 1011 for £8–30K of Manse’s sales 1 2 3111 References 4 5 Borden, N.H. (1964) The concept of the marketing mix. Journal 6 of Advertising Research, June, pp. 2–7. 7 Carratu, V. (1987) Commercial counterfeiting. In J. Murphy (eds), 8 Branding: A Key Marketing Tool. London: Macmillan. 9 Christopher M., Payne A. and Ballantyne D. (1991) Relationship 20111 Marketing. Oxford: Butterworth–Heinemann. 1 Christopher M., Payne A. and Ballantyne D. (1994) Relationship 2 Marketing. Oxford: Butterworth–Heinemann. 3 Cravens D.W. and Piercy N.F. (1994) Relationships marketing 4 and collaborative networks in service organizations. Inter- 5 national Journal of Service Industry Management, 5 (5), pp. 39–53. 6 Doyle, P. (1995) Marketing in the New Millennium. European 7 Journal of Marketing, 29 (13), pp. 23–41. 8 Dwyer F.R., Schurr P.H. and Oh S. (1987) Developing 9 buyer–seller relationships. Journal of Marketing, 51 (April), pp. 30111 11–27. 1 Ford D.F. (1990) Understanding Business Markets: Interaction, 2 Relationship and Networks, for the Industrial Marketing and 3 Purchasing Group. London: Dryden Press. 4 Grönroos C. (1989) Defining marketing: a market-orientated 5 approach. Journal of Marketing, 23 (1), pp. 52–60. 6 Grönroos C. (1990) Service Management and Marketing. Managing 7 the Moments of Truth in Service Competition. Lexington, MA: 8 Free Press/Lexington Books. 9 Grönroos C. (1991) The marketing strategy continuum: towards 40111 a marketing concept for the 1990s. Management Decision, 29 1 (1), pp. 7–13. 2 Grönroos C. (1994) From marketing mix to relationship 3 marketing: towards a paradigm shift in marketing. Asia- 4 Australia Marketing Journal, 2 (1). 5 Grönroos C. (1996) Relationship marketing: strategic and tactical 6 implications. Management Decision, 34 (3), pp. 5–14. 7 Gummesson E. (1987) The new marketing: developing long 8 term interactive relationships. Long Range Planning, 20 (4), 49111 pp. 10–20.

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1111 Gummesson, E. (1993) Quality Management in Service Organiza- 2 tions. New York: International Service Quality Association 3 (ISQA) and St John’s University, p. 233–4. 4 Gummesson E. (1996a) Why relationship marketing is a para- 5 digm shift: some conclusion from the 30R approach. Presented 6 at the 1st Management and Decision Internet Conference on 7 Relationship Marketing, MCB Publishing. 8 Gummesson E. (1996b) Comments and Discussion. 1st Manage- 9 ment and Decision Internet Conference on Relationship 1011 Marketing, MCB Publishing. 1 Gummesson E. (1996c) Relationship marketing: from 4Ps to 2 30Rs. Preliminary translation from the English adaptation 3111 of Relationsmarknadsföring: Från 4P till 30R, Malmö: Liber- 4 Hermods, first published in Swedish in June 1995. 5 Gummesson E. (1996d) Relationship marketing and imaginary 6 organizations: a synthesis. European Journal of Marketing, 30 7 (2), p. 31–44. 8 McGarry E.D. (1950) Some functions of marketing reconsidered. 9 In Coc R. and Alderson W. (eds), Theory of Marketing, 20111 Homewood, IL: Richard D. Irwin, pp. 263–79. 1 Millman, A.F. (1993) The emerging concept of relationship 2 marketing. Proceedings from the 9th Annual IMP Conference, 3 Bath, 23–25 September. 4 Morgan R.D. and Hunt S.D. (1994) The commitment–trust theory 5 of relationship marketing. Journal of Marketing, 58 (July), pp. 6 20–38. 7 Hunt S.D. and Morgan R.M. (1994) Relationship marketing in 8 the era of network competition. Marketing Management, 5 (5), 9 pp. 18–28. 30111 Kotler P. (1992) It’s time for total marketing. Business Week, 1 Advance Executive Brief, vol. 2. 2 Payne A., Christopher M., Clark M. and Peck H. (eds) (1995) 3 Relationship Marketing for Competitive Advantage: Winning and 4 Keeping Customers. Oxford: Butterworth–Heinemann. 5 Payne A. (2000) Customer retention. In Cranfield School of 6 Management, Marketing Management: A Relationship Marketing 7 Perspective. London: Macmillan. 8 Peck H. (1996) Towards a framework for relationship marketing 9 – the six markets model revisited and revised. Marketing 40111 Education Group Conference (MEG), University of 1 Strathclyde, 8–12 July. 2 Sheth J.N and Parvatiyar A. (1995) The evolution of relationship 3 marketing. International Business Review, 4 (4), pp. 397–418. 4 5 6 7 8 49111

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1111 Activities 2 3 1. Select a product or service that you regularly purchase, i.e. 4 groceries, takeaway meals, petrol, drinks in a pub. Make a 5 calculation of your annual spend on these products or services 6 and for how many years you are likely to continue this 7 purchasing pattern. What then is the ‘lifetime value’ of your 8 custom with your supplier of these goods or services? 9 1011 2. Select an organization and its major supplier. How many 1 different relationships do you think you can identify in the 2 overall buyer–supplier relationship. Identify those that are the 3111 strongest and those that are the weakest. 4 3. Select an organization and map out all the relationships that 5 it has with its various ‘publics’. How can the organization try 6 to retain a positive relationship with those publics? 7 8 9 20111 Questions 1 2 1. Take any of the theories of relationship marketing in this 3 chapter. Examine how this theory might work in an organi- 4 zation of your choice. 5 2. Discuss the key differences between transactional and rela- 6 tionship marketing in any company of your choice. 7 8 3. How do the various stages in a buyer-supplier relationship of 9 your choice evolve? State those features of the relationship 30111 that increase and decrease as the relationship develops. 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 186 1111 CHAPTER 2 ●●●● 10 3 4 5 6 Human resource 7 8 9 1011 management in 1 2 3111 4 the extended 5 6 7 8 organization 9 20111 1 2 Lynette Harris 3 4 5 6 7 8 9 30111 Key objectives 1 2 • To develop an understanding of alternative approaches to 3 strategic human resource management 4 • To examine the dominance of flexibility in organizational 5 human resourcing strategies as 6 7 (a) a means of managing in a context of uncertainty, and 8 (b) the pursuit of a dual human resourcing strategy through 9 externalizing functions and services 40111 1 • To explore issues of employee commitment, development 2 and rewarding employee contribution in supply chains 3 • To consider the impact of external influences, such as the 4 political and economic context of the organization and, the 5 degree of regulation on human resourcing practices 6 7 • To examine the factors that can influence human resourcing 8 strategies in supply chain situations 49111 Food Supply Chain Management

1111 Introduction 2 3 Of all organizational strategies human resource management is 4 the most likely to be characterized by tensions and paradoxes 5 in its application. This can be particularly evident in organiza- 6 tional initiatives designed to obtain greater flexibility through 7 the use of external sources to supply services or goods, rather, 8 than provide these through a directly employed workforce. 9 What may make good commercial sense frequently challenges 1011 contemporary management thinking. For example, an employer 1 engaged in a supply relationship can be driven more by customer 2 demands to keep costs down than the need to develop positive 3111 employment relationships through a proper recognition and 4 reward of employee contribution. 5 The recession of the early 1980s led to pressures to reduce 6 overheads and a closer examination of personnel management’s 7 specialist contribution to the business (Guest 1982; Tyson and 8 Fell 1986). The concept of human resource management (HRM), 9 originating in the United States (Beer et al. 1984), claimed to offer 20111 an approach to the employment relationship that was radically 1 different from traditional personnel management. It is claimed 2 that the distinction between traditional personnel management 3 and HRM to lay in the latter’s strategic intent. Fundamental to 4 the new thinking was the emphasis on a greater integration of 5 human resource policies with wider business objectives and 6 between different human resourcing practices. 7 Due to a climate of economic uncertainty and increasing 8 competition, the trend since the 1980s has been for HR policies 9 to focus on adaptability and responsiveness to change rather 30111 than stability and continuity (Blyton and Turnbull 1992). This 1 shifted the focus away from the large internal labour markets 2 that had developed within organizations, which offered long 3 term job security with prospects for career advancement to a 4 directly employed workforce. To manage this uncertainty 5 employers increasingly aimed for lean and responsive organiza- 6 tional forms (Kinnie et al. 1999), through a variety of employ- 7 ment contracts, other than full-time permanent positions or, by 8 using alternative external sources for supplying services. 9 Encouraged by a management philosophy of ‘getting back 40111 to basics’, identified as an essential ingredient by Peters and 1 Waterman for excellence in company performance (1982), many 2 organizations reviewed their activities with the aim of returning 3 to their core competencies. This supported an increased use of 4 contracting out arrangements leading to the growth of the 5 ‘extended organization’, which Colling observes (2000) has been 6 one of the most significant and enduring outcomes of the shift 7 in balance to the dominance of the market economy in the 1980s. 8 Such extended organizational relationships focus attention on 49111 human resourcing practices in terms of their ability to provide

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1111 the ‘skills and behavioural flexibility necessary to support tighter 2 integration’ (Scarborough 1999). 3 This chapter will explore the operational context for strategic 4 human resource management and identify some of challenges 5 and constraints that exist in the development of positive and 6 progressive HR practices in supply chain management. 7 8 Alternative approaches to human resource management 9 1011 David Guest in a series of influential articles (1987, 1989, 1991) 1 defined HRM essentially as having four key policy aims. These 2 were identified as its strategic integration with business objec- 3111 tives, high quality, high employee commitment and flexibility. 4 In the 1980s, political, technological and demographic changes 5 in the operating environment led to strategic human resourcing 6 responses being frequently focused on the last of these four goals 7 – increased flexibility. The drivers for more flexible approaches 8 to the structure of work have stemmed from: 9 20111 • Economic pressures in an increasingly competitive and 1 volatile market. 2 3 • Uncertainty about demand, leading to uncertainty about 4 labour requirements. 5 • The demands of new technologies. 6 7 • A changing work force and new working patterns. 8 9 The difficulty in any analysis of flexibility, however, lies in iden- 30111 tifying exactly what we mean by it. Atkinson’s (1985) proposed 1 model of the ‘flexible firm’ depicts three sorts of flexibility to 2 meet varying levels of demand. These are functional flexibility, 3 through developing and utilizing the skills of the core work- 4 force, numerical flexibility, achieved by adjusting the numbers 5 of the directly employed, and, financial flexibility, also known as 6 distancing, based on paying a fee rather than a wage through 7 arrangements such as outsourcing and the use of subcontracting. 8 A fourth form of flexibility, not present in Atkinson’s model, 9 is ‘temporal’ flexibility, which is concerned with when work is 40111 carried out, evident in the growth of alternative shift patterns 1 and annual hours contracts designed to accommodate ‘peaks and 2 troughs’ in demand. 3 As already identified, the use of sub-contracting, strategic 4 outsourcing, supply chain regimes and joint ventures has prolif- 5 erated in recent years (Mabey et al. 1998), in both the UK’s private 6 and public sector. The 1998 Workplace Employee Relations 7 Survey (WERS) reported that 90% of employers contract out 8 one or more services and a quarter of all employers reported a 49111 growing use of sub-contracting (Cully et al. 1998). The type of

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1111 contractual relationship that is adopted will influence approaches 2 to employment practices (Felstead 1993). Colling (2000) suggests 3 that at one end of the spectrum is an emphasis on competition 4 between providers and a scrutiny of contractual terms which 5 will tend to lead to low trust and distanced relationships, at the 6 other are ‘engaged’ relationships where greater security is built 7 into the contract. For Beaumont et al. (1996) such relationships 8 are likely to be characterized by some element of mutual depen- 9 dency with opportunities to take a longer term approach to 1011 human resourcing considerations (for further discussion see 1 section on employee commitment). 2 The extremes of these two approaches highlight one of the 3111 tensions that exist within human resource management, 4 described by Storey (1992) as the ‘hard and soft versions’ of 5 HRM. The stereotype of the ‘hard’ or instrumental approach is 6 of a rational outcome model driven by a business strategy of 7 obtaining competitive advantage through labour cost minimiza- 8 tion. In contrast the ‘soft’ or humanistic approach embraces the 9 concept of mutuality and is based on developing reciprocal 20111 relationships through the strategic management of people, but 1 not necessarily at their expense. Inherent in this second approach 2 is the development of ‘a highly committed and capable work- 3 force, using an integrated array of cultural, structural and 4 personnel techniques’ (Storey 1995). This requires ‘a distinctive 5 approach to human resource management’ described by Wood 6 and Albanese (1995) as ‘high commitment management’ with 7 the following basic characteristics: 8 9 • all managers are concerned with human resourcing issues; 30111 1 • human resourcing issues are central in all strategic decision 2 making; 3 • a strong culture which encourages employees to be highly 4 committed to the organization and to continuous improve- 5 ment; 6 7 • a focus on high trust, team working and willing co-operation; 8 • an emphasis on employee development and continually devel- 9 oping skills to achieve both personal growth and task 40111 flexibility. 1 2 (Adapted from Watson 1999.) 3 4 In practice, the evidence is that differences in management style 5 and approaches to human resourcing between one organization 6 and another are shaped by such factors as size, the nature and 7 availability of labour, its employee relations’ traditions and the 8 presence, or otherwise, of a trade union (Gratton et al.1999). It 49111 will be argued that in a supply chain these internal differences

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1111 become even more significant. The impact of the prevailing 2 external business environment on the nature and growth of oper- 3 ational networks, and their employment practices, should not be 4 overlooked or underestimated. 5 6 HRM and its external context 7 8 The economic, political and social environment are a major influ- 9 ence on the way outsourcing relationships are approached and 1011 developed. The change of direction in the UK’s political and 1 regulatory framework since 1997 will arguably create a climate 2 more conducive to the development of positive approaches to 3111 HR issues in supply chain relationships than previously existed. 4 5 The regulatory framework 6 7 HR practices are heavily influenced by levels of employment 8 regulation (Harris 1999) and we are currently experiencing a shift 9 to increased employment rights. Until recently UK businesses 20111 enjoyed relative freedoms in their ‘hiring and firing’ practices 1 compared to their European counterparts (Grubb and Wells 2 1993). Employers, regardless of the size of their workforce, are 3 having to re-examine their existing employment processes to take 4 account of changes in employment law. There continues to be an 5 ‘incoming tide’ (Ewing 1993) of provisions from EC law which 6 has advanced the employment protection legislation of the 1970s 7 and is supported by the present government’s commitment to the 8 provision of minimum employment standards (Gennard 1998). 9 Since October 1998 there has been legislation to regulate 30111 working hours, the introduction of a national minimum wage 1 and the Employment Relations Act 1999 (ERA), which intro- 2 duced a wide range of new individual and collective rights. More 3 legislation is on its way and, from October 2000, UK courts and 4 tribunals must take into account decisions of the European Court 5 of Human Rights or the Commission of Human Rights. Other 6 substantial changes are taking place which will have an impact 7 on HR standards and practices. For example, the replacement 8 of compulsory competitive tendering by ‘Best Value’ in local 9 government will broaden measures of effectiveness away from 40111 just measuring the costs of providing a service. 1 If UK employers operating in a deregulated labour market 2 demonstrated little innovation in their use of flexible working 3 practices, (Brewster 1998) increased levels of employment law 4 could be the catalyst for more imaginative approaches to work 5 force flexibility. The dominance of ‘numerical flexibility’ as a cost 6 minimization strategy for coping with uncertainty becomes less 7 attractive when it is more difficult and potentially expensive to 8 dismiss employees. One possible outcome is a greater value being 49111 placed on functional flexibility, leading to longer term human

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1111 resourcing strategies, concerned with developing the skills of the 2 existing workforce. Imposing minimum standards through the 3 law is, however, only part of the solution in developing progres- 4 sive HR standards. Imposing statutory requirements can all too 5 easily result in compliance rather than real commitment with 6 the minimum becoming the norm. 7 The legal framework needs to be actively supported by 8 employer led initiatives such as the Race for Equality Campaign 9 described in the following illustration. 1011 1 Case study – setting standards for equality of opportunity 2 3111 The Chair of the Better Regulation Task recently announced programmes to tackle 4 Force’s anti-discrimination board has racism under the RfO banner. These embrace 5 reported that the Race for Opportunity (RfO) community relations initiatives, secondments 6 campaign is the least supported of the and senior management attitude training. At 7 Business in the Community initiatives. The the launch of these initiatives the Chairman 8 aim of the RfO is to develop more proactive of the Granada Group issued a strong warn- 9 measures which would include the creation ing against corporate back slapping as only 20111 of an equal opportunities kite mark for firms 140 firms had so far signed up for the cam- 1 supply chains, a change in IIP requirements paign which just wasn’t enough. He observed 2 and more proactive encouragement from the that ‘for many employers tackling discrimi- 3 Treasury. nation was a bit like going on a diet – they are 4 Four High Street banks and six other large all very keen to start but not this week.’ 5 employers including British Telecom (BT), (Source: News and Analysis, People 6 Littlewoods, Sainsbury and Granada have Management, 16 September 1999) 7 8 9 30111 Changes in employment 1 2 Greater innovation in approaches to human resourcing will also 3 be driven by changes in the nature of work, the composition of 4 the workforce, new patterns of participation and the ongoing 5 shift of jobs from the manufacturing to the service sector. The 6 service sector now provides 75% of all jobs in the UK compared 7 to less than 17% in manufacturing. 8 The sector is also the second largest employer of female labour, 9 with women making up 54% of its workforce (LMST 2000). This 40111 gender balance and the prevalence of part time working is accom- 1 panied by the largest proportion of workplaces with low pay 2 and some of the lowest reported levels of productivity (Cully et 3 al. 1998). It was anticipated that the introduction of the minimum 4 wage in April 1999 would have the greatest impact on hotel 5 and catering establishments and this was borne out by recent 6 research undertaken by the author into the impact of employ- 7 ment regulation on SMEs. In an analysis of the nature of enquiries 8 of 200 firms to an ACAS public enquiry point in June 1999, 49111 90% enquiries concerning the minimum wage came from firms

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1111 employing between 25 to 49 employees in the hotel and catering 2 industry (Harris 2000). 3 Suppliers to larger companies are frequently smaller companies 4 who have become increasingly important as a source of employ- 5 ment opportunities in the UK (Storey 1994). Firms employing 6 50 employees or less now provide 45% of non-government 7 employment (LMQR 1999). The approach to human resource 8 management in these SMEs tends to be very different from those 9 of their larger customers. Research evidence indicates that SMEs 1011 are characterized by their preference for informality (Matlay 1999) 1 and a ‘reactive’ model (Lane 1994) in dealing with employment 2 issues. It is argued that the sustainability of this approach is 3111 challenged by the increase in regulation, but smaller firms face 4 particular challenges in interpreting and applying employment 5 legislation without internal HR expertise. 6 In conclusion, across the private and public sector, the 7 extended organization looks set to increase but it is argued that 8 a changing regulatory framework will reinforce the importance 9 of seeking the means of securing longer term employee capa- 20111 bility and commitment in supplier arrangements. 1 2 The quest for employee commitment 3 4 Promoting the link between organizational performance and 5 employee commitment is a key concept in the literature on 6 human resource management (Walton 1985; Guest 1987). At the 7 heart of strategic HRM is the notion that to be successful there 8 must be a climate where employees can positively identify with 9 the goals of the organization. 30111 Wood’s study (1995) of employment practices suggests that a 1 distinction can be made between the commitment and the perfor- 2 mance management approach. The first of these focuses on 3 progression, training and development and internal forms of 4 flexibility which Hendry observes (1995) is similar to the tradi- 5 tional ‘internal labour market’, although lower on job security. 6 By comparison, the performance management approach is domi- 7 nated by the concept of increasing commitment bought through 8 financial incentives linked to measurable outcomes and an 9 emphasis on achieving high performance tied into the strategic 40111 objectives of the organization. 1 There is frequently a visible lack of congruence between 2 employment practices, which use the language of development, 3 yet apply hard measures when it comes to the allocation of 4 rewards. This can erode rather than improve levels of commit- 5 ment. In supply chain relationships where customer demands 6 limit suppliers’ internal organizational autonomy, the problems 7 of meeting the expectations of the work force can be particularly 8 acute. This is illustrated in the following, fictional, case study of 49111 a pay dispute at one large food distribution company.

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1111 Case study – the pay dispute at Friesco TGM Ltd 2 3 Friesco TGM Ltd is part of the TGM Group plus a lump sum of £100 to all employees 4 and has provided a distribution service for who achieved the required changes for the 5 chilled and ambient food to a very large and new seven day working patterns. 6 well respected food retailer, Gilbertsons, for The company stressed that its inability to 7 over 20 years. It employs some 1400 people, pay more made it impossible to increase this 8 mainly as drivers, warehouse operatives and pay offer so it was put to a ballot and rejected 9 operational administration. The T&GWU by 95% of the workforce. The disagreement 1011 has full recognition rights with Friesco and between the parties was further inflamed by 1 there is a joint agreement on pay and condi- recent press reports over the level of certain 2 tions covering all hourly paid and salaried executive pay remuneration packages which 3111 staff. Industrial relations within the had included the Chief Executive of TGM 4 company had traditionally been very good Ltd and had drawn adverse comment from 5 with highly co-operative working relation- the Director of the Confederation of British 6 ships between management and employees. Industry (CBI). 7 Eighteen months ago the Friesco contract The union’s view was that it was wrong 8 with Gilbertsons changed from a cost plus that employees should be urged to demon- 9 management fee arrangement to a fixed strate restraint and bear the brunt of any cost 20111 price arrangement which is periodically cutting exercise if company directors were 1 renegotiated. Due to increasing competition not leading by example. 2 in food retailing the customer has become The company’s case was that insufficient 3 increasingly concerned with seeking value progress had been made on achieving the 4 for money and has unfavourably compared necessary savings, if they were to stand a 5 its distribution costs with those of its major chance of retaining the Gilbertsons contract, 6 competitors. As a result the present 3-year without which the future existence of Friesco 7 contract with Gilbertsons was agreed on the was in jeopardy. Any distribution company 8 basis that Friesco’s distribution costs would was by its nature labour intensive and at 9 be cut by 10% for every pound of sales by Friesco labour costs amounted to 75% of its 30111 the end of the contract period. overall operating costs. It was, therefore, crit- 1 The new contract had considerable impli- ical that any wage award was self-financing 2 cations for staffing levels and working through improved productivity. Distribution 3 arrangements at Friesco which resulted in a and food retailing were extremely compet- 4 series of cost cutting initiatives and discus- itive and their current contract with 5 sions on new methods of working with the Gilbertsons would be one that that Friesco’s 6 trade union since the new contract was intro- competitors would be very pleased to gain. 7 duced. As well as reaching a new agreement The union’s reaction was to inform the 8 on seven day work and reducing drivers’ company that feelings among the workforce 9 overtime payments, two depots had been were running so high that their intention 40111 closed with redundancies among managerial was to ballot the workforce over taking 1 and support staff, although most drivers had industrial action in the form of either an 2 been transferred to work from other, albeit overtime ban or strike action. 3 less convenient, depots. On the grounds of A useful exercise would be the examina- 4 the membership’s considerable co-operation tion of the key issues raised by this dispute 5 over changes to working practices, the union and the identification of alternative solutions 6 submitted a claim for a substantial pay to the problems that the company and the 7 increase from 1 April. In response the union, are facing. 8 company offered a 1.5% increase in basic pay 49111

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1111 This case study illustrates the danger that suppliers can face 2 ‘the worst of all worlds’ – tied into contractual performance indi- 3 cators which not only limit organizational freedoms but also 4 reinforce a focus on short term goals. This has implications for 5 the nature of the psychological contract that exist between 6 employer and employee. The growing literature on the psycho- 7 logical contract suggests that there are broadly two types of 8 contracts (Rousseau 1996). These can be summarized as: 9 1011 • relational contracts that are built on long term relationships, 1 based on an implicit mutual commitment, in which Herriot 2 and Pemberton (1996, p. 762) observe ‘perceptions of equity 3111 and honour’ become more pronounced over time; 4 • transactional contracts based on a purely instrumental 5 exchange with a focus on outcomes and distributive justice. 6 7 Kessler and Undy (1996) suggest that in the process of creating 8 ‘leaner organizations’ there are three particular areas of concern 9 – the loss of jobs for life, a breakdown in degrees of loyalty from 20111 employees, due to a loss of trust in the employer’s commitment 1 to honour their side of the bargain, and a lack of employee 2 involvement. Flatter structures erode the potential for career 3 progression which leads to employees adjusting their expecta- 4 tions of a long term organizational future. This visible lack of a 5 longer term investment in the workforce can force employees 6 into a more transactional psychological contract with their 7 employers. 8 Kinnie et al. (1999, p. 223) observes how the management of 9 the employment relationship in supply firms is influenced by 30111 the actions of customers and competitors. Three key pressures 1 are identified of ‘time compression, uncertainty and continuous 2 change’. Competing for orders and raised customer expectations 3 can result in constant change. The organizational response to 4 these external pressures is to reduce costs often at the expense 5 of the terms and conditions offered to the workforce. 6 Figure 10.1 illustrates how this ongoing quest for ‘competitive 7 flexibility’ (Grahl and Teague 1992) through controlling and 8 reducing labour costs can result in eroding employee trust and 9 commitment and the positive aspects of the psychological 40111 contract between employer and employee. 1 The alternative approach is one that Grahl and Teague identify 2 as ‘constructive flexibility’, where such conflict is reduced by 3 identifying areas of mutual benefit to increase trust and collabo- 4 ration. The aim is to develop closer working to reduce the adverse 5 consequences of maximizing external competition, on both 6 employers and employees, at the receiving end of the process. In 7 human resourcing terms this can involve a radical rethink of 8 approaches to recruitment and selection, training and develop- 49111 ment, rewards and employee involvement and participation.

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 Figure 10.1 4 Competitive flexibility, 5 its impact on employee 6 commitment (Beaver and 7 Harris 1996) 8 9 20111 To summarize, there are potentially real gains to be made from 1 a highly committed workforce but to realize these individuals 2 have to perceive that an acceptable level of reciprocity exists in 3 the employment relationship. 4 5 Developing and sharing knowledge 6 7 The evidence in much of the literature on supplier firms, in 8 supply chain is that the transfer of expertise is a ‘one directional’ 9 process with the competences of smaller firms being absorbed by 30111 more powerful customers (Turnbull 1991; Harland 1996). Hunter 1 et al. (1996) provide a more positive perspective suggesting that 2 there could be a significant transfer of knowledge from buyer to 3 supplier though development activities and concerns for quality 4 and continuous improvement across the business. This is illus- 5 trated in the following example of practice at Mars Four Square 6 division. 7 8 9 Case study – Mars Four Square division: mutuality in action 40111 1 The Four Square division of Mars is a distributor staff are not only given technical 2 supplier of drinks systems. At Four Square training in servicing, fault finding and 3 there is a seven-step programme to develop cleaning but also a lot of sales and customer 4 all suppliers to be suppliers of excellence. care training. This is done intensively 5 Relevant copies of the training programme initially and then through refresher up-date 6 are available on the range of drinks prod- courses. Distributors are also trained to 7 ucts to suppliers with personal notes to help clients and consumers in the use of 8 make people aware of the formal training the product (either on Four Square’s or 49111 courses that area available. Drink Systems the client’s premises) and such training is

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1111 included in the price of the contract from by learning new techniques from their 2 the outset. Detailed manuals, technical suppliers. 3 bulletins and newsletters supplement face (Source: People Management 4 to face events. Four Square also benefit September 1992, p. 29) 5 6 7 It is a logical step for total quality management to be applied 8 through the extended organization and some of the issues that 9 arise when these concerns are not addressed in supply rela- 1011 tionship are described in the following, fictional, case study. 1 2 3111 Case study: outsourcing the delivery service at Burneys Breweries 4 5 Burneys is a major UK brewing company were felt to be ‘teething troubles’ and that the 6 that decided to outsource its beer deliveries service would settle down but they persisted. 7 to public houses in 1997, the main objective Burneys spent considerable amounts of time 8 being to cut core business costs. The delivery during the 20 months of the new delivery 9 service had become expensive to operate, arrangements resolving individual com- 20111 the draymen’s pay included extensive plus plaints from their customers and trying to 1 payments, negotiated by the union over the sort out the problems with Team Services. 2 years, and, it was felt that this part of the The new delivery teams were less experi- 3 company’s operations could be provided, enced, did not know the publicans person- 4 more effectively, by using an outside service ally or have the same loyalty to the brewery 5 provider. The majority of Burney’s 280 that the old draymen had. Difficulties that 6 draymen received a redundancy payment used to be resolved on the spot were not 7 and only a small minority joined Team dealt with which added to the level of formal 8 Services, the company that Burneys had complaints and reported customer dissatis- 9 contracted to provide their delivery service. faction. 30111 Team Services was non-unionized, paid The new service proved cheaper to pro- 1 lower rates of pay and less in premium vide and overheads had been significantly 2 payments, for overtime working, than the reduced, goodwill was being lost but the 3 draymen had experienced working for company’s image as a first class provider to 4 Burneys. Many of Burney’s draymen had its customers was being tarnished. It was 5 long service and the redundancy packages feared that certain publicans might turn to 6 that were offered to them were not unat- other brands. There was also a concern that 7 tractive. Team Services were cost cutting by operating 8 After a few months into the new operation with reduced numbers on the delivery teams 9 Burneys had received a significant number of than the 260 employees originally proposed. 40111 complaints about the new delivery service. As the decision to outsource the delivery 1 These consisted of late deliveries, damage service was not going to be reversed the level 2 done to beer kegs being delivered and col- of service had to be dramatically improved. 3 lected and a lower level of service generally The problem was how to ensure the services 4 than they had been used to when Burneys provided by Team Services reached the stan- 5 employed its own draymen. Initially these dards required by Burneys. 6 7 8 The case study is useful in explaining key human resource issues 49111 and opens the debate about what steps Burneys could take to

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1111 improve the quality of services provided by Team Services. It 2 also raises the question of how these problems could have been 3 avoided in the first instance. 4 If the core business is be properly supported new organiza- 5 tional forms require line management and HR specialists to 6 recognize that training, coaching, mentoring and counselling 7 activities have to be extended to all parties in the supply chain. 8 Any investment in training does, however, raise questions of 9 who should bear the costs and whether the investment will be 1011 worthwhile in terms of the potential for increased profitability. 1 Rothwell (1992) suggests that where the benefits are mutual, for 2 example through increased sales for the manufacturer and the 3111 retailer, then the costs should be shared. This requires close 4 collaboration to initiate and maintain these joint activities. This 5 may be driven by the type of issues raised in the case study or 6 simply by legislation such as the manufacturers of food 7 processing equipment ensuring that suppliers and retail fran- 8 chises are fully conversant with food hygiene regulations. 9 Approaches to training and development could learn from 20111 the type of pioneering initiative recently announced by the 1 Web, Ford, GM and Daimler Chrysler who are linking their 2 suppliers and their products into a vast single Internet based 3 procurement system. A company intranet or the Internet offers 4 exciting new opportunities in training delivery and providing 5 advice to employees across supply chains which can offer far 6 greater flexibility and speed of access than more traditional 7 methods. 8 There is insufficient scope within this chapter to discuss the 9 idea of the learning organization which has flourished in recent 30111 years as a means of sustaining competitive advantage through 1 human resourcing policies which promote continuous learning, 2 teamwork, employee participation and flexibility (Edmundson 3 and Moingeon 1996). As a concept though it has much to offer 4 the stakeholders in supply chain relationships in terms of 5 harnessing individual learning to support new systems for 6 providing goods and services. It also provides real opportuni- 7 ties for proactive HR specialists to contribute to creative forms 8 of development in the new organizational structures. 9 40111 Conclusions 1 2 All the indications are that outsourcing will increase but to 3 date the human resourcing complexities of supply chain manage- 4 ment have received less attention than other aspects such as 5 procurement and demand planning. The development of new 6 organizational forms require HR strategies which address issues 7 of flexibility, customer orientation, team working and knowl- 8 edge management across a range of supply relationships (IPD 49111 1998, p. 16).

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1111 For managers operating through supply relationships the 2 transition from managing their own employees to managing 3 through contracts is not an easy one and insufficient attention 4 has been paid to their development needs to enable them to 5 carry out their new role effectively. The HR specialist has much 6 to offer in developing new approaches to employee resourcing 7 issues in the distanced organization, although it is suggested that 8 as outsourcing develops it is likely to be mirrored by similar 9 changes in the provision of HR services. HR professionals will 1011 increasingly be employed themselves by outsourced providers 1 advising a range of different account holders (McLuhan 2000, 2 p. 33). 3111 Intense competitive pressures on suppliers in extended orga- 4 nizational structures cannot only lead to increased job insecurity, 5 the intensification of work and adversely effects levels of commit- 6 ment but, also make it difficult for employers to make a credible 7 contribution to safeguarding employee health and well-being 8 (Burchell et al. 1999). One conclusion is that this can only be 9 resolved through establishing a regulatory framework setting 20111 minimum standards and by specifying HR standards in contrac- 1 tual agreements, to avoid destructive forms of competition 2 achieved at the expense of the workforce. It is argued that such 3 measures alone will not provide a solution. They need to be 4 supported by employer led initiatives ‘championing’ new and 5 more creative human resourcing strategies which involve all the 6 parties concerned in supply chain relationships. 7 8 9 References 30111 1 Atkinson J. (1985) Flexibility: planning for an uncertain future. 2 Manpower Policy and Practice, 1, Summer. 3 Beaver G. and Harris L. (1996) The hidden price of the dispos- 4 able workforce. Journal of Professional HRM, 2, pp. 3–8. 5 Beaumont P., Hunter L. and Sinclair D.(1996) Customer–supplier 6 relations and the diffusion of employee relations changes. 7 Employee Relations, 18 (1), pp. 9–19. 8 Beer M., Spector B., Lawrence P., Mills Q. and Walton R. (1984) 9 Managing Human Assets. New York: Free Press. 40111 Blyton P. and Turnbull P. (1992) Reassessing Human Resource 1 Management. London: Sage Publications. 2 Brewster C. (1998) Flexible working in Europe: extent, growth 3 and the challenge for HRM. In P. Sparrow and M. Marchington 4 (eds), Human Resource Management: the New Agenda. London: 5 Financial Times/Pitman Publishing. 6 Burchell B., Day D., Hudson M., Ladip D., Mankelow R., Nolan 7 J., Reed H. Wichert I. and Wilkinson, F. (1999) Job Insecurity 8 and Work Intensification: Flexibility and the Changing Boundaries 49111 of Work. York: York Publishing Services.

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1111 Colling T. (2000) Personnel management in the extended orga- 2 nizations. In S. Bach and K. Sisson) (eds), Personnel Manage- 3 ment: A Comprehensive Guide to Theory and Practice. Oxford: 4 Blackwell, pp. 70–86. 5 Cully M., O’Reilly A., Millward N., Forth J., Di, G. and Bryson 6 A. (1998) The 1998 Workplace Employee Relations Survey. 7 London: DTI. 8 Edmundson A. and Moingeon B. (1996) When to learn and when 9 to learn why: appropriate organizational processes as a source 1011 of competitive advantage. In A. Edmundson and B. Moingeon 1 (eds), Organizational Learning and Competitive Advantage. 2 London: Sage. 3111 Ewing K. D. (1993) Swimming with the tide: employment protec- 4 tion and the implementation of European Labour Law. 5 Industrial Law Journal, 22 (3). 6 Felstead A. (1993) The Corporate Paradox – Power and Control in 7 the Business Franchise. London: Routledge. 8 Gennard J. (1998) Labour Government: change in employment 9 law. Employee Relations, 20 (1), pp. 12–25. 20111 Grahl J. and Teague P. (1992) Industrial relations trajectories and 1 European human resource management. In C. Brewster and 2 S. Tyson (eds), International Comparisons in Human Resource 3 Management. London: Pitman, pp. 67–91. 4 Gratton L., Hope Hailey V., Stiles P. and Truss C. (1999) Strategic 5 Human Management. Oxford: Oxford University Press. 6 Grubb D. and Wells W. (1993) Employment regulation and 7 patterns of work in EC countries. OECD Economic Studies, 21, 8 pp. 7–56. 9 Guest D. (1982) Has the recession really hit personnel manage- 30111 ment? Personnel Management, 14 (10), pp. 36–9. 1 Guest D. (1987) Human Resource Management and indus- 2 trial relations. Journal of Management Studies, 24 (5), pp. 3 503–21. 4 Guest D. (1989) Personnel and HRM: can you tell the difference? 5 Personnel Management, January, pp. 48–51. 6 Guest D. (1991) Personnel management: the end of orthodoxy? 7 British Journal of Industrial Relations, 29 (2), 149–76. 8 Guest D. and Conway N. (1998) Fairness at work and the psycho- 9 logical contact. Issues in People Management, No. 21. London: 40111 Institute of Personnel and Development. 1 Harris L. (1999) Employment law and human resourcing – 2 challenges and constraints. In J. Leopold, L. Harris and 3 T. Watson (eds), Strategic Human Resourcing: Principles, 4 Perspectives and Practices in HRM. London: Financial Times/ 5 Pitman Publishing, pp. 265–90. 6 Harris L. (2000) Knowing the rules – employment regulation and 7 smaller companies. Paper presented to the Small Business and 8 Enterprise Development Conference, 10–11 April 2000, 49111 University of Manchester.

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1111 Harland C.M. (1996) Supply chain management relationships: 2 chains and networks. British Journal of Management, 7 (Special 3 Issue), pp. S63–S80. 4 Hendry C. (1995) Human Resource Management – a Strategic 5 Approach to Employment. Oxford: Butterworth-Heinemann, 6 pp. 431–3. 7 Herriot P. and Pemberton C. (1996) Contracting careers. Human 8 Relations, 49 (6), pp. 757–87. 9 Hunter L., Beaumont P. and Sinclair D. (1996) A partnership 1011 route to Human Resource Management. Journal of Management 1 Studies, 33 (2), pp. 235–57. 2 IPD (1998) IPD Guide to Outsourcing. London: Institute of 3111 Personnel & Development. 4 Kessler I. and Undy R. (1996) The new employment relation- 5 ship: examining the psychological contract. Issues in People 6 Management. London: IPD. 7 Kinnie N., Purcell J., Hutchinson S., Terry M., Collinson M. 8 and Scarborough H. (1999) Employment relations in SMEs: 9 market-driven or customer shaped? Employee Relations, 21 (3), 20111 pp. 218–35. 1 LMQR (Labour Market Quarterly Report) (1999) Small and 2 medium sized enterprises: their role in the economy. Skills 3 and Enterprise Network Publications, DfEE, November, 4 (99), 4 pp. 12–16. 5 LMST (Labour Market and Skills Trends) (2000) Skills and 6 Enterprise Network. London: DfEE Publications. 7 Lane D.A. (1994) People management in small and medium sized 8 enterprises. Issues in People Management, No. 8. London: 9 Institute of Personnel and Development. 30111 Mabey C., Salaman G. and Storey J. (1998) Human Resource 1 Management. A Strategic Introduction. Oxford: Blackwell. 2 Matlay H. (1999) Employee relations in small firms – a micro- 3 business perspective. Employee Relations, 21 (3), pp. 285–95. 4 McLuhan R. (2000) Outsourcing skills. Personnel Today, Special 5 Report, 18 April, pp. 25–33. 6 Peters T.J. and Waterman R.H. (1982) In Pursuit of Excellence: 7 Lessons from America’s Best Companies. New York: Harper and 8 Row. 9 Rothwell S. (1992) Polishing up the supply chain. Personnel 40111 Management, September, pp. 28–32. 1 Rousseau D.M. (1996) Psychological Contracts in Organizations: 2 Understanding Written and Unwritten Agreements. Thousand 3 Oaks, CA: Sage. 4 Scarborough H. (1999) The HR implications of supply chain rela- 5 tionships. Human Resource Management Journal, 10 (1), pp. 5–16. 6 Storey D.J. (1994) Understanding the Small Business Sector. London: 7 Routledge. 8 Storey J. (1992) Developments in the Management of Human 49111 Resources. Oxford: Blackwell.

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1111 Storey J. (ed.) (1995) Human Resource Management: a Critical Text. 2 London: Routledge. 3 Turnbull P. (1991) Buyer–supplier relations in the UK automo- 4 tive industry. In P. Blyton and J. Morris (eds), A Flexible Future? 5 Prospects for Employment and Organization. New York: De 6 Gruyter. 7 Tyson S. and Fell A. (1986) Evaluating the Personnel Function. 8 London: Hutchinson. 9 Walton R.E. (1985) From control to commitment in the work- 1011 place. Harvard Business Review, March–April, pp. 77–94. 1 Watson T.J. (1999) Human resourcing strategies. Choice, chance 2 and circumstances. In J. Leopold, L. Harris and T. Watson 3111 (eds), Strategic Human Resourcing: Principles, Perspectives 4 and Practices in HRM. London: Financial Times/Pitman 5 Publishing, pp. 17–37. 6 Wood S. (1995) The Four Pillars of HRM: are they connected? 7 Human Resource Management Journal, 5 (5), pp. 53–8. 8 Wood S. and Albanese M. (1995) Can we speak of high commit- 9 ment management on the shop floor? Journal of Management 20111 Studies, 32 (2), pp. 214 –47. 1 2 3 Activity 1 4 5 Refer back to the first case study (Setting Standards) in order 6 to undertake the following tasks: 7 1. Outline the business case for integrating equal opportunities 8 into overall business strategy. 9 30111 2. Suggest ways to encourage more employers to sign up for 1 initiatives to tackle discrimination such as the RfO campaign, 2 3. Identify the key issues to be reflected in the equality stan- 3 dards to be used as the equal opportunities ‘kite mark’. 4 5 4. Suggest how the equality standards could be introduced into 6 supply chain firms so that they became more than just a state- 7 ment of intent but are translated into positive actions to tackle 8 discrimination. 9 5. Propose ways in which the effectiveness of the proposed kite 40111 mark could be measured. 1 2 3 4 Activity 2 5 6 Many small suppliers to hotel and catering chains and food 7 retailers have no internal HR expertise and insufficient resources 8 to buy in expensive consultancy services. The need for access 49111 to specialist knowledge is, however, becoming increasingly

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1111 critical both in terms of coping with changing legislation but also 2 to promote the development of progressive HR practices and 3 develop more innovative approaches to employment issues. 4 Suggest ways in which specialist HR support could be made 5 available to smaller organizations without excessive cost but with 6 a proper understanding of the particular challenges they face. 7 8 9 1011 Questions 1 2 1. What changes in the external environment would encourage 3111 the development of more proactive approaches to the employ- 4 ment relationship in supply chain arrangements? 5 2. In what ways can a greater integration of human resourcing 6 practices with wider business objectives be achieved in the 7 distanced organization? 8 9 3. What mutual benefits are there for larger companies and their 20111 suppliers in ensuring that employees working in the supply 1 chain are developed to increase their skills and abilities? 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 203 1111 CHAPTER 2 ●●●● 11 3 4 5 6 Supply chains: 7 8 9 1011 issues in 1 2 3111 4 management 5 6 7 8 accounting 9 20111 1 2 Anthony J. Berry, John Cullen and William Seal 3 4 5 6 7 8 9 30111 Key objectives 1 2 • To examine the management accounting issues posed 3 through the development of supply chain management 4 • To explore holistic systemic accounting procedures 5 designed to ensure the management of costs throughout 6 the supply chain 7 8 • To consider current approaches to inter-firm accounting and 9 discuss their succession for both customers and suppliers 40111 1 2 3 Introduction 4 This chapter explores the management accounting issues posed 5 by the development of supply chain management. It is based 6 upon a research project undertaken by the authors in 1998 7 and 1999 across a range of companies in the United Kingdom. 8 49111 Supply chains: issues in management accounting

1111 The ‘relevance of accounting debate’ (Kaplan 1984) argued 2 that the management accounting practices in use were about 3 efficiency, but were also ensuring ineffectiveness and uncom- 4 petitiveness as they did not focus managers’ attention upon how 5 the whole cost structure could be managed. But Kaplan did point 6 to the differences between cost management and measurement 7 in, firstly (traditional) accounting terms; secondly, re. system 8 optimization; and thirdly, re. strategic cost management. The 9 development of activity based costing and target costing went 1011 some way to address the accounting cost issues. 1 There have been rapid changes in technology and organiza- 2 tion of production, attention to lean production (Womack et al. 3111 1990), closer supplier relationships (Lamming 1993), world class 4 manufacturing and flexible specialization, a network of long- 5 term relationships between customers and suppliers (Sako 1992; 6 Akoi 1988; Okimoto 1986). The term ‘supply chain management’ 7 seems to have originated in the 1980s consisting of the internal 8 business functions of purchasing, manufacturing, sales and 9 distribution and been externalized beyond the boundary of the 20111 firm to incorporate managing operations across organizational 1 boundaries, an inter-firm view (Harland 1996). There are exten- 2 sive definitions of these processes (for specific definitions see 3 Glossary). 4 Sako (1992) identified four main theoretical approaches to the 5 study of supply chains: (a) transaction cost economics, following 6 Coase (1937) and Williamson (1975, 1979); (b) relational contract 7 theory influenced by Macaulay (1963) and Macneil (1974); (c) a 8 sociological approach to networks (Granovetter 1985; Frances 9 and Garnsey 1996) and (d) networks as management strategies 30111 (e.g. Miles and Snow 1986; Nohria and Eccles 1992). 1 In the study of accounting issues in schema (a), Gietzmann 2 (1996) argued that co-operative strategies required a re-exami- 3 nation of the accounting governance systems that assume arm’s 4 length transactions. These assumptions may act as a major 5 obstacle to the formation of alliances or partnerships where infor- 6 mation exchange is essential (Stuart and McCutcheon 1996). 7 Success in partnerships (Mohr and Spekman 1994) requires 8 commitment, co-ordination, trust, sharing of risks and informa- 9 tion, comunication quality and participation and joint problem 40111 solving of disputes. Such partnerships may achieve reduction of 1 transaction and production costs (Williamson 1975; Dyer and 2 Ouchi 1993). Trust, while advocated by many authors (Pruitt 3 1981; Stuart and McCutcheon 1996) was recognized as needing 4 time and care to build (Turnbull et al. 1992). Such partnerships 5 are a considerable organizational innovation (Teece 1996) and 6 may be a viable and advantageous route to achieving the bene- 7 fits of vertical integration (Johnstone and Lawrence 1988). Much 8 of the literature discusses the successes for both customers and 49111 suppliers in partnerships resulting in a win–win situation (Kanter

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1111 1994; Macbeth and Ferguson 1994) and joint successes (Helper 2 and Sako 1995). 3 4 The management accounting problem 5 6 Lean production requires changes in the organization of produc- 7 tion and the collection of cost accounting data in the customer 8 and in the supplier (Lamming 1993). He also noted the success 9 of Japanese suppliers and assemblers in the control of the Return 1011 on Assets (RoA) achieved by each company in a partnership and 1 the poor quality of similar UK data. In his view ‘lean accounting 2 would provide the means for such information, upon which 3111 lean production might be based in the search for reducing costs, 4 improving value and gaining a better understanding of the 5 behaviour of both’ (1993, p. 200). 6 As supply chains develop, via outsourcing and/or partner- 7 ships, lean supply arrangements (Saunders 1994) are needed as 8 a greater part of the cost of production is entailed in the supplied 9 goods. Saunders noted that ‘costs are an important dimension 20111 of performance in supply chains and it is a factor that needs to 1 be managed on an integrated basis’ (1994 p. 213). He argued for 2 a more proactive role for purchasing and supply management, 3 for a more holistic and systematic approach leading to a ‘total 4 cost of supply’ or ‘total cost of ownership’ which would by 5 necessity need to evaluate dimensions such as the cost of 6 assisting suppliers with negotiations, make or buy decision, 7 product development and modification cost, a comparison of 8 costs of home or overseas sourcing and analysis of product costs. 9 Furthermore, he saw the need for the use of activity based 30111 costing, target costing and open book policies to aid supply chain 1 effectiveness. The conflict between these ideas from partnership 2 and the asset management basis of accounting was recognized 3 by Gietzmann (1996). Some modification of the accounting gover- 4 nance seems to be necessary, based, argues Gietzmann, upon 5 trust and commitment. But the adoption of Japanese supply chain 6 and accounting practices has been found to be difficult because 7 UK firms may be attempting to introduce the practice or the 8 technique without the necessary attention to the governance 9 issues (Gietzmann 1996). 40111 The vertical integration role of accounting has also been 1 reinforced by the common functional structures in organizations, 2 each with their own budgets. The integration of functional oper- 3 ations has normally taken place in the discussions and debates 4 in the planning and budgeting cycle. However, it has been 5 argued that supply chains are essentially horizontal processes 6 that require integration along the chain. The search for more 7 effective cost models of operations was given impetus by the 8 recognition of Cost Drivers (Porter 1985), the factors that deter- 49111 mine the cost of an activity, e.g. economies and diseconomies of

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1111 scale, learning or experience effects, pattern of capacity utiliza- 2 tion, linkages, inter-relationships, integration, timing of market 3 entry, discretionary policies, location and institutional (legal and 4 regulatory) costs. These create the possibility of analysing the 5 costs in value chain analysis and the search for competitive 6 advantage. This new focus upon a wider array of causes of costs 7 moves away from a condition where ‘accounting systems do 8 contain useful data, but they often get in the way of strategic 9 cost analysis’ (Porter 1985, p. 63). The inward vertical integra- 1011 tion model of accounting ignores value created outside the firm’s 1 boundaries (Partridge and Perren 1994). 2 Subsequent research emphasized that the identification of cost 3111 drivers and analysing costs through the value chain, were essen- 4 tial components in the search for competitive advantage (Hergert 5 and Morris 1989; Bromwich 1991; Shank and Govindarajan 1992; 6 Partridge and Perren 1994). 7 Activity based analysis provided information along the chain 8 of value adding activities within a ‘total cost management’ 9 approach (Quillian 1991), which contained ABC, process value 20111 analysis and performance measurement. Further, Quillian noted 1 that such an approach ‘can act as a catalyst for integrating 2 isolated logistics functions, leading to substantial improvements 3 in costs, cycle times, inventories and levels of customer service.’ 4 (p. 9). Complementing this supplier study, Lere and Saraph 5 (1995) examined the supply issues from the purchaser’s perspec- 6 tive, noting how ABC can be used as a basis for price negotiation 7 and as a means of exploring with suppliers as to how they have 8 arrived at a price. 9 Their model was designed to identify the costs triggered by 30111 purchasing parameters such as product design specification, lot 1 size, delivery schedule, shipments, number of design changes, 2 level of documentation, inspection, allocation of overhead costs 3 and calculations of cost per unit. These two studies taken together 4 suggested that suppliers and buyers could usefully jointly 5 examine these issues to gain common efficiencies but it did not 6 indicate how any savings could be shared. 7 For assemblers who purchase much (approaching 80% by 8 value) of their parts the issue of supply effectiveness and effi- 9 ciency is a crucial contributor to competitiveness. ‘For Nissan, 40111 achieving total cost control throughout the whole supply chain 1 has represented a critical challenge’ (Carr and Ng 1995, p. 348). 2 These authors reported that Nissan used a multi-disciplinary 3 team approach to supply cost management. Of special note was 4 the very limited role of accountants in these processes which 5 were built upon value engineering and ‘value analysis to contin- 6 ually review product costs and manufacturing process’ (p. 356). 7 The degree of openness of the books or transparency (see 8 Lamming 1993) in practice in the study of Carr and Ng was 49111 limited, with two major suppliers showing ‘a greater concern as

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1111 to whether Nissan would exploit its position of power, particu- 2 larly in the light of its tougher circumstances’ (p. 361). 3 The accounting measures of performance are based either upon 4 profitability or cost; the supply chain advocates speak mostly 5 about costs but partnership is intended to bring benefits to all 6 of the participants in a shared destiny. It would be necessary to 7 at least align the performance with the shared destiny principle 8 (Harland 1996), with some agreement as to the measures to be 9 used (Hope and Hope 1995), perhaps extending the concept of 1011 the balanced scorecard to the problem. The balanced scorecard 1 has four elements: customer, internal business, innovation and 2 learning together with the financial perspective. 3111 Much of the literature of supply chains has its origins in the 4 study of Japanese assemblers, especially the motor industry. 5 Whether the social structure of Japanese industry is crucial to 6 the operation of these supply chains is unclear, but it is argued 7 (Whitley 1994; Scott 1995) that the wider patterns of values 8 and beliefs do shape and construct the economic arrangements 9 of corporations and markets. Japanese and Asian cultures are 20111 viewed as having a more dependent culture than the UK and 1 this is held to explain some aspects of inter-organizational behav- 2 iours, where ‘trust’ is implied but may actually be more a case 3 of social obligation. This may not easily be applied in Anglo- 4 Saxon contexts. The issue of dependence, power and dominance 5 in network formation and functioning was addressed by Zheng 6 et al. (1997) in the pharmaceutical and automotive industries, 7 where they found that the final manufacturer was dominant; in 8 the retail consumer goods sector the final retailer exercised 9 considerable power while in electronic components there was 30111 no one dominant actor. Further, Castells (1996) argued that the 1 trend to supply chains and networking does not mean that the 2 UK is shifting to an Asian model of the corporation. ‘Countries 3 and institutions continue to shape the organizational require- 4 ments of the new economy, in an interaction between the logic 5 of production, the changing technological base and the institu- 6 tional features of the social environment. The architecture and 7 composition of business networks being formed around the 8 world are influenced by the national characteristics of societies 9 where such networks are embedded’ (1996, p. 194). 40111 In the UK, as noted by Turnbull et al. (1992), there is a lack 1 of trust (or social obligation): 2 3 After more than ten years of price freezes, volume cuts, 4 multiple sourcing and the like, many suppliers view the 5 latest moves to JIT as another means by which the vehi- 6 cle assemblers intend to put the squeeze on (pp. 167–8) 7 8 This expectation of power was paralleled (Frances and Garnsey 49111 1996) by evidence that UK large food stores used accounting

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1111 techniques as control mechanisms beyond their own boundaries 2 in which suppliers lost more degrees of freedom, gave rise to 3 barriers to entry and an increase in market power and concen- 4 tration. 5 Trust is not such a simple concept, nor is it readily created; 6 Sako (1992) notes three types of trust: contractual trust, the 7 keeping of promises; competence trust, that partners have the 8 ability to carry out the work; and goodwill trust, allowing more 9 discretion and implying the possibility of more commitment. In 1011 these cases trust appears to be about the acceptance that the 1 other will behave well and not exploit any offers. 2 3111 The management accounting problem in practice? 4 5 Much of the literature of accounting in relation to supply chains 6 was either complaining or normatively expressing requirements 7 in relation to governance or management. We began therefore 8 with the question: ‘What was the observed contribution of 9 management accounting to the management of supply chains. 20111 What were the explanations for that?’ 1 We were concerned with supply chains within firms (the intra- 2 firm case) and between firms (the inter-firm case) and we 3 considered four ideal types of relationships between entities: 4 5 1. The autonomous firm in the arm’s length market relationship 6 of free buyers and sellers. This is a condition where firm A 7 is independent from firm B – the inter-firm case. 8 2. Where the output of firm A goes directly into the production 9 system of firm B – serial dependence. 30111 1 3. Where firm A and firm B affect each other’s behaviour, 2 described as reciprocal dependence. 3 4. Where the behaviour of firm A and firm B is interlinked and 4 described as mutual dependence. 5 6 These four ideal types in the inter-firm cases represent the 7 process of creating a managed supply chain through three stages 8 of transition: from autonomy to serial dependence, from serial 9 dependence to reciprocal dependence and from reciprocal depen- 40111 dence to mutual dependence where full partnership exists. This 1 latter is the idealized state of supply chains which corresponds 2 to the ‘Japanese’ model. 3 We considered management accounting around six main 4 elements relating to the cycle of planning and control; the 5 costing practices; cost management; issues in supply chains; the 6 changing role of the management accountant; and performance 7 management. 8 We studied management accounting practice in the UK in 49111 relation to the development of supply chain management. The

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1111 research (fully reported in Berry et al. 2000), was based upon 16 2 companies, from four sectors. From these we wrote three inter- 3 firm cases, one at each of the stages of serial dependence, 4 reciprocal dependence and mutual dependence. These and the 5 other companies were interviewed using a semi-structured 6 schedule which, together with documentation, formed the basic 7 data collection. One key finding was that in the inter-firm cases 8 we found that supply chains were managed link by link with 9 some very limited understanding beyond the first link. 1011 1 Case study – ‘Colfood Suppliers’ 2 3111 Colfood (a fictitious name but the study is The company had responded by becoming 4 based on an actual company), a multi-million both more conscious of profit, operational 5 pound subsidiary of an international com- effectiveness, cost reduction and efficiency. 6 pany, were very customer oriented. Hence Profitability had risen more than five 7 Colfood had always been aware of the issues percentage points. As it did so the managers 8 in managing supply. The basic processes were had become more protective of their results, 9 the provision of many goods and services were less willing to bend in negotiations and 20111 flows into a convergent production process of were aware that for internal transfers there 1 a dozen or so parallel and related product was a new ‘zero sum game’, one manager’s 2 groups. Considerable effort had been made in gain was another’s loss. 3 procurement and logistics to get smooth load- Now David Smith, Managing Director, 4 ings on the plants. Inter-product differences, was troubled by the feeling that the different 5 planning, product and plant development pieces were not as internally coherent as they 6 were the subject of a sophisticated planning needed to be to meet the challenge of the 7 effort and were resolved by hierarchic flat integrated customer services offered by 8 when internal negotiations were failing to competitive European firms. Also the senior 9 resolve problems. management team had become aware of the 30111 From the production plants product was need to manage the costs of the whole of 1 shipped in cold wagons to several cold stores the chain, from the upstream supply system, 2 and thence in ever diverging streams to via the transformation processes in the plants 3 customers. The accountants worked a system and including the downstream processes 4 of full absorption costing ‘down to pack including the costs of usage borne by the 5 size’, acknowledging that this involved a final customers. This meant an overhaul and 6 great measure of judgement about alloca- maybe a radical repositioning to gain the 7 tions of overhead, processing, transport and advantages of an integrated end-to-end sup- 8 administration and sales costs. ply chain management with mutual working 9 About four years ago Colfood had been with suppliers, partners and customers. 40111 ‘shaken’ from their rather established The major problem was that the profit 1 professional managerial practices by the centre managers had become accustomed to 2 introduction of performance management. being responsible and powerful people. The 3 The new performance imperative was based new ideas threatened their independence of 4 upon considerations of profitability and action and control. Change to the new ideas 5 based upon driving market based metrics looked as though it would be slow and very 6 down into the organization. Managers difficult, demoralizing and costly, even if the 7 were rewarded with a substantial element necessity for such action was real and the 8 of profitability related pay. benefits were there to be won. 49111

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1111 The decision and control cycle of planning, budgeting and reporting 2 3 In virtually all of our case study companies, routine manage- 4 ment accounting cycles remained in place despite accounting 5 innovations. In most situations supply chains had little impact 6 on the routine structures of financial planning, budgeting and 7 reporting. There was a tendency to provide routine monthly 8 reports under traditional functional responsibility headings. 9 However, fitting with the stages of development model, there 1011 were new horizontal integration processes created alongside the 1 vertical integration procedures of management accounting. 2 In the supply chain environment the time cycles of order fulfil- 3111 ment were becoming much shorter and diachronic to monthly 4 and annual cycles of management accounting. There was 5 evidence of the attention directing elements of management 6 accounting being by-passed by physical on-line real time obser- 7 vations and action taken without ‘formal’ cost analysis. 8 The changes in management accounting practice, broadly fitted 9 to the stages of development model. Cost management for effi- 20111 ciency and for effectiveness was broadly changing in line with 1 the stages of development model with more complexity as the 2 nature of the interdependence became mutual. 3 4 Costing practices: how costs were measured 5 6 The use of standard cost was much wider than we had expected, 7 largely to measure product profitability. It appeared that the 8 advent of supply chain management had had no effect upon 9 this, even with new understandings about how costs were 30111 incurred and managed. To some extent the changes in time cycles 1 have led to standards not being used for detailed variance 2 analysis; but analysis of cost movements was common among 3 our companies. There was little evidence of the recognition and 4 use of marginal and variable costs except in circumstances where 5 the cost of a major material input so dwarfed other costs that 6 the material cost was an estimate of variable costs. There was 7 little evidence of the use of life cycle costing in any of the research 8 companies. 9 ABM/C has been applied in the larger companies in intra-firm 40111 supply chains. The expectation that ABM/C would find a ready 1 application in the inter-firm supply chain was not observed. 2 The expectation that supply chain management would lead to 3 the use of target costing, as a key management accounting change 4 was not borne out, except in the case of Japanese owned and 5 influenced companies. There was no evidence of the use of 6 throughput costing in any of the companies. 7 While many companies had active cost management proce- 8 dures these were part of ongoing management and not an 49111 outcome of supply chain management. Of course, supply chain

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1111 management itself was seen as a cost control approach which 2 stimulated attention to the internal costs and especially to the 3 input costs and the costs of procurement. The companies in inter- 4 firm supply systems in this research had not formed cost models 5 and analysis along the chains. 6 There was little or no evidence of the analysis of the benefits 7 and costs of changing the process of managing suppliers; 8 decisions were taken on the self evident propositions of simpli- 9 fication of number of suppliers and staff reductions would have 1011 positive outcomes. It was found that few companies had 1 the accounting procedures to record and track the costs of the 2 purchasing. Of course the central thrust of much supply chain 3111 thinking is to reduce costs and improve the reliability and quality 4 of goods and services in shorter time cycles. The observed devel- 5 opments fitted those ideas. 6 The cost of management of suppliers was a major element in 7 the management of the supply chain. In the inter-firm cases of 8 serial dependence the reduction of the number of suppliers to 9 one or two created a new mode of reciprocal dependence. It 20111 appeared that an efficiency frontier had been reached via reduc- 1 tion and simplification; the next stage was to build collaborative 2 advantage. 3 All companies were aware of the need to manage the cost of 4 stock holding. The use of lean production concepts to reduce 5 cycle times and stock levels was common. 6 7 Cost management 8 9 Cost management in supply systems was moving from within 30111 the firm to include the upstream processes and inputs to the 1 firm, embracing both production and procurement. There was 2 scattered evidence of techniques such as horizontal information 3 systems, kaizen costing, benchmarking, open book accounting 4 (see later) and value engineering. 5 6 Considerations of efficiency ●●● 7 8 Supply chain management offers the possibility of developing 9 optimization analysis of supply chains to enable cost minimiza- 40111 tion to be managed. This requires sufficient knowledge of the 1 marginal costs of the production processes across the chains. 2 Only two of the intra-firm companies had the required knowl- 3 edge of marginal cost and the models of the processes. As far 4 as we could understand from the research companies, few if any 5 of the supply chains were at capacity constraints. Where capacity 6 was problematic it occurred where different supply chains were 7 using the same production and distribution facilities. 8 Cost management was central to supply and supply chain 49111 management; especially noting (Houlihan 1984; Saunders 1994;

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1111 Lere and Saraph 1995) that as companies introduced lean manu- 2 facturing there was a tendency to purchase sub-assemblies which 3 were described as material inputs. (The overall relationship of 4 labour and material costs may not have changed but in relation 5 to the final assembler it appeared to have changed.) 6 7 Considerations of system optimization ●●● 8 9 Management accounting procedures that were based upon a 1011 more systemic approach to cost management might have found 1 a ready application in the inter-firm and intra-firm supply chains 2 because they were developed as a means of moving away from 3111 simple overhead rate calculations. But there was little evidence 4 of application of business process re-engineering (BPR), activity 5 based management (ABM) or activity based costing (ABC). This 6 was true for both inter- and intra-firm supply chains, probably 7 because the supply chains in this study were not managed across 8 organizations, they were managed link by link; with little or no 9 consideration of the sequence of links in the chain. 20111 1 Considerations of strategic decision making ●●● 2 3 The use of supply chain management as a strategic tool to 4 generate a new mode of strategic integration was evident in all 5 intra-firm cases. This was because the larger multi-national 6 companies in our study operated across many regions and coun- 7 tries and markets. But that was not so in the inter-firm cases, 8 acting as a barrier to supply chain effectiveness. 9 30111 Supply chain processes 1 2 The use of ‘open books’ followed the stages model. In market 3 or serial dependence the books were closed; as reciprocal depen- 4 dence developed then the books were open to facilitate the 5 chain relationships. The degree of openness should not be over- 6 stated; these were specific to particular cases and not a general 7 invitation to access companies’ accounts. In the mutual depen- 8 dence cases of inter-firm chains specific attention was given to 9 open books and in the case of construction projects there were 40111 cases of common open books. Often, open book accounting was 1 perceived as a mechanism whereby the supplier opens its books 2 to the customer. It was important to recognize, however, that 3 the need to share information must be two-way and that there 4 was therefore a need for the customer to open its books to the 5 supplier. 6 The main focus of supply chain reporting had not changed; 7 but the impact of supply chain development at each stage was 8 leading to a consideration of the need to report along and about 49111 the chain.

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1111 The stages of supply chain development place greater 2 demands upon the integration of accounting data with other infor- 3 mation. Such integration was rarely observed, but the connection 4 to process driven integrated information systems was visible in 5 the developments in the multi-nationals. 6 This study was not primarily concerned with Electronic Data 7 Interchange. However, much change was observed, with the 8 early stages of the supply development using simple linking 9 exchanges, such as ordering and scheduling; but at the most 1011 developed multi-national companies the use of EDI was via very 1 complex logistics systems to which there were options to add 2 systems for accounting. 3111 There was little evidence of a role for management accounting 4 in the strategic management of the supply chain except via 5 special projects and the involvement of management accountants 6 in the work of strategic management. 7 8 Relational contracting and the shared destiny ●●● 9 20111 A supplier to a number of multi-national companies in the auto- 1 motive sector found that their customers had diverse approaches 2 to the management of the supply chain. These diverse 3 approaches apparently stemmed from different understanding 4 of ‘relationship’, a consequence of diverse trading experience. 5 Where their customers had been hard bargainers, it was likely 6 to take many years before the company was likely to be more 7 than sufficiently co-operative. They assumed that the approaches 8 from the hard bargainers were another form of extracting 9 compliance and cost reduction, or of the hard bargainers’ 30111 extracting more of the profit from the system. The protestations 1 of a new beginning were not believed. In contrast, the compa- 2 nies that had some understanding of collaboration were given 3 more attention, and some sharing of productivity and product 4 technology improvements with the customers and with parallel 5 suppliers was developed. However this company was unwilling 6 to open its accounting books in any great detail and certainly 7 unwilling to enter into detailed discussions of its cost structures 8 with any of its customers. This suited one of its customers, which 9 had a concentration upon decremental costing rather than exam- 40111 ining cost structure. This observation was at variance with the 1 implications from Carr and Ng’s study, with the supplier not 2 wholly accepting the demands from the purchaser. 3 The evidence suggests that the advent of supply chain manage- 4 ment and its stages has led to significant increase in organizations 5 working for horizontal integration. The use of multi-functional 6 teams was very common. The management accountants were 7 becoming members of supply chain teams with managerial 8 responsibility rather than providing just accounting advice. This 49111 was taking place in the context of ‘delayering’ and hence the

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1111 complexity of work that a team was expected to handle was also 2 increasing. It appears that the full development of the intra-firm 3 supply chain could yet produce a very radical change to 4 organizations and to the role of management accountants. The 5 inter-firm companies were more limited in their changes but 6 radical solutions to the problem of closer integration of the 7 companies in supply systems cannot be ruled out. 8 All of this expansion in scope for the management accountant 9 must also have been accomplished without diminution of the 1011 professional capability to assure the integrity of accounting 1 systems and procedures and the ability to provide sound inter- 2 pretation of the information provided. 3111 4 Performance management 5 6 There was a significant impact of supply chain management 7 on performance measurement and management. As the supply 8 chain stages were moved along then the degree of attention given 9 to this issue increased. The problems presented to performance 20111 management, which has been based upon the vertical hierarchy, 1 when supply chain management becomes a day-to-day issue for 2 managerial focus and decision becomes clearer. The challenge 3 presented in the later stages is whether to continue with ‘bolt 4 on’ additional supply chain performance measurements or 5 radically to change the whole organization to a supply chain 6 management principle and hence integrate with a process driven 7 structure together with a process driven integrated information 8 system. 9 Existing performance management systems could inhibit the 30111 development of supply chain ideas. The new demands of supply 1 chain thinking, it was observed in one such intra-firm company, 2 forced operational integration and redefined both the structures 3 of responsibility and accountability and the required financial 4 decision rules for transfer, thus affecting the divisional measures 5 of performance. This had a direct impact upon managers who 6 had become accustomed to performance-related pay based upon 7 their divisional performance (in context of plans) leading to 8 significant problems in introducing intra-organizational supply 9 chain integration. 40111 In some of the multi-national companies in our study, espe- 1 cially in the intra-firm cases, it was observed that there was 2 considerable use of quasi-economic control such as Return on 3 Investments, Return on Assets, Residual Income and its variants 4 as a means of introducing financial market-related disciplines 5 into the divisions by separating them; whereas supply chains 6 sought to connect them. 7 This problem of change was based upon the use of manage- 8 ment accounting and control procedures being used for short, 49111 medium and long term integration with horizontal integration

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1111 being a residual problem. In the newer world of supply chain 2 thinking the vertical integration of the management accounting 3 and control cycle still exists for the longer term (and of course 4 for financial reporting). However, there was evidence from two 5 of the companies that there was an emerging shift to systems of 6 information and control for horizontal integration for the short 7 and medium term. 8 9 Discussion and conclusions 1011 1 This study was of rapidly changing organizations in varied tran- 2 sitions along the stages model with a variety of other changes 3111 happening at the same time, with potential to affect each other 4 and management accounting. The potential for a quite dramatic 5 impact was observed to be greater in the mutually dependent 6 modes, compared to the serial and reciprocal dependent modes. 7 Further, it was common for management accounting to be 8 constructed upon the basis of the organization’s structures of 9 responsibility and accountability. Here management accounting 20111 and control was a basic procedure for vertical integration of 1 financial behaviour. Horizontal integration was achieved via the 2 use of transfer pricing within a corporate policy. 3 Our findings demonstrate that there has been little use made 4 of the conceptual change in accounting cost models. Standard 5 costing for products was common, with little use of variable, 6 marginal, target costing (except where influenced by Japanese 7 management), life cycle costing, or activity based costing, with 8 no reported use of throughput costing. So the management 9 accounting practices were observed to be very ‘traditional’ in 30111 their connection to product cost and margin calculations, stock 1 valuation and working capital analysis. 2 These observations were largely indifferent to the classifica- 3 tions of inter- and intra-firm supply chains and to the stages of 4 development of the supply chain. It seems that the normative 5 ideas of Saunders (1994), with which we agree, had yet to pene- 6 trate our research companies to any substantial degree. But it 7 was the case, for all of these companies, as Porter (1985) and 8 Shank and Govindarajan (1992) have argued, that cost manage- 9 ment in the context of product quality and market issues, was 40111 critical to competitive success. 1 In addition, there was evidence in some companies that the 2 penetration of management accounting into the micro detail of 3 organizational work was being pushed back up a flattening hier- 4 archy. This occurred because the managers could use physical 5 measures as a basis for decisions, having an understanding of 6 the consequences for costs. The point at which physical and 7 accounting measures were integrated was shifting in the intra- 8 firm and to a lesser extent in the inter-firm cases into procedures 49111 for horizontal integration.

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1111 There was little or no evidence from the inter-firm cases of 2 the impact of supply chains upon the use of management 3 accounting for strategic management. In the intra-firm cases of 4 mutual dependence we observed the firms to be close to the 5 provision of an integrated logistics, procurement, production and 6 market model with accounting data in it so as to create an on- 7 line strategic management tool. 8 Horizontal information systems in the inter-firm cases (both the 9 serial dependent and reciprocal dependent cases) were very 1011 much project based additions to extant procedures. There was 1 no conclusive evidence of EDI being used systemically along the 2 supply chain in (Marson and Massey 1999). This issue is explored 3111 in parallel with the accounting project, but in the intra-firm cases 4 the development of supply chains was leading to a revolution 5 in the use of EDI as an internal integration vehicle to permit 6 supply chain management. 7 One case was specifically undertaken to explore the issue of 8 management accounting and the shared destiny principle. The 9 evidence suggested that accounting and management accounting 20111 aid the development of the alliance. It is argued in that case that 1 accounting can and did play a constitutional role in developing 2 the alliance, as Gietzman (1996) suggested. 3 There was evidence from the case studies that companies, 4 having been through the first stage of cost management and 5 supplier management, began to build upon their experience of 6 managing serial dependence to move towards reciprocal depen- 7 dence. The respondents, managers, purchasing managers and 8 management accountants acknowledged that the next stage 9 would include relational contracting to include a wider sharing 30111 of accounting information. However, in the more adversarial 1 culture of the UK, the evidence suggested that this step will 2 require some time to elapse before histories of dominance 3 by customers would be set aside and invitations to greater 4 collaboration would be accepted. The two companies in our 5 study at the mutual dependence stage of inter-firm relations 6 were engaged in relational contracting and in gain sharing. 7 8 The cutting edge: the intra-firm examples 9 40111 In general the greatest impact of supply chains upon manage- 1 ment accounting was in the intra-firm chains in the multi-national 2 companies. These intra-firm companies had developed very 3 sophisticated logistic models of procurement, production and 4 distribution, including the flows in their suppliers’ factories (pro- 5 curement) and marketing data. However, the marketing and 6 accounting data were not yet integrated into the supply chain. This 7 was to be a next major step to meet the ideas of Quillian (1991). 8 These examples were the product of a convergence of a number 49111 of ideas and technologies, including computational technology,

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1111 very complex logistics models, satellite communication tech- 2 nology, local access to global systems, application of systemic 3 thinking as a mode of integration, moves towards the creation 4 of lean manufacturing and world class manufacturing, the need 5 for rich information for decision and control and analysis, the 6 capacity to manage beyond the legal boundaries by modes of 7 dominance, of serial dependence, of reciprocal dependence and 8 of mutual dependence. 9 These were being brought together to produce a new process 1011 driven (systemic) integrated information system, PDIIS. 1 However this new (if embryonic) system was introduced along- 2 side the extant systems and does not as yet displace them. 3111 However if the organization structure is radically changed to 4 being process driven then the older systems will have to change. 5 In this way the new (or emerging) PDIIS systems may be 6 embedded before the old systems are dis-embedded. They will 7 not, it seems, replace the need for local operating information 8 systems, but when integrated with accounting then they present 9 the possibility of becoming a tool for strategic analysis and 20111 management. Two of the companies were close to such possi- 1 bilities, with several more seeking to move in that direction, from 2 reciprocal to mutual dependence. 3 This new ideal type of PDIIS represents a capability of hier- 4 archic firms to gain flexibility and complex co-ordination. Such 5 capability is unlikely to be attained in the inter-firm case although 6 ‘platforms’ will soon be available. 7 In the inter-firm cases the ‘supply chain’ was almost always 8 managed as a set of discrete links with little or no attention to 9 managing the whole chain. This reflects the construct of a supply 30111 chain as an observed set of connections but not as a managed 1 set of inter-firm behaviours. This absence of any integration of 2 management accounting along the chain reflected the issues 3 of ownership and asset protection. The experience of these 4 companies in supply chains in the UK was that they were not 5 surrendering to the image of the integrated supply chain; rather 6 they were managing their destiny by engaging in a series of 7 dependent relationships to their own and mutual advantage. 8 This fits with the arguments of Scott (1995) and Castells (1996) 9 that the economic arrangements will reflect the (changing) social 40111 structure. 1 In relation to governance issues, management accounting 2 developments were central to the development of reciprocal and 3 mutual dependence, in accordance with Gietzmann’s (1996) 4 suggestions. This process was clearly more difficult in the some- 5 what conflictual and autonomy-preferring Anglo-Saxon context 6 (Turnbull et al. 1992), but the advent of the challenge to develop 7 along the stages of supply chains was changing behaviour; it 8 was possible to build contractual trust and in the cases of mutual 49111 dependence there was evidence of goodwill (Sako 1992).

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1111 Figure 11.1 summarizes the stages of development of the 2 management accounting response to the stages of supply chains. 3 Much of the observed practice of management accounting was 4 rather ‘traditional’ and responsive to supply chains in episodic 5 rather than systemic ways. The impact of supply chains upon 6 management accounting practices followed the stages of devel- 7 opment of the supply chain, which were easier to implement in 8 the intra-firm case. The ideas and concepts of accounting 9 informed all cost management practices in both intra- and inter- 1011 firm cases. 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 • 7 • 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure 11.1 Stages in development of management accounting for supply chain management

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1111 The shortening of time cycles does lead to the seeming redun- 2 dancy of the post hoc information role of accounting, as action 3 follows upon physical data rather than accounting data. Here 4 the accountant as member of the team must be able to infer 5 the impacts upon accounts and advise, on-line in real time, on 6 desirable actions. 7 While management accounting practice might appear to be 8 traditional in its routine operations, the practice of supply chain 9 management accountants, in projects and analysis, was quite 1011 the opposite. Management accountants were key actors in the 1 strategic management of the inter- and intra-firm supply chain. 2 It was very clear from the three case studies that management 3111 accountants were active partners in the new management 4 team’s cultures which follow the logic of the chains as well as 5 holding to the logics of hierarchy. In this sense the practice of 6 accounting was not, as Porter (1985) stated, obstructing new 7 developments. 8 It is possible that once the technology of process driven infor- 9 mation systems is available to a wider audience it will come to 20111 impact upon the inter-firm case, to perhaps meet Lamming’s 1 (1993) request for lean accounting. Figure 11.1 provides a frame- 2 work for describing the possible path of change of management 3 accounting practices as process driven integrated information 4 systems are developed. From the routines of hierarchic systems, 5 via a series of complex and ad hoc projects, the technology is 6 slowly being created for process driven integrated information 7 systems. At the moment the existing systems, which require great 8 expertise and support as organizations change in many ways, 9 are being maintained and remain embedded. The possible new 30111 systems will become embedded in parallel and proved in prac- 1 tical use before any dis-embedding can take place. It is not that 2 the managers and accountants are risk averse; it is that the tech- 3 nical and managerial utility of such new systems will require 4 substantial robustness tests before they can take over. 5 6 Acknowledgement 7 8 The authors wish to acknowledge the financial support of the 9 Chartered Institute of Management Accountants, the assistance 40111 of ISCAN, Sheffield and the participating companies for their 1 help with the project from which this chapter is drawn. 2 3 References 4 5 Akoi M. (1988) Information, Incentives and Bargaining in the Japanese 6 Economy. New York: Cambridge University Press. 7 Berry A.J., Cullen J., Seal W.B., Ahmed M. and Dunlop A. (2000) 8 The Consequences of Interfirm Supply Chain Management for 49111 Management Accounting. CIMA.

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1111 Bromwich M. (1991) Accounting for strategic excellence. In 2 Okonomistyring OG strategic – nyeideer nye erfarinjer. Denmark: 3 Systime. 4 Carr C. and Ng J. (1995) Total cost control: Nissan and its UK 5 supplier partnerships. Management Accounting Research, 6, 6 347–5. 7 Castells M. (1996) The Rise of the Network Society. Oxford: 8 Blackwell. 9 Coase R. (1937) The nature of the firm. Economica 4, pp. 386–405. 1011 DTI/Supply Chain Networks Group (1997) Supply Chain 1 Management Attitude Survey. Report of the Supply Chain 2 Working Group, April. 3111 Dyer J.H. and Ouchi W.G. (1993) Japanese-style partnerships: 4 giving companies a competitive edge. Sloan Management 5 Review, Fall, pp. 51–62. 6 Frances J. and Garnsey E. (1996) Supermarkets and suppliers in 7 the United Kingdom: System integration, information and con- 8 trol. Accounting, Organizations and Society, 21 (6), pp. 591–610. 9 Gietzmann M.B. (1996) Incomplete contracts and the make or 20111 buy decision: governance design and attainable flexibility. 1 Accounting, Organizations and Society, 21 (6), pp. 611–26. 2 Granovetter M.S. (1985) Economic action and social structure: 3 the problem of embeddedness. American Journal of Sociology, 4 91 (3), pp 481–510. 5 Harland C.M. (1996) Supply chain management: relationships, 6 chains and networks. British Journal of Management, 7, Special 7 issue, pp. s63–s80. 8 Helper S.R. and Sako M. (1995) Supplier relations in Japan and 9 the United States: are they converging?, Sloan Management 30111 Review, Spring, pp. 77–84. 1 Hergert M. and Morris D. (1989) Accounting data for value chain 2 analysis. Strategic Management Journal, 10, 175–88. 3 Hope T. and Hope J. (1995) Transforming the Bottom Line: 4 Managing Performance with the Real Numbers. London: Nicholas 5 Brealey. 6 Houlihan J.B. (1984) Supply Chain Management. Proceedings of 7 the 19th International Technical Conference, BPICS, pp. 101–10. 8 Johnston R. and Lawrence P. R. (1988) Beyond vertical integra- 9 tion – the rise of the value-adding partnership. Harvard 40111 Business Review, July/August, pp. 94–101. 1 Kanter R.M. (1994) Collaborative advantage: the art of alliances. 2 Harvard Business Review, July/August, pp 96–108. 3 Kaplan R.S. (1984) Yesterday’s accounting undermines produc- 4 tion. Harvard Business Review, July/August, pp 95–101. 5 Lamming R. (1993) Beyond Partnership: Strategies for Innovation 6 and Lean Supply. New York: Prentice Hall. 7 Lere J. and Saraph J. (1995) Activity based costing for purchasing 8 managers’ cost and pricing determinations. International 49111 Journal of Purchasing and Materials Management, Fall. pp. 25–31.

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1111 Macaulay S. (1963) Non-contractual relations in business: a pre- 2 liminary study. American Sociological Review, 28 (2), pp. 55–67. 3 Macbeth D.K. and Ferguson N. (1994) Partnership sourcing: an 4 integrated supply chain approach. London: Financial 5 Times/Pitman Publishing. 6 Macneil I.R. (1974) The many futures of contract. Southern 7 California Law Review, 47, pp. 691–816. 8 Marson J. and Massey P. (1999) The strategic use of IT in the 9 supply chain. Journal of Financial Information Systems, 4, pp. 1–2. 1011 Miles R.E. and Snow C.C. (1986) Organizations: new concepts 1 for new forms. California Management Review, 28 (3), pp. 62–73. 2 Mohr J. and Speckman R. (1994) Characteristics of partnership 3111 success: partnership attributes, communication behaviour and 4 conflict resolution techniques. Strategic Management Journal, 15, 5 pp. 135–52. 6 Nohria N. and Eccles R.G. (1992) Networks and Organizations; 7 Structure, Form and Action. Boston: Harvard Business School 8 Press. 9 Okimoto D.I. (1986) Regime characteristics of Japanese indus- 20111 trial policy. In Hugh Patrick (ed.), Japan’s High Technology 1 Industries. Seattle: University of Washington Press. 2 Partridge M. and Perren L. (1994) Cost analysis of the value 3 chain: another role for strategic management accounting. 4 Management Accounting, July/August, pp. 22–8. 5 Porter M.E. (1985) Competitive Advantage: Creating and Sustaining 6 Superior Performance. New York: The Free Press. 7 Pruitt D.G. (1981) Negotiation Behaviour. New York: Academic 8 Press. 9 Quillian L. (1991) Curing ‘functional silo syndrome’ with logis- 30111 tics total cost management. CMA Magazine, June, pp. 9–14. 1 Sako M. (1992) Prices, Quality and Trust: Inter-firm Relations in 2 Britain and Japan. Cambridge: Cambridge University Press. 3 Saunders M. (1994) Strategic Purchasing and Supply Chain 4 Management. London: Pitman for the Chartered Institute of 5 Purchasing and Supply. 6 Scott W.R. (1995) Institutions and Organizations. London: Sage. 7 Shank J.K. and Govindararajan V. (1992) Strategic cost manage- 8 ment and the value chain. Journal of Cost Management, 5 (4), 9 pp. 5–21. 40111 Stuart F.I. and McCutcheon D. (1996) Sustaining strategic 1 supplier alliances. International Journal of Operations and 2 Production Management, 16 (10), pp. 5–22. 3 Teece D. (1996) Firm organization, industrial structure and tech- 4 nological innovation. Journal of Economic Behaviour and 5 Organization, 31, pp. 193–224. 6 Turnbull P., Oliver N. and Wilkinson B. (1992) Buyer–supplier 7 relations in the UK automotive industry: strategic implications 8 of the Japanese manufacturing model. Strategic Management 49111 Journal, 13, pp. 159–168.

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1111 Whitley R. (1994) Business Systems in East Asia. Firms, Markets 2 and Societies. London: Macmillan. 3 Williamson O.E. (1970) Corporate Control in Business Behaviour. 4 Englewood Cliffs, NJ: Prentice Hall. 5 Williamson O.E. (1973) Markets and hierarchies. American 6 Economic Association, 63, p. 2. 7 Williamson O.E. (1975) Markets and Hierarchies: Analysis and Anti- 8 trust Implications. New York: Free Press–Macmillan. 9 Williamson O.E. (1979) Transaction – cost economics: the gover- 1011 nance of contractual relations. Journal of Law and Economics, 1 22 (2), pp. 3–61. 2 Womack J.P., Jones D.T. and Roos D. (1990) The Machine that 3111 Changed the World. New York: Rawson Associates. 4 Zheng J., Harland C., Johnsen T. and Lamming R. (1997) Features 5 of supply networks. Paper presented at the BAM Conference, 6 London. 7 8 Questions 9 20111 1. This chapter explains that the emergence of supply chain 1 management requires a fundamental change in accounting 2 procedures: 3 4 (a) explain in detail the need for procedural change 5 (b) provide a brief indication as to the nature of these changes. 6 7 2. What may be the challenges faced by companies in the imple- 8 mentation of total cost of ownership approach. 9 3. Explain the concept and importance of activity based analysis. 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 223 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 PART 2 ●●●● 3 3 4 5 6 Supply Chain 7 8 9 1011 Perspectives 1 2 3111 4 Internationalization of the Supply Chain 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 PERSPECTIVE 2 ●●●●●● 1 3 4 5 6 Internationalization 7 8 9 1011 of the hospitality 1 2 3111 4 industry 5 6 7 8 Kevin Nield 9 20111 1 2 3 4 5 6 Introduction 7 The hospitality industry is by its very nature international. 8 The demand for it is international and many of the compa- 9 nies that operate within it are international. A cursory look 30111 at demand sources shows us that part of the demand for 1 hospitality services is derived from international tourists and 2 international business. In a global economy it makes economic 3 sense for the hospitality industry to be global. 4 The reasons for a company making the decision to operate 5 in international markets are well documented, and amply 6 illustrated by Teare and Olsen (1992). They identify two sets 7 of reasons that stem from inside or outside the company and 8 are either proactive or reactive. The proactive reasons include 9 growth and profit motives, managerial urge, the opportuni- 40111 ties that exist in foreign markets, agents encouragement, 1 extension of products and unique products. These unique 2 products and extension of products and product range, bring 3 with them supply chain problems. Reactive reasons for 4 internationalization include, the desire to diversify, risks and 5 saturation of domestic markets, as was experienced by 6 McDonald’s in the USA. The McDonald’s Corporation is 7 discussed in more depth later in this perspective. 8 49111 Food Supply Chain Management

1111 Multinational companies in the international hospitality industry 2 3 The international nature of the hospitality industry is reflected 4 in the global nature of the major players. These players were at 5 one time primarily American, but they now stem from across 6 the globe. Major multinationals in accommodation include 7 Granada (UK), Accor (France), Starwood which includes ITT 8 Sheraton, Westin (US), New World (Hong Kong), Saison (Japan) 9 and Movenpick (Switzerland). At the same time, we should not 1011 forget the major players in the global restaurant industry, 1 including well-known names and brands such as McDonald’s 2 (US) and Burger King (UK). Table P1.1 gives the world’s top 3111 five hotel chains. 4 The scale of investment in accommodation and catering 5 services requires that substantial expenditure on land, buildings 6 and equipment be made, e.g. the Ritz in Madrid was recently 7 sold for a price in the region of £80 million. Investments of that 8 magnitude may be difficult to finance, and the risks of such an 9 investment may be thought, by many, to outweigh the benefits. 20111 Added to this, any expansion based on that magnitude of costs 1 will be slow. These pressures have helped bring about change 2 in the type of investment in overseas markets from direct invest- 3 ment to non-investment management arrangements (NIMAs) 4 and management contracts. Where direct investment was the 5 norm from the 1950s to the 1960s, management contracts and 6 NIMAs account for over 90% of all multi-national involvement 7 (Dunning and McQueen 1982) 8 9 Forms of NIMA 30111 1 The most common forms of non-investment management 2 arrangements in the international hospitality industry are the 3 franchise and the management contract. 4 5 6 7 Chain Hotels Rooms 8 9 Cendant Corporation (Howard Johnson, 5979 499 056 40111 Ramada, Travelodge Hotels Inc.) (USA) 1 Bass Hotels and Resorts (Holiday Inn, 2738 461 434 2 Forum, Inter-Continental) (UK) Marriott International (USA) 1696 328 300 3 Choice Hotels International (USA) 3670 305 171 4 Accor (France) 2666 291 770 5 6 Note: Best Western has been omitted as it is a hotel consortium that 7 Table P1.1 seeks to operate as a brand. 8 The world’s top five Source: Adapted from Hotels Magazine 49111 hotel chains

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1111 Franchises 2 3 Young et al. (1989) and Ellis and Williams (1995) identify two 4 types of franchise, these are: 5 1. ‘Product and trade name’ franchise: An example of this is 6 where Coca-Cola agrees to sell its syrup and the right to sell 7 its trademark to independent bottlers (franchisees). 8 9 2. Business-format franchise: This involves trademarks and prod- 1011 ucts but also marketing strategies, quality control, operating 1 procedures and communication between the franchiser and 2 the franchisee. 3111 This latter type of franchise is most common in the hospitality 4 industry. Examples of this type of franchise include McDonald’s, 5 Holiday Inn and KFC. The important thing about this is that each 6 enterprise is separately owned, financed from independent 7 sources but carry a single trading name. To the outside world 8 they are one and the same, for example how many people real- 9 ize that Holiday Inn is a franchise or know that KFC is not a 20111 chain? Just recently Forte have signed a franchise deal to manage 1 two new hotels in Israel – Le Meridien in Tel Aviv and Le 2 Meridien in Eilat. 3 4 5 International management contracts 6 A management contract is an agreement where one company (A) 7 runs a hotel or other enterprise for another company (B). In this 8 arrangement, company A, the contractor, may offer a brand 9 image, e.g. Moat House, or Hilton and their operating standards, 30111 management systems, staff management, reservations and refer- 1 ral capabilities. In return for this the contractor receives new mar- 2 kets, reduced financial risks and, of course, profit (Eyster 1997). 3 Recent examples of management contracts are Hilton Inter- 4 national, which has won its first management contract at the 5 British Colonial Hilton, Nassau after a $50m refurbishment and 6 30 Thistle hotels which have been sold to Lehman Bros. The 7 management contract has been awarded to Peel Hotels. 8 9 40111 The advantages of non-investment management arrangements 1 The advantages of the arrangements that NIMAS bring are aptly 2 illustrated in the scenario outlined below. 3 4 5 Scenario 6 1. A local company owns a hotel in Spain. 3. An American multi-national management 7 contractor operates the hotel. 8 2. This company is in turn owned by a 49111 British holding company.

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1111 This relationship gives the optimum best use the American company becomes the well- 2 of the factors of production. known multi-national operator e.g., Sheraton 3 Figure P1.1 illustrates the factor that is or Hyatt. But it should be noted, that these 4 contributed by each of the players in this types of arrangements are essentially part of 5 scenario. the supply chain and as such impact upon 6 What happens next is that the UK the operation and in some cases, the ethics 7 company has a development portfolio and of the supply chain. 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 Figure P1.1 Contribution of each player in the scenario (adapted from Bull 1995) 7 8 9 30111 1 Problems associated with internationalization 2 3 Government or legal restrictions 4 5 Quite simply there may be restrictions that mean that a fran- 6 chise cannot operate in the way that it wishes to. For example 7 McDonald’s prefers to own the leases on all of its properties. 8 This is not possible in some countries, where foreign ownership 9 of land is not allowed. This may also have supply chain 40111 implications, e.g., there may be government restrictions on the 1 purchase of goods. 2 3 Recruitment of suitably qualified franchisees 4 5 The problem here is that it might be necessary for franchisees 6 to have qualifications or attributes to make the franchise a 7 success. For example, a service culture that they simply do not 8 possess. This is particularly true in Eastern Europe, where service 49111 may be regarded as synonymous with servility.

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1111 Lack of local funding 2 3 Franchising is potentially very expensive to the franchisee, a 4 typical franchisee would have to pay for the cost of the restau- 5 rant and its equipment, a ‘joining royalty’, training costs and 6 inventory costs. This sort of finance, and the institutions that may 7 supply finance for franchises, are not available in many countries. 8 This may also be the case in regard to management contracts. 9 1011 Difficulty of controlling franchisees and other parties to the contract 1 2 Franchise and management contracts are legally binding agree- 3111 ments. A franchise package and a management contract are 4 normally very rigid, both parties must do exactly what is stip- 5 ulated in the contract. This may be easy to control in the home 6 country, but may be extremely difficult in other countries where 7 contract law is not the same, or where legal procedures are 8 slow and drawn out. This may immediately have supply chain 9 implications, e.g. where franchisees move away from prescribed 20111 suppliers. 1 2 The offerings of both the franchise and the management contractor 3 4 These may have to be re-designed to make them saleable in 5 foreign markets. Food products that are acceptable in one coun- 6 try are not acceptable in another. The obvious examples are pork 7 in Moslem countries and beef in India. However, there are other 8 cultural considerations that will have to be taken into account and 9 questions of national taste that may have to be considered. 30111 Because of the problems associated with the above, it has been 1 suggested that franchising may become more common in the 2 later stages of market development. As was recorded in the 3 McDonald’s annual report of 1995, 47% of the restaurants that 4 operated outside of the USA, were franchised, while only 29% 5 were operated as company owned. The remainder were oper- 6 ated by affiliates (Daniels and Radeburgh 1998). 7 Further evidence of franchising becoming more common in 8 the later stages of market development may be demonstrated by 9 McDonald’s entry into the UK market in the 1970s. All of the 40111 original restaurants were owned by McDonald’s and of them 1 only one traded at a profit in the early years. The reasons for 2 this were that McDonald’s wished to establish the brand and 3 the advertising costs associated with start-up, were too high to 4 be borne by the franchisees. 5 6 The supply chain and the international hospitality industry 7 8 It is self-evident that the hospitality industry is part of the food 49111 supply chain. How this relationship is handled will vary from

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1111 company to company. At one extreme all products will be 2 imported from prescribed supplier or suppliers, at the other 3 extreme suppliers will be freely selected, local and imported 4 produce will be utilized. 5 Daniels and Radeburgh (1998) point to the problems that 6 McDonald’s faced in setting themselves up in Moscow. After 7 years of negotiation, a joint venture between McDonald’s and 8 Moscow City Council, was agreed. The original idea was that 9 as far as possible, local produce should be used. Unfortunately 1011 this proved to be impossible. It had been expected that some 1 goods would be available locally and that others would be 2 provided as part of the national planning process. Some goods 3111 simply did not exist in Russia, e.g. the Russet Burbank potato. 4 The results of all of this were that McDonald’s had to build 5 and operate its own food processing plant on the outskirts of 6 Moscow and had to provide the expertise to help Russian farmers 7 and producers provide food stuffs of the required quality. In 8 addition, they also had to provide transport as this was unreli- 9 able for food supplies. 20111 Supply chain implications also come from the type of opera- 1 tion, e.g. many hotels are catering for foreign nationals. It is 2 arguable, that many of the hotels on the Costas of Spain are 3 catering for markets that are not Spanish, the result of this is 4 that goods are imported to suit the foreign tastes. This, there- 5 fore involves problems associated with importing, such as 6 exchange rate fluctuations, reliability of delivery and the nega- 7 tive impacts on the balance of payments. In the case of large 8 concerns, some of the problems may be overcome by central 9 buying and warehousing but this is not possible for everyone. 30111 Other supply chain implications stem from the type of 1 contract. As part of some franchises, the contract stipulates 2 that foodstuffs must be supplied by the franchiser or a supplier 3 approved by the franchiser. The result of this is that for 4 some overseas operations, the majority of its supplies are 5 supplied from the home country of the franchisers. The impli- 6 cation of this is that the supply chain is short, but the supply 7 line is long. 8 The ethics of the international hospitality supply chain 9 also need a mention. In research carried out in the Black Sea 40111 resorts of Romania, Kozak and Nield (1998) reported that many 1 of the local food products were not to the taste of foreign tourists. 2 The obvious solution to this dilemma was to import foodstuffs 3 to suit foreign tastes, but this could not be done by national 4 hotels for reasons of finance. It may be argued that this should 5 not be considered for ethical reasons as some of the foods 6 that were disliked by foreign nationals were in fact national 7 dishes, and part of the cultural heritage of Romania. Supply 8 chains within the international hospitality industry have cultural 49111 implications that should not be forgotten or overlooked.

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1111 References 2 3 Bull A. (1995) The Economics of Travel and Tourism, 2nd edn. 4 London: Longman. 5 Daniels J.D. and Radeburgh L.H. (1998) International Business, 8th 6 edn. Reading, MA: Addison Wesley. 7 Dunning J.H. and McQueen M. (1982) Multinational corpora- 8 tions in the international hotel industry. Annals of Tourism 9 Research, 4, pp. 69–90. 1011 Ellis J. and Williams D. (1995) International Business Strategy. 1 London: Pitman. 2 Eyster J.J. (1997) Hotel management contracts in the US: 12 areas 3111 of concern. Cornell HRQ, 38 (3), pp. 21–33. 4 Kozak M. and Nield K. (1998) Importance-performance analysis 5 and cultural perspectives in Romanian Black Sea resorts. 6 Anatolia, Winter, 9 (2), pp. 99–116. 7 Teare R. and Olsen M. (eds) (1992) International Hospitality 8 Management. London: Pitman. 9 Young S., Hammil J., Wheeler C. and Davies J.R. (1989) Inter- 20111 national Market Entry and Development: Strategies and 1 Management. Brighton: Harvester Wheatsheaf. 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 233 1111 PERSPECTIVE 2 ●●●●●● 2 3 4 5 6 Internationalization 7 8 9 1011 of food retailing 1 2 3111 4 Nicholas Alexander 5 6 7 8 9 20111 1 2 Introduction 3 The food distribution process has long been characterized by 4 the international nature of food distribution channels. The 5 movement of products from locations where the product is 6 produced, to the location where it is required, but cannot be 7 produced, is a fundamental of world trade and food supply 8 systems. Traditionally, however, while the distribution system 9 itself has been internationally based, the final commercial 30111 participant in the channel of distribution has been far from 1 international in operation. In recent years this traditional 2 picture has changed. 3 This perspective analyses the development of nationally 4 based food retailers towards international retailing operations. 5 A number of examples are used to explain why European 6 food retailers have begun to contemplate non-domestic expan- 7 sion and to chart through to the new millennium, the 8 international directions that have been taken. 9 40111 1 The growth of international food retailing 2 US food retailing has had an important, yet often indirect, 3 impact on the practices adopted by food retail operations. 4 While some US food retailers, such as Safeway, have attempted 5 to establish international operations, their influence in inter- 6 national markets has primarily come from the innovations in 7 operating practices, that have subsequently been adopted else- 8 where in international markets. 49111 Internationalization of food retailing

1111 In contrast, European food retailers have played, and are 2 continuing to play, an important and direct role in the interna- 3 tionalization of food retailing activities. From the late 1960s, 4 European food retailers have been increasingly constrained by 5 the limitations of their domestic markets and began to explore 6 the opportunities to expand within Europe and further afield. 7 Burt (1991) has shown that the late 1960s and early 1970s 8 witnessed a considerable growth in the international activities 9 of food retailers based in France and Germany. 1011 The initial period of expansion in the late 1960s and early 1 1970s was followed by a period of further expansion, during 2 which market opportunities outside Europe became an impor- 3111 tant destination for European food retail investment. By 1980, 4 10% of US grocery retailing was in the hands of European 5 owned retailers (Ball 1980; Seigle and Handy 1981). The attain- 6 ment of ‘European retailers’ significant role in the distribution 7 of food products in the US, was mainly achieved through the 8 acquisition of existing US food chains. Important acquisi- 9 tions included that of A&P (Atlantic & Pacific) in 1979 by the 20111 Tengelmann Group based in Germany, the acquisition in 1977 1 of Bi-Lo by Ahold the Dutch retailer and the acquisition in 2 1974 of Food Town Stores by the Belgian retailer Delhaize. 3 4 5 Structure of growth 6 The reasons why European food retailers began to look toward 7 non-domestic markets, at the end of the 1960s and early 1970s, 8 are numerous. 9 Although some retail organizations, such as the non-food 30111 retailers the Body Shop and Benetton, internationalized early 1 during their commercial development, food retailers have tended 2 to achieve considerable penetration levels within their domestic 3 market before moving towards international activity. Thus, inter- 4 nationalization for food retailers is often associated with 5 saturation of the domestic market (Alexander 1997). This satu- 6 ration may take two forms: 7 8 1. Saturation as the result of market saturation: Here the retailer 9 concerned has exploited, or nearly exploited, the opportunities 40111 available in the domestic market. For example, Tesco began 1 international expansion on mainland Europe during the 1990s 2 at a time when it was mopping up the last market opportu- 3 nities within the UK. 4 5 2. Saturation as a result of the imposition of regulation: This 6 regulation is often the consequence of fears expressed by 7 independent traders, or other interested parties, who fear a 8 reduction in local and national competition, with the removal 49111 of small enterprises from the retail structure. The Belgian and

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1111 French markets illustrate this type of development. In France 2 the Loi Royer and in Belgium regulations known as the Padlock 3 Law, restricted the development of large format food outlets 4 from the early 1970s. Consequently, for retailers such as 5 the French food retailer Carrefour and the Belgian retailer 6 Delhaize, internationalization was no longer merely an option, 7 it became an imperative. 8 9 Thus, large format food retailers have been forced out of their 1011 domestic market and into the international environment because 1 of commercial or regulatory restrictions. In Europe, these pres- 2 sures began to become significant in the 1960s. However, such 3111 pressures were exacerbated by the general economic downturn 4 in the European market in the mid-1970s. These economic pres- 5 sures further encouraged retailers to seek markets such as the 6 US, where economic and regulatory conditions were considered 7 more attractive and less restrictive. 8 The growth of a very large food distribution system in the 9 domestic market, not only had an impact on intra-retail compe- 20111 tition, but also on the relationships that existed within the 1 distribution channel. The growth of retail power within the 2 distribution system led some analysts to suggest that a new 3 stage in the development of distribution channels had been 4 achieved. Pommering (1979) suggested that there were three 5 phases of development. The first stage, attributed to the 1950s, 6 was described as a period of manufacturer domination in a 7 context where the unsophisticated distribution system acted 8 merely as a conduit for the flow of goods from producer to 9 retailer. The second stage, the 1960s, was seen as a period when 30111 the consumer’s role began to change as the growth in consumer 1 choice empowered the consumer in the market. The third stage, 2 the decade of the 1970s, with the concentration of power within 3 the retail sector, saw retailers adopting roles previously attrib- 4 uted to other members of the distribution channel. 5 As a result of this enhanced role, retailers were in a far 6 stronger position to develop managerial functions such as 7 formalized marketing departments, (Piercy and Alexander 1988) 8 and consequently consider the development of international 9 retail operations. Food retail organizations achieved, and subse- 40111 quently developed, a capacity to operate outside their domestic 1 markets. 2 As Vida and Fairhurst (1998) have noted, decision maker 3 characteristics and firm characteristics play an important role in 4 the development of international retail operations. Thus, through 5 increased experience of the international environment, the 6 knowledge base within the firm and the increased commitment 7 of resources, food retailers became more adept at dealing with 8 the challenges of the international market. 49111

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1111 Direction of international expansion 2 3 Some cross-border or border-hopping activity characterized 4 the early international development of food retailing. Thus, 5 Carrefour experimented with its innovative hypermarket format 6 in adjacent markets in Europe. However, in many instances, 7 European markets were not particularly attractive target markets 8 for international expansion. In the more developed markets of 9 Western Europe, there already existed relatively advanced food 1011 retail structures where indigenous retailers were capable of 1 fending off the incursions of retailers from neighbouring markets. 2 Some international food retailers were successful in the devel- 3111 opment of less developed markets in Europe, for example on 4 the Iberian peninsula. French retailers, such as Carrefour and 5 Promodès, were to take the lead in these markets, and by the 6 end of the 1980s, had established a considerable market presence 7 in the Spanish and Portuguese markets. These French market 8 entrants often used partnership agreements with local businesses 9 and used fascias other than those used in the domestic market, 20111 while the expansion involved the transfer of skills and format 1 from one market to another. This, however, was not the 2 fundamental logic behind the initial process of food retail inter- 3 nationalization by European retailers outside Europe. 4 During the second half of the 1970s the US proved attractive 5 to European food retailers. Before 1975, the US had seen very 6 little external investment in its food distribution sector. By 1980, 7 10% of all food retail sales in the US occurred through European- 8 owned retail operations. These sales did not occur mainly 9 through the fascias used by European food retailers in their 30111 domestic market, although the German retailer Aldi was an 1 exception to this general trend. 2 European food retailers’ approach to the US retail market was 3 fundamentally investment based. The existing fascias were 4 retained and to a great extent so were existing management 5 structures. Indeed, one of the lessons of this period of expan- 6 sion was the role existing management are able to play in the 7 development of acquired operations. 8 In the 1980s, European food retailers were faced with two 9 fundamental options when considering international expansion. 40111 There was either the European market or there was the US. For 1 some, diversification in the domestic market proved a third and 2 fundamentally more attractive option. Nevertheless, a small 3 group of ambitious retailers began to explore the possibilities of 4 expansion within Latin America, but this was not considered an 5 option by most of the larger European food retailers at that time. 6 In the 1990s, the international expansion opportunities began 7 to change. With the collapse of political structures, in the centrally 8 planned countries of East Europe, markets in the region offered 49111 new prospects for commercial development on the European

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1111 retailers’ doorstep. Although, the opportunities for expansion in 2 East Europe did not prove as exceptional as had originally been 3 envisaged, some market opportunities did emerge. In particular, 4 the geographically proximate and socio-economically more 5 developed markets of Poland, the Czech Republic and Hungary 6 began to attract European retailers. 7 Also, in the early 1990s, the markets of East Asia began to 8 attract more interest. Although, European retailers had been 9 operating in East Asian markets for some time, these markets 1011 tended to be limited in size or culturally challenging. Hong Kong 1 and Singapore had been the mainstay of international retail pene- 2 tration within the region for a number of decades, while Japan 3111 proved a difficult trading environment. In the early 1990s, the 4 opportunities in the region changed with the emergence of 5 the Asian tiger economies. Suddenly, the region offered large 6 consumer markets that were served by traditional and increas- 7 ingly outmoded retail structures. 8 Although, the exploitation of the East Asian market was inter- 9 rupted by the financial and subsequent economic crises in the 20111 region, the region has seen European food retailer expansion. 1 By the end of the 1990s, Tesco operated 13 Lotus stores in 2 Thailand and Ahold operated 39 Tops supermarkets in Thailand, 3 13 in Singapore, 7 in Indonesia and 5 in Malaysia (Retail 4 Intelligence 1999). Likewise, Carrefour operated 19 hypermar- 5 kets in Taiwan, 7 in Thailand, 4 in South Korea, 4 in Malaysia 6 and 3 in Hong Kong. 7 Latin America has increasingly proved of interest to interna- 8 tional food retail operations as markets stabilized. Carrefour, for 9 example has, shown considerable interest in the global region in 30111 the 1990s. 1 2 International food retailing 2000 3 4 At the beginning of the twenty-first century, the international 5 group of food retailers is dominated by European operations. 6 Elsewhere, food retailers have mainly remained willing to 7 operate in the domestic market rather than explore the interna- 8 tional opportunities available to them. For example, despite the 9 increasing concentration of food operations in the Australian 40111 market, Australian food retailers have proved reluctant to move 1 into potentially lucrative neighbouring markets. This is particu- 2 larly surprising given the opportunities offered by markets on 3 the Pacific Rim. Nevertheless, it is possible that recent federal 4 government enquiries into the limited number of food retailers 5 operating in the Australian market and their potentially 6 damaging impact on competition, may encourage food retailers 7 based in the market to consider international expansion. 8 In the US, food retailers have been generally content to remain 49111 within the domestic market. Food retailers, such as Safeway,

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1111 have attempted to establish operations outside the US in the 2 past, although these initiatives are remembered now by the 3 fascias left behind rather than through their current influence 4 on international food retailing. The exception to this rule is 5 Wal-Mart with its much publicized entry into the European 6 market through acquisitions in Germany and the UK. The 7 company has an opportunity to become a world player in the 8 retail food market. 9 The greatest influence of Wal-Mart on the market however, 1011 may not be its commercial activities, but the effect that the global 1 development of the retailer has on the other international 2 retailers. That is, retailers elsewhere may see the arrival or threat- 3111 ened arrival of Wal-Mart in the domestic market as a reason for 4 market consolidation. The recent merger of Carrefour and 5 Promodès is evidence of the likely response to the development 6 of a large international US food operation. However, a particu- 7 larly crucial point will have been reached when the response to 8 such threats does not merely cause merger activity within a 9 European market, but across European markets. 20111 In Europe, at the end of the 1990s, the largest ten retail orga- 1 nizations were all retailers that had food at the core of their 2 operation. Although many of these retailers had entered other 3 non-food areas, in an attempt to exploit lucrative market oppor- 4 tunities, they were in origin all food retailers (see Table P2.1). 5 Internationally these retailers have major interests in the 6 various regions of the world. They are investing in North 7 America, in East Asian markets and markets in Latin America. 8 They are also making investments in Europe, particularly the 9 less developed markets of the Mediterranean and the emerging 30111 markets in Eastern Europe. One of the significant consequences 1 of these international developments has been the emergence of 2 a new type of food retailer – the global food retailer. Ahold is 3 a good example of one of these. 4 5 6 Retailer Market of origin Turnover (Ecu bn) 7 8 Metro Germany 46.6 9 Intermarché France 34.5 40111 Rewe Germany 32.3 1 Promodès France 32.3 Edeka Germany 30.3 2 Tesco UK 27.5 3 Carrefour France 27.4 4 Tengelmann Germany 27.1 5 Ahold Netherlands 26.5 6 Aldi Germany 23.7 7 Table P2.1 8 Largest retailers in Europe, Source: Retail Intelligence1999 49111 1997/98

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1111 Conclusion 2 3 In the past 40 years, food retailing has moved from a nation- 4 ally based competitive structure to an internationally based 5 competitive structure. The largest food retailers in the world 6 now have considerable international interests. Food retailers 7 will find it increasingly difficult to compete in their domestic 8 markets without the channel power that international opera- 9 tions bring. 1011 Although European food retailers have achieved a global oper- 1 ating base, the food retail structure within Europe remains 2 fractured and regionalized. In the core markets in Europe, there 3111 is still relatively little competition from food retailers based in 4 other core markets. Thus, retail structures in France, Germany, 5 the Netherlands and the UK have seen limited international 6 penetration by food retailers based in these markets. Instead, 7 firms from countries are competing for space and market share 8 in emerging markets such as Brazil and Poland. 9 In Brazil, Carrefour is competing with Ahold, Auchan and 20111 Casino for market penetration. In Poland, Carrefour is competing 1 with Ahold, Aldi, Auchan, Dohle, Intermarché, Jerinónimo 2 Martins, Leclerc, Metro and Tesco amongst other west European 3 food retailers. 4 In their domestic markets, the structure of the local market 5 and planning regulations make it very difficult for retailers to 6 compete with each other as they do in international markets, 7 unless they are prepared to acquire an existing operation or 8 engage in merger activity. Given the relative size of the organi- 9 zations, the former is not easily achieved and the latter has not 30111 so far proved popular. However, with the increasingly compet- 1 itive nature of the international retail market, such developments 2 will occur as the global food retailers’ attempt to secure their 3 market position in the European marketplace. When this does 4 occur, the power of food retailers within the distribution channel 5 in Europe will increase considerably and further alter the balance 6 of power within the channel between producer and retailer, to 7 the advantage of the retailer. 8 9 References 40111 1 Alexander N. (1997) International Retailing. Oxford: Blackwell. 2 Ball R. (1980) Europe’s US shopping spree. Fortune, 1 December, 3 pp. 82–8. 4 Burt S. (1991) Trends in the internationalization of grocery 5 retailing: the European experience. International Review of 6 Retail, Distribution and Consumer Research, 1 (4), pp. 487–515. 7 Piercy N. and Alexander N. (1988) The status quo of marketing 8 organization in UK retailers: A neglected phenomenon of the 49111 1980s, The Service Industries Journal, 8 (2), pp. 155–75.

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1111 Pommering D. (1979) Brand marketing: fresh thinking needed. 2 Marketing Trends, 1, pp. 155–75. 3 Retail Intelligence (1999) Retail Sans Frontieres: The Internationali- 4 sation of European Retailing. London: Retail Intelligence. 5 Seigle N. and Handy C. (1981) Foreign ownership in food 6 retailing. National Food Review, Winter, pp. 14–16. 7 Vida I. and Fairhurst A. (1998) International expansion of retail 8 firms: a theoretical approach for future investigations. Journal 9 of Retail and Consumer Services, 5 (3), pp. 143–51. 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 241 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 PART 2 ●●●● 3 3 4 5 6 Supply Chain 7 8 9 1011 Perspectives 1 2 3111 4 Contemporary Issues 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 PERSPECTIVE 2 ●●●●●● 3 3 4 5 6 The case of 7 8 9 1011 GM food 1 2 3111 4 David Barling 5 6 7 8 9 20111 1 2 Introduction 3 The large-scale introduction of GM (genetically modified) 4 crops, mainly imported from overseas, into the food chain 5 since 1996 has been met with strong consumer resistance in 6 Europe. The strength of the public’s reaction initially caught 7 many by surprise, not least the large agricultural biotech- 8 nology corporations and the large food manufacturers. The 9 force and breadth of this reaction has reverberated back along 30111 the food supply chain, creating a series of complex challenges, 1 both to the key actors along the food supply chain and to 2 governmental regulators (national and international) alike. 3 A key signal from the market has been interpreted as the 4 need to provide the consumer with a choice between GM and 5 non-GM foods. However, within this statement lies a range 6 of disputed terms and definitions. Also, the establishment of 7 a supply chain of non-GM foods has invoked a range of issues 8 and challenges at the different points along the international 9 food chain. The operation of a meaningful labelling regime 40111 within the European Union (EU) is also a major challenge as 1 it is dependent on some method of verification, for which reli- 2 able and accurate detection methods are necessary. The 3 concept of consumer choice has not stopped at the labelling 4 of the final product. There has been a gradual, sometimes 5 begrudging, acceptance that systems of identity preservation 6 or segregation for non-GM and GM foods, allowing for the 7 possibility of traceability and audit trails along the food chain, 8 are necessary for genuine consumer choice. It has been the 49111 Food Supply Chain Management

1111 retailers and the food manufacturers who have taken the lead 2 in the development of alternative supply chains to meet the 3 consumer’s desire for non-GM food. 4 5 GMOs and the food supply chain: alternative models 6 7 The established view of the entry of GMOs (genetically modi- 8 fied organisms) into the food chain is depicted in Figure P3.1, 9 starting with the agricultural biotechnology companies and 1011 the development of patented GM seeds, moving along to the 1 producer or farmer/grower until the food product reaches 2 the consumer. However, the reaction of European consumers 3111 to the large scale entry of GM foods, has inverted the sequence 4 of the food chain, as the large food retailers have responded to 5 their consumers’ concerns. Hence, these retailers have confirmed 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure P3.1 The entry of GMOs into the food chain

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1111 their key role as powerful contractors in the supply chain, as 2 well as effectively being gatekeepers for their customers concerns 3 (Marsden et al. 2000). The food retailers have sought to manage 4 the supply chain in order to provide a non-GM supply separate 5 from the intermingled supplies (of GM with non-GM commodi- 6 ties), that initially entered the food chain in 1996. 7 Figure P3.2 provides a different dynamic to the food chain 8 relationship for the supply of GM/non-GM foods. In this 9 dynamic the end user, the consumer and subsequently the 1011 retailer become key drivers. To quote Bill Wadsworth, technical 1 director of Iceland, who pioneered the search for a non-GM 2 soybean supply: ‘The only way that any European consumer 3111 was given a choice was because we fundamentally broke the 4 supply chain. We set up a totally unique supply chain’ (House 5 of Commons Select Committee on Science and Technology 1999). 6 Hence, we see two alternative models of the food supply chain 7 in existence with the latter model seeking to establish itself 8 effectively. It was the large-scale entry of GM soybean and maize 9 commodities into the European food chain that triggered these 20111 developments, as the next section explains. 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure P3.2 The dynamic for the supply of non-GM foods

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1111 None the less, in attempting to realize the non-GM food chain 2 the actors in the food chain and the regulators are faced with a 3 number of complex challenges. 4 5 The large scale entry of GM crops into the European 6 food supply and the market reaction 7 8 The first large scale planting of GM crops began in North 9 America in 1996. By 1998, farmers in the large crop-growing 1011 areas of countries such as the US, Canada and Argentina grew 1 commercially an estimated 27.8 million hectares of GM crop vari- 2 eties, increasing to 39.9 million hectares in 1999 (Gene Watch 3111 UK 1999). This first generation of GM crops were cleared by 4 their government authorities for field characteristics determined 5 by bacterial genes, such as tolerance to the broad spectrum herbi- 6 cides glyphosate and glufosinate ammonium and insect 7 resistance due to the insertion of genes from the soil bacterium 8 Bacillus thuringiensis (Bt). 9 The first GM crops were novel extensions of the agrochemical 20111 technology inputs that offered potential agronomic benefits to 1 farmer/growers, such as reducing the number of herbicide 2 sprays during crop cultivation and more effective immediate 3 pest control. This first generation of GM products reflected the 4 growing corporate concentration that was developing in the so- 5 called ‘life sciences’ sectors. The ‘life sciences’ strategy was to 6 bring together pharmaceuticals, biotechnology, agribusiness, 7 food, chemicals, cosmetics and energy (e.g. ethanol) all under 8 one corporate umbrella. The large agrochemical companies were 9 rapidly merging and integrating in the 1990s both horizontally 30111 and vertically. For example, Aventis was formed from the 1 merger of Hoescht (which included AgrEvo) and Rhône Poulenc. 2 Novartis emerged from the merger of Ciba Geigy and Sandoz 3 and Astra Zeneca was a merger of a pharmaceutical with a crop 4 science company. In the US, Monsanto and DuPont, as well as 5 Novartis and Astra Zeneca from Europe, were rapidly absorbing 6 seed companies to exploit their germplasm holdings (RAFI 1999). 7 In addition, the agricultural biotechnology corporations had 8 entered into strategic alliances with the large agribusinesses who 9 in turn controlled large sections of the grain commodity gath- 40111 ering and distribution markets in the US and for overseas export. 1 Monsanto formed an alliance with Cargill and Novartis with 2 Archer Daniels Midland (ADM) (Heffernan et al. 1999). The US 3 agricultural biotechnology companies were estimated to have 4 spent approximately $2000 million on research and development 5 by 1995, while sales of agricultural biotechnology products 6 amounted to just $100 million in that year (Robinson et al. 1998: 7 52). Hence, there was a pressing need to realize these invest- 8 ments with increased sales as the first large scale plantings of 49111 GM crops began. In 1996, Monsanto’s Round-Up Ready soybean,

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1111 containing bacterial genes for glyphosate tolerance and a marker 2 gene resistant to the antibiotic ampicillin, received an EU 3 marketing licence for grain importation, storage and use in agri- 4 culture. This was initially seen as a turning point for the industry, 5 by critics and supporters alike, as it allowed for the large scale 6 importation of GM soybean and derivatives into the European 7 food market (Anon 1996). 8 It was estimated that something like 60% of foodstuffs on 9 sale in Europe would contain GM soybean derivatives. In 1011 1997, Novartis’ Maximizer GM Bt maize, which included novel 1 genes for resistance to the European corn borer and marker 2 genes for tolerance to glufosinate and resistance to the antibi- 3111 otic ampicillin, was licensed for importation and agricultural use. 4 Subsequently, in 1998 some 15 000 hectares of Bt maize were 5 grown in Spain and 1000 hectares in France (NFU 1998). 6 The EU’s approval of the Novartis’ Bt maize had been 7 extremely divisive. The presence of the marker gene for resis- 8 tance to the antibiotic ampicillin had lead several competent 9 national authorities to vote against commercial approval under 20111 the regulatory directive for the deliberate release of GMOs 1 into the environment (90/220). The national authorities were 2 concerned that as the maize would be used for animal feed, the 3 marker gene resistant to ampicillin might pass to the animal’s 4 gut, become activated there and cause therapeutic problems 5 (Barling 1997). This conflict symbolized the difficulties that the 6 regulatory regime under Directive 90/220 was experiencing, 7 which has led to its revision. 8 The risk assessment boundaries under the regulation were 9 unclear and had generally failed to take adequate account of the 30111 possible wider ecological effects of the release of GMOs, in partic- 1 ular with the regard to the potential impacts upon local and 2 regional biodiversity in Europe. 3 Also, the agricultural impacts of particular GM crops were 4 often ignored in the risk assessment process under the regula- 5 tory regime’s procedures. Consequently, although certain GM 6 varieties of maize and oilseed rape gained regulatory approval, 7 under the EU process, they were subsequently denied market 8 access in individual member states, putting further stress on the 9 regulatory regime (Barling 2000). In June 1999 the Council of 40111 Ministers announced a de facto moratorium of new commercial 1 approvals until the completion of the revision of the Directive. 2 Also, this example highlighted the lack of legislation covering 3 GM animal feed. 4 The first large scale shipment from the US of GM soybean 5 mixed in with non modified grain reached Antwerp in 1996 6 where Greenpeace organized an unsuccessful attempt to 7 prevent the unloading of the cargo. The protests did succeed in 8 raising public awareness, notably amongst northern continental 49111 consumers, of the large scale entry of GM commodities into the

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1111 European food chain. The disquiet amongst the German public 2 led some of the main food processors and distributors, including 3 Unilever and Nestlé, to remove soy oil from these modified 4 soybeans at the end of 1996 (Nottingham 1998). However they 5 refused at this stage to remove the oil from their products in 6 other European countries. Survey evidence through the 1990s 7 suggested that the European public were wary of the applica- 8 tion of GM to food, wanted clear labelling and were concerned 9 with the environmental impacts, as well as the potential human 1011 health risks, of GM food production. Trust in the regulators 1 was extremely low in most of Europe, in part reflecting the 2 lack of confidence from successive food and health crises 3111 (Barling et al. 1999). 4 The publicity attached to the imports of the soybean and maize 5 and the increased focus on the potential impacts upon biodi- 6 versity and farming practice in the European agri-environment, 7 of herbicide- and pesticide-modified GM crops, all helped to 8 heighten these public concerns further. The sluggish response 9 of the regulatory process was quickly outpaced by the further 20111 response of the key commercial players in the food chain as the 1 public voiced their disquiet as consumers. 2 The public discontent at the entry of these GM products into 3 the food chain spread to other major European nations, notably 4 in France and the UK, by the end of 1998. The public’s concerned 5 reached fever pitch in the early months of 1999, as was reflected 6 by campaigns on the issue of GM foods by the tabloid news- 7 papers, the Daily Express and the Daily Mail. The sensitivity of 8 the UK market was reflected in the case of a GM tomato paste 9 that had been launched in both the Sainsbury and Safeway 30111 supermarket chains in the UK in 1996. The launch of this product 1 was seen as an example of good practice for a new technology 2 product entry, with full labelling and explanatory leaflets. 3 Initially, it outsold its non-modified alternative, which it 4 undercut in price. However by the end of the decade the super- 5 markets, due to falling sales, had withdrawn the product. 6 Sainsbury had responded to the increased media reports about 7 GM food in early 1999 by opening a dedicated customer call line 8 on the subject. They received 300 calls in the first four hours and 9 reacted accordingly (House of Commons Select Committee for 40111 Agriculture 1999). 1 Initial calls from European food retailers and processors 2 for the segregation of modified from non-modified soybean for 3 the European market were met with resistance in the US by the 4 large US grain companies and the American Soybean Association 5 (Anon 1997). The UK frozen food retailer, Iceland, responded 6 by leading a search for non-modified sources of soybean from 7 Canada and Brazil for their own brand foods. Iceland also 8 sourced non-modified soybean derivatives from the same area 49111 in Brazil. The company sought to verify their supplies using the

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1111 detection methodology for GM DNA of polymerase chain 2 reaction (PCR) technology, developed by a US company, which 3 they then brought over to labs in the UK. However, the relia- 4 bility of these detection methods was not complete, so Iceland 5 supported them with a clear audit trail of testing through the 6 different stages of the food chain, from the field through to 7 the different processing and manufacturing phases (House of 8 Commons Select Committee on Science and Technology 1999). 9 In March 1998 they were able to announce their own brand foods 1011 as being non-GM. 1 The major supermarket retailers in the UK and northern 2 Europe soon followed Iceland’s lead. In March 1999, a consor- 3111 tium of Sainbury, Marks & Spencer, Carrefour (France), 4 SuperQuinn (Ireland), Effelunga (Italy), Migros (Switzerland) 5 and Delhaize (Belgium) was announced. Their intention was to 6 create a market presence with enough buying power to ensure 7 the maintenance of a non-GM supply chain, fully tested and 8 audited for their own brand products (Anon 1999). The major 9 processors also followed suit, under pressure from the retailers, 20111 as did some of the major restaurant and catering groups. A 1 survey by Friends of the Earth found that in March 2000 most 2 of the world’s top twenty-six food manufacturers who sold in 3 the European market had adopted non-GM policies for that 4 market (Friends of the Earth 2000). 5 The US suppliers began to make more amenable responses to 6 the question of segregation of soybean (and maize) exports 7 to Europe and Japan by the end of decade, as they saw their 8 share decline in these export markets. This meant the dedica- 9 tion of discrete grain elevators, silos and ship containers for 30111 non-GM commodities by companies like ADM. Some US farmers 1 also began to respond to the demands of the European and 2 Japanese market by revising their growing of GM crops. Cargill 3 offered some growers a premium for non-GM soybean for manu- 4 facture as Japanese Tofu. The Managing Director of Cargill in 5 the UK, speaking in late 1999, considered that for the next five 6 years the food industry would ‘remain where it is . . . i.e. that 7 it will not receive GM ingredients’ (House of Commons Select 8 Committee on Agriculture 2000). Hence, the creation of a non- 9 GM supply chain was international in its scope. In 1999 the 40111 regional government of the Brazilian province of Rio Grande del 1 Suid sought to ban the growing of GM soybean, putting it in 2 dispute with the national authorities (Bellos 1999). The following 3 year the first futures contract for GM free grain (soybean) was 4 announced for the Tokyo Grain Exchange (Tett 2000). The value 5 of agricultural bi-technology within the large ‘life sciences’ corpo- 6 rations came under scrutiny. Further mergers occurred (e.g 7 Monsanto with Pharmacia Upjohn) and the possible float of 8 the agricultural biotechnology arms from some of these large 49111 corporations was rumoured.

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1111 In effect, a private system of regulation that was market led 2 rapidly appeared, enabled both by the corporate concentra- 3 tion in different stages of the food chain (at retailing, processing 4 and, to a lesser extent, catering) and to some extent by the 5 improvements in detection technology. At the production 6 and commodity distribution end of the food system corporate 7 concentration had facilitated the development of agricultural 8 biotechnology. Ironically, corporate concentration at the retail 9 and food processing ends of the food system was enabling the 1011 European consumers’ rejection of the technology. However, 1 despite the rapid move to find non-GM supply chains, the search 2 for non-GM products, especially soybeans and maize and their 3111 derivatives, faced a number of difficulties at the various stages 4 of the food chain. 5 6 The challenges for segregation/identity preservation of 7 non-GM food 8 9 The use of identity preservation (IP) systems for separating 20111 premium crops from the main bulk predated the growing of GM 1 crops. However, the introduction of IP systems on such a large 2 scale amongst crops like soybean, that were traditionally inter- 3 mingled through bulk methods of collection, storage and 4 transportation, were more challenging. 5 The challenges to generating a non-GM supply of, for example, 6 soybean or maize starts with the planting and harvesting of seed 7 on the farm. Potential problems include the possibility of the 8 mixing of GM with non-GM seeds due to: impurity in the seed, 9 mixing with volunteer plants already in the field, seed lying 30111 dormant in the soil seed bank and mutation in the crop emerging 1 in later generations. Also, there is possibility of cross-pollination, 2 raising questions of the adequacy of the separation distances 3 between GM and non-GM crops. Mixing with seeds through 4 harvesting, drilling and storage equipment is also a possibility. 5 Hence strong protocols of good practice need to be adhered 6 to by the agricultural industries (Barling 2000). In addition, care 7 needs to be taken over segregation in animal feed, where the 8 industry has lagged behind in developing protocols and segre- 9 gation compared to the human food supply. 40111 The subsequent move towards segregated handling systems 1 has begun, but accidental or adventitious contamination remains 2 a remote possibility during these stages, although safeguards 3 were being put in place to try to avoid any intermingling beyond 4 the farm gate during the shipment and transportation of grain. 5 Initial claims that premiums would be added to the non-GM 6 supplies and result in increased cost to the consumer were not 7 realized. The final costs of segregating non-GM from GM grain 8 within these bulk systems have yet to reach the consumer (House 49111 of Commons Select Committee on Agriculture 2000). Also, the

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1111 derivatives added to the final manufactured food product are 2 such a small percentage of that product that the impact on 3 the final cost has been minimal. The segregation at the proces- 4 sing of the grain at both the primary stage (into oils, flour 5 and other derivatives such as lecithin) and the secondary stage 6 (insertion of oils etc. into the final manufactured product, such 7 as margarine) intended for human consumption, has become 8 increasingly widespread. 9 Finally, the presentation of the final product to the consumer 1011 via food retailers and catering outlets, has been the focus of an 1 evolving and somewhat confusing labelling regime within the 2 European Union (EU). 3111 4 The EU labelling regime for GM food and international tensions 5 6 The prevalence of soya derivatives in processed foods high- 7 lighted the shortcomings of the EU’s regulations for labelling 8 GM foods as laid down in 90/220 and the Novel Foods and 9 Novel Food Ingredients Regulation (258/97). The estimated 60% 20111 of foodstuffs on sale containing GM soybean derivatives would 1 not be labelled as to their GM content. The Commission then 2 began an incremental process of strengthening the labelling 3 provisions relating to live GMOs and GM foods, focusing in 4 particular on those foods with ingredients derived from GM 5 soybean and maize. The labelling of ingredients and manufac- 6 tured foods was dependent upon the detection of any GM DNA 7 or protein in the final product. 8 Threshold levels for adventitious contamination were also set, 9 at a maximum of 1% for the total food product and also for any 30111 specific ingredients therein. The emphasis was on accepting 1 a tolerance limit for any adventitious contamination, as it was 2 realized that such contamination remained possible at the 3 various stages of the food chain. The threshold level was also 4 seen as realistic given the limited ability of the technology to 5 detect extremely low levels of GM DNA or protein presence. 6 However, as the detection technology was seen as becoming 7 more precise, so pressure remained for the threshold level to be 8 reviewed and revised downwards when possible. The labelling 9 regime has also extended to food additives. A further goal of 40111 the Commission was the introduction of a ‘GM free’ label, as 1 opposed to ‘non-GM’. However, the adventitious contamination 2 and incomplete detection methodology remained obstacles to 3 introducing a truly accurate GM free label (House of Commons 4 Select Committee on Agriculture 2000). Certainly, to achieve such 5 labelling a far tougher regulatory regime in terms of isolation 6 distances for the planting of GM crops would have to be intro- 7 duced and GM seed regulation would have to be in place. Neither 8 regulatory condition exists at the time of writing (mid-way 49111 through 2000).

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1111 The extensions of the labelling regime still focused on the 2 composition of the final product, not upon the methods of 3 production. Systems for traceability from seed to shelf, which 4 might force consumers to take a process based choice in their food 5 purchase, were not regulated in the 1990s, rather they emerged 6 from the industry initiatives explained previously. None the 7 less, the European Commission conceded that such systems of 8 complete traceability of food products, from seed to shelf, would 9 be its goal and the requirements in the Common Position on the 1011 revision of 90/220 reflected this ambition (Barling 2000). 1 The reaction of the US regulators to the resistance of the 2 European consumers was to seek to support the interests of 3111 the large agricultural biotechnology companies through recourse 4 to international trade politics. The General Agreement on Trade 5 and Tariffs (GATT) Uruguay Round agreements from 1993 had 6 set up a rules based regime for international trade, including 7 food and agriculture within its scope, under a newly formed 8 World Trade Organization (WTO). 9 The agreement on the application of sanitary and phytosani- 20111 tary (SPS) measures had given the WTO governance over 1 disputes concerning food standards, including the power over 2 the imposition of sanctions upon member states deemed to have 3 broken the rules, through a disputes panel process. The advi- 4 sory body on issues of safety and standards to the WTO was to 5 be the United Nations’ joint FAO/WHO body, the Codex 6 Alimentarius Commission. A further agreement, on Technical 7 Barriers to Trade (TBT), also included a rule prohibiting the 8 imposition of labels on traded goods that discriminated 9 against them on the basis of means of production. This provi- 30111 sion offered a potential challenge through the WTO disputes 1 procedures to the evolving European regime on labelling. The 2 presence of these agreements loomed over the increasing diver- 3 gence between the US and EU regulatory regimes on GM foods. 4 The US employed the rhetoric of potential trade war over the 5 transatlantic disagreement over GM foods and the Clinton 6 Administration put diplomatic pressure on the UK government 7 under Tony Blair to seek concessions from their European part- 8 ners (Hencke and Evans 2000). The US government’s official 9 position was that labelling of GM foods was discriminatory, as 40111 there were no scientific grounds for distinguishing GM crops 1 and foods from non-GM. The validity of this scientific position 2 was highly contested, however, both by social interests and 3 national governments. 4 Many of the key differences between the US, EU and other 5 nations were on the subject of ongoing negotiations within 6 Codex, including the labelling of GM foods. Early in 2000 an 7 International Biosafety Protocol was finally agreed on the safe 8 transfer, handling and use of any living modified organisms 49111 resulting from biotechnology, under the Convention on

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1111 Biodiversity. The conclusion was reached after extensive delays 2 from the so called Miami Group of large scale GM commodity 3 exporters, whose positions were co-ordinated by the US and 4 supported by the large biotechnology industries. The agreements 5 reached by the Protocol suggested a positive way forward to 6 handle the international movement of GMOs. None the less, 7 differences remained between the WTO agreements and the 8 Protocol and the relationship between these agreements in inter- 9 national law remained ambiguous (Allen 2000). 1011 1 Conclusions 2 3111 The dynamics behind the entry of GM food onto the European 4 market and the reaction, in turn, of the European market and 5 the food supply chain have been outlined. The key roles of the 6 large food retailers and the other sectors of the food chain close 7 to the consumer, such as the food manufacturers and proces- 8 sors, have been identified. The drivers in the food chain are 9 increasingly those actors placed at the consumption end rather 20111 than at the production end. 1 The search for a non-GM food supply became an issue of 2 international politics, as the EU and other national and interna- 3 tional regulators sought to balance the demands of the European 4 public with the priorities of international trade and the economic 5 interests of the large scale agricultural biotechnology corpora- 6 tions. The case of GM food or, more accurately, of non-GM 7 food provides a vivid example of the challenges facing the 8 management of the international food supply chain in the new 9 millennium. 30111 1 References 2 3 Allen E. (2000) Greens and free-traders join to cheer GM crop 4 deal. The Financial Times, 31 January, p. 11. 5 Anon (1996 ) European Union okays use of soybean produced 6 by biotechnology; case seen as turning point for industry. 7 World Food Regulation Review, 5/12: 27 8 Anon (1997), Boycott begins against products containing US 9 genetically engineered soybeans. World Food Regulation Review, 40111 6 (6), pp. 22–3. 1 Anon (1999) Sainsbury’s, M&S in ‘GM-free’ retailer consortium. 2 ENDS Report, 290, pp. 33–4. 3 Barling D. (1997 ) Regulatory conflict and the marketing of agri- 4 cultural biotechnology in the European Community. In John 5 Stanyer and Geoff Stoker (eds), Contemporary Political Studies 6 1997. Nottingham: Political Studies Association of the United 7 Kingdom, pp. 1040–8. 8 Barling D., de Vriend H., Cornelese J.A., Ekstrand B., Hecker 49111 E.F.F., Howlett J., Jensen J.H., Lang T., Mayer S., Staer K.B.

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1111 and Trop R. (1999) The social aspects of food biotechnology: 2 a European view. Environmental Toxicology and Pharmacology, 3 7, pp. 85–93. 4 Barling D. (2000) GM crops, biodiversity and the European Agri- 5 environment: regulatory lacunae and revision 2000. European 6 Environment, 12 (4). 7 Bellos A. (1999) Brazil fights phantom menace in soya wars. The 8 Guardian, Society section, 9 June, p. 4. 9 Buffin D. (1998) Genetic segregation: an interview with Malcolm 1011 Walker. Pesticides News, 40, June, pp. 6–7. 1 Friends of the Earth (2000) European food manufacturers shun 2 GMOs but consumers urged to keep up the pressure. Press 3111 Release, Friends of the Earth, UK, 7 March. 4 Gene Watch UK (2000) GM Crops and Food: A Review of 5 Developments in 1999. Gene Watch UK Briefing 9. Tideswell: 6 Gene Watch UK. 7 Heffernan W.D., Hendrickson M. and Gronski R. (1999) 8 Consolidation in the Food and Agriculture System. Report 9 prepared for the National Farmers Union. Columbia: 20111 University of Missouri. 1 Hencke D. and Evans R. (2000) How US put pressure on Blair 2 over GM food. The Guardian, 28 February, p. 8. 3 House of Commons Select Committee on Science and Technology 4 (1999) Minutes of evidence: Examination of Witnesses 5 (Questions 1–19) 3 March 1999. 6 http//www.parliament.the-stationery-office.co.uk/pa/ 7 cm199899/cmselect/c. . ./9030303.ht. 1 April 1999. 8 House of Commons Select Committee on Agriculture (2000) The 9 Segregation of Genetically Modified Foods. Third Report 199– 30111 2000. http://ww.publications.parliament.uk/pa/cm199900/ 1 cmselect/cmagric/71/7103.htm. 15 March 2000. 2 Marsden T., Flynn A. and Harrison M. (2000) Consuming Interests: 3 the Social Provision of Foods. London: UCL Press. 4 NFU (1998) Written evidence of the NFU of England and Wales 5 to the House of Lords’ European Communities Committee 6 inquiry into EC regulation of genetic modification in agricul- 7 ture. London: National Farmers Union. 8 Nottingham S. (1998) Eat your Genes: How Genetically Modified 9 Food is Entering our Diet. London: Zed Books. 40111 RAFI (1999) The Gene Giants: Masters of the Universe? RAFI 1 Communique March/April. http://www.rafi.org/commu- 2 nique/flxt/19992.html. 9 September 1999. 3 Robinson D.J., Davies H.V., Birch A.N.E., Wilson T., Kerby N.W., 4 Squire G.R. and Hillman J.R. (1998) Development, Release and 5 Regulation of GM crops. Scottish Crop Research Institute 6 Annual Report 1997/98. Invergowrie: SCRI. 7 Tett G. (2000) Japan starts first GM-free futures contract. The 8 Financial Times, 22 March, p. 43. 49111

●●● 256 1111 PERSPECTIVE 2 ●●●●●● 4 3 4 5 6 European trends 7 8 9 1011 in food safety: 1 2 3111 4 implications for 5 6 7 8 the hotel sector 9 20111 1 2 Tim Knowles 3 4 5 6 7 8 9 30111 Context 1 Throughout the food supply chain, food safety is of paramount 2 importance and successive governments have legislated to 3 ensure this is achieved. In Europe, following more than 4 30 years of legislative activity, most national food laws have 5 been harmonized at European Union (EU) level. However, a 6 gap has emerged between legislative intention and operational 7 good practice in hotels. Such dissonance has clear implica- 8 tions for the provision of safe food to the customer (Knowles 9 1992, 1994, 1999). 40111 Many studies have maintained that the community’s legisla- 1 tive programme in the foodstuffs sector has had a generally 2 positive impact (EC Commission 1996). Yet, by contrast, 3 Knowles (1999) has highlighted a number of criticisms of the 4 programme in terms of unnecessarily detailed legislation; 5 fragmentation; difficulties of adapting the legislation to inno- 6 vation and problems in the day-to-day functioning of the 7 internal market. Furthermore, recent unfortunate events, such 8 as BSE, E. coli and the continuing debate over GM foods, raise 49111 Food Supply Chain Management

1111 doubts about the capacity of existing legislation to fulfil its public 2 health objectives (Pennington Report 1997). 3 The central issue from the literature is that, in contrast to legis- 4 lation in most member states, EU food law has developed very 5 much in an ad hoc fashion over time (Painter 1991; O’Connor 6 1993; Roberts 1993; North 1996). There has been no central 7 unifying text setting out the fundamental principles of EU food 8 law, one that clearly defines the obligations of all concerned 9 (WHO 1988). 1011 1 Influences 2 3111 Whilst this perspective focuses upon the hotel industry, the 4 primary influence on food safety has evolved specifically from 5 the realization of the internal market (EC Commission 1986). For 6 the future, the development of activities in the hotel sector will 7 also be strongly influenced by the new provisions added by the 8 Maastricht Treaty concerning human health protection (Article 9 129), consumer protection (Article 129a) and the environment 20111 (Article 4 130r) (see EC Commission 1993b). 1 EU legislation applicable to foodstuffs has developed from the 2 variety of legal bases set out in the treaty to serve different policy 3 objectives. Such opacity is open to criticism since there is no 4 coherent policy and the approach is piecemeal. The BSE crisis, 5 which has affected red meat sales in hotel restaurants, is one 6 example that has highlighted the need for a European food policy 7 to mitigate the fragmentary approach of legislators (COMM 8 1997a, 1997b; EC Commission 1985). 9 30111 Rationalization 1 2 The need for rationalization comes from the complexity, frag- 3 mentation and incoherence of EU food law, specifically in terms 4 of the formulation of a European food policy. Certain legislative 5 provisions are unnecessarily detailed and prescriptive and fail 6 to take account of the development of internal control systems 7 by the hotel industry. Duplication of legislative provisions is a 8 case in point (EC Commission 1985). All developed countries 9 have adopted a substantial body of legislation which seeks 40111 to guarantee that food is safe, wholesome and fit for human 1 consumption, that commercial transactions are conducted fairly 2 and that the necessary systems of official control and inspection 3 are put in place. 4 However, in recent years, a new range of issues concerning 5 foodstuffs has emerged, as a result of increasing scientific knowl- 6 edge (e.g. genetically modified organisms, awareness of the links 7 between nutrition and health) and as a result of the new aspi- 8 rations of consumers. As the implementation of the internal 49111 market has progressed, national rules have increasingly been

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1111 replaced by EU legislation. It follows that, with this transfer of 2 decision-making, the EU must itself develop policies that both 3 provide for a high level of protection and meet the legitimate 4 demands and expectations of consumers. However, at the same 5 time, the EU must also avoid legislation that imposes unneces- 6 sary burdens on the hotel industry, the costs of which, of course, 7 would ultimately be passed on to consumers through higher 8 prices. In essence, the central issue in developing an appropriate 9 policy revolves around the adopted regulatory framework 1011 (Jackson 1990). 1 2 Regulatory approach and EU working procedures 3111 4 The regulatory framework must be designed and implemented 5 in a way that places primary responsibility for the production 6 of safe and wholesome food with producers and the hotel 7 industry. As a principle, the framework should offer the industry 8 flexibility to design and implement appropriate internal moni- 9 toring procedures, provided that these procedures are backed 20111 up by effective official control systems. The problem for EU legis- 1 lators is that both industry- and product-specific approaches 2 offer advantages and disadvantages. An industry (horizontal) 3 approach makes it possible to take a general overview of a partic- 4 ular situation and facilitates implementation, particularly for 5 food businesses working in many sectors, including not only 6 manufacturers, but also hotels, both small and large. A product 7 (vertical) approach, on the other hand, makes it possible to adjust 8 the legislation to the needs of a specific sector, particularly in 9 cases where a more targeted approach to legislation has been 30111 judged necessary. It also makes it possible to envisage a more 1 integrated regulatory framework that covers all facets of a partic- 2 ular sector. 3 Since a more prescriptive approach requires legislators to iden- 4 tify the major risk factors and the means of managing those risks, 5 it often makes it easier for hoteliers to identify their obligations 6 and hence facilitates the tasks of the control authorities. In this 7 sense, prescription results in control (North 1996). 8 A more general approach, on the other hand, leaves industry 9 with greater flexibility in the implementation of the legislation 40111 and is thus likely to reduce compliance costs. It is also likely to 1 minimize the need for frequent updating of the legislation. 2 However, it requires both hotel businesses and the control 3 authorities to take a much more proactive role in analysing the 4 food safety hazards presented by different activities and ensuring 5 that effective measures may be taken to control them. Evidence 6 from Knowles (1999) suggests that a sizeable minority have 7 not adopted this proactive approach. The need to be proactive 8 may present particular difficulties for small businesses in the 49111 hotel sector, (i.e., 80% in the UK and 95% in Italy), although

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1111 the elaboration of industry-wide codes of practice may provide 2 a partial solution to this problem. 3 It should be noted that industry- and product-specific 4 approaches are not necessarily mutually exclusive. Indeed, 5 empirical evidence from Knowles (1999) suggests that the 6 industry is experiencing difficulties in adapting to a general 7 approach and while this problematic situation does not negate 8 such an evolving framework, stronger emphasis should be 9 placed on training and monitoring by the authorities. In such 1011 circumstances, a balanced approach is necessary between 1 detailed prescriptive legislation and a more general legislative 2 approach. 3111 In developing this theme of regulation, due to the sensitivity 4 of the foodstuffs sector within hotels, debate has occurred upon 5 the extent to which the use of codes of practice are appropriate, 6 either as an alternative to regulation, or in order to supplement 7 it. The problem here is the degree to which codes remain 8 genuinely voluntary. 9 Another issue to recognize is that, at the national level, there 20111 has been an increasing employment of codes of practice, a usage 1 that brings with it the risk of new de facto barriers to intra- 2 Community trade and the free movement of goods and services 3 within the EU. In the field of food hygiene, voluntary instru- 4 ments are being used to complement the existing legislation, for 5 instance, Article 5 of Directive 93/43/EEC (EC Commission 6 1993a). 7 It should be noted that to be fully effective, the principles 8 of subsidiarity and legislative simplification must be applied at 9 the national as well as at the Community level – situations 30111 contradicted by current available evidence i.e. differences in 1 temperature control within member states. Consistency in the 2 application of this principle is important, otherwise there will 3 be a constant risk of fragmentation of the internal market 4 into separate national markets. In line with the principle of 5 subsidiarity, member states can therefore adopt more detailed 6 legislation in order to take account of the particular situation in 7 their countries, a good example being Denmark in relation to 8 the issue of temperature control (Act 1973, 1993). However, so 9 as to protect the Community interest, notably the operation of 40111 the internal market, the Commission has powers to supervise 1 the use that member states make of this possibility. 2 To be effective, consultation on food safety matters should be 3 concerned with the technical aspects of a proposal and should 4 also involve those with socio-economic interests affected by EU 5 legislation, e.g. hoteliers. While this consultation process does in 6 part exist through the Advisory Committee on Foodstuffs, estab- 7 lished in 1975, it is important for reasons of clarity to take steps 8 to improve the process through, for instance, the increased use 49111 of Green Papers.

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1111 Directives versus regulations 2 3 The provisions of certain initiatives can be extremely detailed 4 and leave little or no margin for the discretion of member states 5 in their implementation. Examples include specific EU provi- 6 sions relating to materials in contact with foodstuffs (EC 7 Commission 1989a). In such circumstances, the use of regulation 8 as an alternative to the directive may present several advantages: 9 1011 • Enabling the uniform application of legislation throughout the 1 internal market. 2 • Increasing the transparency of EU law and since member 3111 states can avoid the implementation of legislation, facilitating 4 the rapid updating of Community legislation in order to take 5 account of technical and scientific developments. 6 7 For these reasons, it is argued that consideration should be given 8 to greater use of regulations in appropriate cases, both in primary 9 and in secondary EU legislation. However, legislation that is 20111 limited in scope to the harmonization of general principles and 1 criteria, such as legislation on the Official Control of Foodstuffs, 2 should continue to be adopted by means of a directive (EC 3 Commission 1989b). 4 5 Democratic deficit 6 7 Practices and procedures within the foodstuffs industry are con- 8 tinually evolving and, from the point of view of innovation and 9 the competitiveness of the hotel industry, it is important that 30111 innovatory products should gain swift access to the European 1 market. This environment of rapid change means that an ability 2 to amend legislation quickly to take account of technical and 3 scientific progress is of fundamental importance. From the public 4 health perspective, it is also important to be able to adapt legis- 5 lation promptly so as to take account of new risk factors that may 6 emerge. However, the problem lies with a Community that does 7 not possess the instruments that are necessary to respond to the 8 growing pace of innovation and the ever-increasing range of 9 scientific knowledge, as in the case of GM technology. 40111 One reason for this situation is the unwillingness of the Council 1 and Parliament to delegate to the Commission the necessary 2 powers for the technical implementation of EU legislation. 3 Although the Council and Parliament have entrusted significant 4 powers to the Commission in fields such as general food hygiene, 5 materials in contact with foodstuffs and food labelling, in other 6 areas there has been much less delegation of authority to the 7 Commission. For example, in the area of food additives, any 8 amendment requires, on average, about five years to complete 49111 procedures at the EU level which increases to six or seven years,

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1111 if allowance is also made for the time necessary for the adop- 2 tion of national implementation measures. By contrast, in most, 3 if not all, member states, a similar decision would be taken far 4 more rapidly by a ministerial order, on advice from the compe- 5 tent national scientific advisory committee and without the need 6 for primary legislation. It is argued that the adaptation of 7 Community legislation to innovation and technical progress in 8 the foodstuffs sector constitutes a serious problem, which needs 9 to be urgently addressed. 1011 1 Definitional problems 2 3111 Another area to tackle in the EU foodstuffs legislation is the 4 problem of definition. Many directives already contain a series 5 of definitions, including those on materials and articles intended 6 to come into contact with foodstuffs, labelling, nutrition labelling, 7 nutrition claims, official control of foodstuffs and hygiene of 8 foodstuffs. 9 However, doubts have sometimes arisen as to whether these 20111 definitions apply only to those specific pieces of legislation in 1 which they are contained, or whether they apply more gener- 2 ally. To remove any further doubt, these definitions should 3 be generally applicable to all EU legislation on foodstuffs. 4 Furthermore, although the legislation of most member states 5 contains a definition of ‘foodstuffs’, the Community does not yet 6 have its own definition. The benefit of an EU definition is that 7 it would ensure that all such legislation on foodstuffs would 8 apply to the same products and substances in all member states. 9 A further question concerns the application of the definition 30111 of primary food production, which may be intended either for 1 human consumption or for industrial use (e.g. potatoes, which 2 may be consumed as food may also be used for the production 3 of industrial starch, or chemicals used as food additives). Their 4 inclusion within the scope of the definition would mean that 5 producers would have to fulfil all the relevant obligations arising 6 under EU food legislation, which may be inappropriately restric- 7 tive. However, it is obviously necessary to ensure that all 8 substances used in food meet the requirements of Community 9 legislation. Furthermore, the concept of ‘placing on the market’ 40111 is employed several times in EU food legislation, without actu- 1 ally being defined. 2 Although a definition of marketing is included in the veteri- 3 nary hygiene directives, its use is not entirely suitable for the 4 purposes of foodstuffs legislation since it excludes retail sale. 5 Other definitions of placing on the market are included in 6 Directive 90/220/EEC (EC Commission 1990) on the deliberate 7 release of genetically modified organisms into the environment, 8 but these definitions are not entirely appropriate to the food- 49111 stuffs sector.

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1111 Food hygiene 2 3 EU legislation on food hygiene and the hotel industry is an 4 area that raises difficult questions for simplification and ratio- 5 nalization within the Community. For instance, foodstuffs of 6 animal origin are covered by a series of 11 product (vertical) 7 directives establishing specific conditions of hygiene for the cate- 8 gories concerned: fresh meat, poultry meat, meat products, 9 minced meat and meat preparations, rabbit, farmed and wild 1011 game, fish, shellfish, eggs and egg products, milk and milk prod- 1 ucts and other products such as frogs legs, snails and honey. 2 These directives set out specific regulatory requirements for 3111 various features of these products, while using a HACCP based 4 approach for other aspects. 5 Alternatively, for foodstuffs not covered by these specific 6 provisions, it is the General Directive on the Hygiene of 7 Foodstuffs that applies (EC Commission 1993a). This directive 8 adopts a more generalized approach to hazard management, 9 based on the application of HACCP principles and the devel- 20111 opment of voluntary codes of good hygiene practices. 1 The co-existence of these two approaches opens the door 2 to numerous criticisms of inconsistency and incoherence. Thus, 3 Article 1(2) of the general hygiene directive requires the 4 Commission to establish a relationship between specific hygiene 5 rules and those of the general directive and, if necessary, to make 6 proposals. 7 As a first step in this process, the Commission has launched 8 a large-scale consultation exercise on the inter-relationship 9 between the vertical veterinary hygiene rules, which apply to 30111 foodstuffs of animal origin. To this end, the Commission has 1 prepared a guide to certain rules governing the production, 2 marketing and importation of products of animal origin intended 3 for human consumption. The guide envisages the consolidation 4 of the provisions of 14 separate directives relating to animal and 5 public health into a single text that would also cover the condi- 6 tions of imports from third countries. Certain common principles, 7 such as HACCP, would be extended to cover all the directives 8 and a number of unnecessarily detailed provisions and contra- 9 dictions in the texts would be eliminated. 40111 Additionally, the Commission has launched a consultation 1 exercise on the possibilities for simplification of the rules, with 2 the following areas being investigated: 3 4 • The role of voluntary instruments, such as standards or codes 5 of practice in veterinary hygiene. 6 • Temperature control requirements. 7 8 • The need and appropriateness of derogations (allowances) for 49111 small and medium-sized enterprises.

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1111 • The international dimension of veterinary hygiene rules. 2 • The role of self-control by manufacturers and the role of the 3 public authorities. 4 5 • Authorization procedures and procedures for the approval of 6 establishments. 7 8 Further questions have also been raised concerning the inclu- 9 sion in hygiene legislation of quality or labelling provisions that 1011 are not directly related to food hygiene. Once the relationship 1 between the specific vertical hygiene directives has been clari- 2 fied, consideration must be given to the association between 3111 them and the general directive on food hygiene. In this context, 4 it would appear appropriate to give priority to ensuring that 5 there is a coherent and consistent body of legislation relating to 6 food hygiene. This goal can best be achieved by the application 7 of HACCP principles and limiting detailed prescriptive provi- 8 sions to cases where they are considered essential. Nevertheless, 9 it should be noted that there is some flexibility in the manner 20111 in which HACCP principles are conceived and applied in present 1 legislation (HMSO 1993). 2 In the general hygiene directive, it was not considered neces- 3 sary to lay down formal HACCP requirements regarding 4 verification and documentation, which may be considered a 5 significant weakness. Each food business is left with the flexi- 6 bility to decide what requirements are necessary, subject to the 7 supervision of the competent authority, thus leaving an element 8 of discretion. By contrast, because of the nature of the foodstuffs 9 concerned, the basic principles for ‘own checks’, set out in the 30111 veterinary hygiene directives, include detailed rules on keeping 1 written records for presentation to the competent authority. This 2 example illustrates flexibility in the design and implementation 3 of food hygiene regulations to ensure the maintenance of a high 4 level of protection, while keeping the regulatory burden for 5 hotels to a minimum. 6 The search for consistency and coherence between the two 7 approaches has therefore been unsuccessful. Ultimately there is 8 no uniform system. 9 Weaknesses are therefore emerging in this twin track 40111 approach, since to be effective, any system of food hygiene legis- 1 lation must cover the entire food chain, from primary production 2 until the point of consumption. The general food hygiene direc- 3 tive covers all stages of food production and distribution after 4 primary agricultural production. There is no general community 5 legislation covering the hygiene of products of non-animal 6 origin at the primary agricultural production stage. In the case 7 of foodstuffs of animal origin, the primary production stage is 8 covered by the veterinary hygiene rules. These directives cover 49111

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1111 all stages from primary production to distribution. However, 2 retail sale in general is excluded from the scope of the veteri- 3 nary hygiene rules and the general hygiene directive therefore 4 applies. The result of this lack of coherence and consistency is 5 confusion. 6 7 Protecting the consumer 8 9 Contained within Article 100a (3), Article 129 and Article 129a 1011 of the Treaty, there are varying requirements for the Commission 1 to address consumer protection (EC Commission 1986). 2 It is argued that the establishment of a proper EU food policy 3111 that gives pride of place to consumer protection and health is 4 an important step towards satisfying these Treaty obligations. 5 In this spirit, the Union must provide itself with the necessary 6 means of action, by identifying two imperatives: 7 8 • The closer involvement of the Parliament in the decision- 9 making process (to this end the Commission should make 20111 more use of Article 100a, qualified majority voting). 1 2 • The need to give the Community greater powers in the field 3 of health. 4 5 As far as food safety is concerned, there can be no scope for 6 compromise. The Treaty requires the Commission to take as its 7 basic position a high level of protection in its proposals, to ensure 8 that public health requirements are fully integrated into its poli- 9 cies. This level of protection must be kept under constant review 30111 and, where necessary, it must be adjusted to take account of new 1 information, or of a re-evaluation of existing information. 2 3 Conclusion 4 5 The argument presented here is that the root of the problem 6 concerning the gap between legislative intention and operational 7 good practice in hotels related to food safety lies with the law 8 and not hotels or personnel. The views advanced are for various 9 measures that might be taken to rationalize or simplify existing 40111 EU legislation to address the variances present within European 1 hotels (Jukes 1991, 1993). They began with a consideration of 2 certain aspects of the EU’s working procedures, such as the 3 choice of legal instruments and the possibility to update legis- 4 lation in accordance with technical and scientific progress. They 5 also considered the scope for improving the coherence of legis- 6 lation through the introduction of common terms and definitions. 7 All these matters are of relevance to food legislation and its 8 implementation within the European hotel industry. 49111

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1111 References 2 3 Act (1973) Denmark Food Act etc., Act No 310 of 6 June, trans- 4 lated by Leatherhead Food Research Association. 5 Act (1993) Denmark Act Amending the 1973 Act on Foodstuffs 6 etc., translated by Leatherhead Food Research Association. 7 COMM (97) 184 (1997a) The Action Plan for the Internal Market. 8 Brussels: EC Commission. COMM 97 (1997b) Results of the Official Control on Foodstuffs: 9 EU Summary of the Inspection and Sampling Statistics 1994, 1011 February. Brussels: EC Commission. 1 EC Commission (1985) Completion of the Internal Market: 2 Community Legislation on Foodstuffs. Communication from 3111 the Commission to the European Parliament, COM (85) 603, 4 Final, Luxembourg. 5 EC Commission (1986) Single European Act 1986. Cmnd 6 9758(1986). Bull EC Suppl 2/86. Brussels: EC Commission. 7 EC Commission (1989a) Official Control of Foodstuffs, Council 8 Directive, 89/397/EEC, OJ No. L 186, June. Brussels: EC 9 Commission. 20111 EC Commission (1989b) Materials and Articles in Contact with 1 Food – General Requirement, Council Directive 89/109/EEC, 2 OJ No L40, February. Brussels: EC Commission. 3 EC Commission (1990) Nutrition Labelling of Foodstuffs, Council 4 Directive, 90/496/EEC, OJ No L 276, October. Brussels: EC 5 Commission. 6 EC Commission (1993a) The Hygiene of Foodstuffs, Council 7 Directive, OJ No L 175/1, June. Brussels: EC Commission. 8 EC Commission (1993b) The Treaty on European Union. Brussels: 9 EC Council and Commission. 30111 EC Commission (1996) The Study of the Impact and Effectiveness 1 of the Internal Market Programme on the Processed Foodstuffs 2 Sector, The Sutherland Report. Brussels: EC Commission. 3 EC Council (1992) European Communities to the Council, 4 Common Position Adopted by the Council with a View to 5 the Adoption of a Directive on the Hygiene of Foodstuffs, 16 6 December. Brussels: EC Commission. 7 HMSO (1993) Assured Safe Catering. London: HMSO. 8 Jackson C. (1990) The role of the European Parliament in the 9 control of foodstuffs legislation. European Food Law Review, 1 40111 (1), pp. 53–71. 1 Jukes D.J. (1991) Food Law Enforcement in the UK – Time for Change? 2 Doncaster: Horton Publishing. 3 Jukes D.J. (1993) Food Legislation of the UK, 3rd edn. Oxford: 4 Butterworth-Heinemann. 5 Knowles T.D. (1992) Effect of the EC Law on the Hospitality 6 Industry – Discussion Paper. Leeds Metropolitan University. 7 Knowles T.D. (1994) Some aspects of UK and European food 8 legislation. Hygiene and Nutrition in Foodservice and Catering, 1 49111 (1), pp. 49–62.

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1111 Knowles T.D. (1999) Attitudes towards Food Safety within 2 selected countries of the European hotel industry. PhD thesis, 3 two volumes, unpublished, University of Luton. 4 North R. (1996) Food Safety Policy in the Hospitality Industry, 5 Tourism and Europe (R. Thomas ed.). London: Cassell. 6 O’Connor B. (1993) Free movement of foodstuffs in EC law. 7 European Food Law Review, 3 (2). 8 Painter A.A. (1991) The origin of food products. European Food 9 Law Review, 2 (4), pp. 282–90. 1011 Pennington Report (1997) The Pennington Group: Report on the 1 Circumstances Leading to the Outbreak of infection E. coli 2 0157 in Central Scotland: the Implications for Food Safety and 3111 the Lessons to be Learned. London: HMSO. 4 Roberts D. (1993) Level playing fields in Europe. European Food 5 Law Review, 4 (1), pp. 32–44. 6 WHO (1988) Food Safety Services, 2nd edn. Rome: World Health 7 Organization. 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 267 1111 PERSPECTIVE 2 ●●●●●● 5 3 4 5 6 European 7 8 9 1011 developments in 1 2 3111 4 Efficient Consumer 5 6 7 8 Response 9 20111 1 2 Herbert Kotzab 3 4 5 6 7 8 9 30111 Introduction 1 In 1992, Efficient Consumer Response (ECR) was presented 2 as a powerful tool for optimizing the supply chain perfor- 3 mance within the US grocery industry. Since then, different 4 European approaches have been developed to transfer the 5 basic ideas of ECR to Europe. The efforts of the European 6 ECR initiatives are presented here, with some discussion of 7 ECR’s future directions. 8 9 40111 What is Efficient Consumer Response? 1 Over the past 15 years, the grocery industry has faced many 2 changes in business practice. There has been a major power 3 shift from manufacturers to retailers. Retailing companies 4 have established their own marketing and logistics approaches 5 and both parties have been finding out how IT and co- 6 operative management styles can help in gaining competi- 7 tiveness and economic growth in an increasingly competitive 8 marketplace. 49111 European developments in Efficient Consumer Response

1111 An excellent example of this phenomenon is that of Wal-Mart 2 Corporation’s distribution strategy (Stalk, Evans and Shulman 3 1992). Wal-Mart has consistently made improvements to its 4 bottom line through streamlining distribution operations to 5 better serve its customers. Importantly, it is not only Wal-Mart’s 6 distribution policy, but also the customer focus of the imple- 7 mentation of the policy, throughout the retailer’s operation, that 8 has led to greater profitability for the company (Karch 1997). 9 Wal-Mart’s partner on the manufacturers’ side has been 1011 Procter and Gamble. Their partnership is seen as the benchmark 1 within the grocery supply chain. One industry-led initiative 2 which analysed the way in which these two companies co- 3111 operate has highlighted Wal-Mart’s and Procter and Gamble’s 4 strategy as an example of Efficient Consumer Response (ECR). 5 For Martin (1994) ECR is a strategy of ‘how partners in the 6 supply chain can best synchronize the flow of product through 7 the distribution pipeline from point of manufacture to point of 8 final sale’. 9 In a highly competitive market, where market shares can 20111 only be taken from competitors, ECR is of particular value. Co- 1 operative distribution strategies can help to increase productivity 2 through increased stability of volume. ECR has been defined by 3 many parties since 1993; for example (Salmon 1993); the Joint 4 Industry Project on Efficient Consumer Response (1995); Tietz 5 (1995a); Tietz (1995b); Töpfer (1995); ECR Europe (1996a); ECR 6 Europe (1997). These definitions show that in the food supply 7 chain ECR is primarily utilized by strategic partnerships to more 8 effectively meet customer needs. 9 30111 Where Efficient Consumer Response started – the US grocery 1 supply chain 2 3 General background 4 5 In the late 1980s and the beginning of the 1990s, a growing 6 number of retailers and manufacturers in the US grocery industry 7 were confronted with losses in market share and declining pro- 8 ductivity (JIPOECR 1995). In 1992, representatives of the grocery 9 industry founded the Efficient Consumer Response Working 40111 Group, with the goal of analysing the grocery supply chain. 1 Companies included: the Coca-Cola Company, Crown/BBK 2 Incorporated, Kraft General Foods, the Kroger Company, Nabisco 3 Food Corporation, the Procter and Gamble Company, Ralston, 4 Purina Company, Safeway Incorporated, Sales Force Companies 5 Incorporated, Scriver Incorporated, Shaw’s Supermarkets Incor- 6 porated, SUPERVALUE Incorporated and the Vons Companies. 7 Their interest lay in the analysis of the mass merchant 8 channel and in particular, the major players Wal-Mart, Target 49111 and K-Mart (Browning 1997).

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1111 Kurt Salmon Associates, a US-based consulting company, were 2 asked by the ECR Working Group to ‘examine the grocery 3 supplier/distributor/consumer value-chain to determine the cost 4 and service improvements the industry could achieve through 5 technological and business practice changes’ (Salmon 1993). Kurt 6 Salmon Associates were chosen due to their experience within 7 the textile industry, where they have developed Quick Response 8 (QR). QR is a logistics strategy, which harmonizes the replen- 9 ishment of merchandise within the textile channel. Instead of 1011 focusing on the replenishment of merchandise, Salmon (1993) 1 worked out a distribution model that also considered other 2 business areas critical for the grocery industry: promotion, new 3111 product introduction and assortment (Tietz 1995b). 4 5 Efficient Consumer Response: improving the supply chain 6 performance of the US grocery industry 7 8 ECR is essentially an end consumer-driven distribution system 9 in which the production is permanently managed by the 20111 consumers’ POS activities (shown in Figure P5.1). Each step of 1 the channel concentrates on its very own core competences and 2 reduces non-value-adding activities. A paperless information 3 flow controls the flow of merchandise. Efficient Replenishment 4 (ER), Efficient Store Assortment (ESA) at POS level, Efficient 5 Promotion (EP) and Efficient Product Introduction (EPI), should 6 ensure ultimate consumer orientation (see Table P5.1). 7 An optimal combination of these four areas thus leads to 8 improvements in consumer satisfaction (Salmon 1993). The 9 benefit of ECR was calculated by Salmon (1993) at US$30 billion. 30111 The potential saving results from a 41% total chain reduction of 1 inventory by speeding up cycle time from an original 104 days 2 to 61 days (see Figure P5.2). 3 The full implementation of ECR based on an ‘everyday-low 4 price-strategy’ then reduces consumer prices by approx. 11%. 5 Based on the different ECR strategies, the savings potential is 6 distributed as presented in Table P5.2. 7 8 9 40111 1 2 3 4 5 6 7 Figure P5.1 8 Vision of the US-ECR 49111 model (Salmon 1993)

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1111 ECR strategies Scope of the ECR-strategies 2 3 Efficient Store Assortment (ESA) Providing a complete, easy-to-shop, assortment of products 4 wanted by the consumers 5 Efficient Replenishment (ER) Maintaining high in-stock levels of the required assortment 6 Efficient Promotion (EP) Harmonizing the promotion activities between manufacturer and retailer by communicating benefits and value 7 Efficient Product Introduction Developing and introducing new products the consumers 8 (EPI) really want by meeting their ultimate needs. 9 1011 Source: Salmon 1993 1 2 3111 Table P5.1 The four ECR strategies 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 Figure P5.2 2 Acceleration of the 3 throughput-time of the 4 merchandise flow in 5 the grocery industry 6 (Salmon 1993) 7 8 9 40111 ECR strategy Cost Financial Total 1 savings savings savings 2 ESA 1.3% 0.2% 1.5% 3 ER 2.8% 1.3% 4.1% 4 EP 3.5% 0.8% 4.3% 5 EPD 0.9% — 0.9% 6 Total 8.5% 2.3% 10.8% 7 Table 5.2 8 Savings potential in Source: Salmon 1993 49111 percentage of sales prices

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1111 Among these savings, Salmon (1993) differentiates between: 2 3 • Cost savings, which result from the elimination of activities 4 and expenses. 5 • Financial savings, which result from reducing inventory and 6 physical assets allow organizations to generate similar Returns 7 on Investment from lower input levels. 8 9 The savings would be shared between manufacturers and 1011 retailers, whereby 54% of the savings will be realized by the 1 manufacturers and 46% by the retailers (Salmon 1993). 2 3111 4 Making ECR work in Europe 5 6 General background 7 ECR-Europe was founded in 1994 by leading European retailers 8 and manufacturers (ECRE 1996a). Founding members included 9 Albert Heijn, Birds Eye Walls, Coca-Cola Germany, Coca-Cola 20111 France, Fegro/Selgros, Henkel, ICA, Johnson and Johnson, Mars, 1 Procter and Gamble (UK and Italy), Promodès, Tesco and Van 2 den Bergh Foods. The organization has its principal office in 3 Brussels, Belgium and is financially supported by the following 4 four associations: AIM – European Brands Association, CIES – 5 The Food Business Forum, EuroCommerce – the European repre- 6 sentation of wholesale and retail trade, and EAN International 7 – the international article numbering association. 8 The initial goal of this initiative was the development of ECR 9 models and practices that are suitable for the European business 30111 situation. In March 1997, during the 2nd ECR-Europe Congress, 1 the ECR-Europe-model, developed by a number of major 2 consulting companies, was presented to the public (Kotzab 1997). 3 Nowadays, ECR-Europe has four focus areas (ECRE 1998): 4 5 • Promotion of national ECR initiatives. 6 7 • Initiation and financial support of ECR pilot projects. 8 • Publication and distribution of ECR literature documenting 9 the progress and the results of ECR. 40111 1 • Organization of the annual official ECR conferences. 2 3 ECR-Europe is led by a board, consisting of top managers from 4 manufacturers and retailers who are actively involved in national 5 ECR initiatives (Kalmbach 1999). ECR-Europe is a non-profit 6 organization and is financed by the conference fees of the annu- 7 ally organized ECR conferences. The consultant companies, 8 which are involved in the ECR pilot projects, do not charge the 49111 participants for their efforts.

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1111 How ECR should work for the European grocery supply chain 2 3 The ECR-Europe model is a co-operative strategy between 4 retailer and manufacturer to fulfil consumer wishes better, faster 5 and at less cost (ECRE 1996a). This strategic objective can be 6 implemented by the realization of selected focus areas (shown 7 in Figure P5.3). 8 This model includes a demand and a supply side representing 9 the marketing and the physical distribution functions in the 1011 supply chain. The interaction of these focus areas leads to 1 improvements of the overall performance, inside and outside of 2 the companies involved. Thus, the result is a higher consumer 3111 value, which is represented in the ECR-Europe model as a func- 4 tion of quality, trust, variety, service, response time and price 5 (see Equation 1) 6 Quality × Trust × Variety × Service 7 Consumer value = ΂–––––––––––––––––––––––––––––––––΃ Response time × Price 8 9 In other words, ECR should guarantee end-users better quality, 20111 more variety and better service, but for less money, less time 1 out of busy schedules and less complexity in the information 2 needed to make educated choices (ECRE 2000). 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 Figure P5.3 ECR-Europe focus areas (ECRE 2000)

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1111 Referring to ECRE (1996a), the improvement of the consumer 2 value is the result of the ‘new’ co-operation between manufac- 3 turer and retailer in the logistic channel. Figure P5.4 tries to 4 describe this suggested improvement. 5 Instead of offering consumers trade-offs between the retailers’ 6 and manufacturers’ activities, both partners combine their 7 offer to ‘categories’. A ‘category’ is a distinct, manageable group 8 of products/services that consumers perceive to be interrelated 9 and/or substitutable in meeting a consumer need (ECRE 1997). 1011 The consumers then perceive categories as ‘complementary 1 information’ (ECRE 1997). 2 The application of the ECR practices suggested in the ECR- 3111 Europe model will lead to a savings of 5.7% (based on retail 4 prices), which is DM50 billion (ECRE 1997; Wiezorek 1997; see 5 also Table P5.3). Inventory can be reduced by 42% and the lead 6 time can be shortened to approx. 43 days. 7 Eighty-four per cent of the reductions are due to savings 8 in the field of operative costs; the remainder results from 9 20111 1 2 3 4 5 6 7 8 9 30111 Figure P5.4 1 Comparison of the traditional 2 and visionary cooperation 3 between manufacturer and 4 retailer in the Europen grocery 5 industry (ECRE 1996a) 6 7 8 90% of the savings in the field of 95% of the savings by reducing 9 operative costs are made by . . . inventory are made by . . . 40111 1 New product introduction –17% Optimal assortment –10% 2 Efficient promotion –16% Continuous replenishment –24% 3 Synchronized production –13% Crossdocking –10% Reliable production –17% Synchronized production –40% 4 Integrated suppliers –28% Integrated suppliers –11% 5 6 Source: Wiezorek 1997 7 8 49111 Table P5.3 Top ECR activities to reduce logistics costs

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1111 inventory reduction. The total inventory level in the different 2 channels is from 28 working days in the UK to 50 working days 3 in Germany. 4 5 Differences between the ECR in the US and the ECR in Europe 6 7 The major difference between the two models lies in the poten- 8 tial for optimization offered by ECR-Europe. On a first sight, the 9 European ECR model does not contribute as much value to the 1011 supply chain as does the American model. Yet while ECR in 1 the USA tries to reduce, e.g. lead time from 104 working days to 2 61 working days, ECR in Europe starts from a basis of 28 to 58 3111 (dependent on member states) working days’ inventory levels 4 within the various supply chains. For that reason, we could con- 5 clude that the logistics performance in the European grocery 6 industry per se is more sophisticated than the American 7 solutions. None the less, Europeans consider that there is room 8 for improvement, particularly in areas other than logistics. 9 Consequently, ECR-Europe, contrary to the US model, considers 20111 the issues facing both the supply and demand side (see ECRE 1 1997). The supply side includes all activities referring to the mer- 2 chandise flow and is defined as category logistics. The different 3 action areas of category logistics are described in Table P5.4. 4 The demand side contains all activities related to strategic 5 management defined as Category Management (Maximow 1997). 6 Category Management is seen as a ‘retailer/supplier process 7 of managing categories as strategic business units, producing 8 enhanced business results by focusing on delivering consumer 9 value’ (ECRE 1997). 30111 1 2 Category logistics- Characteristic 3 strategies 4 Efficient sourcing: Pull instead of push 5 Flow-through-systems 6 Global sourcing 7 Vertical integration of the value-chain 8 Efficient replenishment: Short lead times 9 Just-in-time-systems 40111 Category-useful logistics 1 Best conditions Efficient systems: IT networks 2 Data warehouses 3 EDI messages 4 Efficient controlling: Activity based costing 5 Reporting and forecasting systems 6 Real-time-controlling 7 Table P5.4 8 Action areas of category Source: adapted from Maximow 1997 49111 logistics

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1111 Category Management is a joint retailer/supplier process that 2 involves managing product categories as business units and 3 customizing them on a store-by-store basis to satisfy customer 4 needs. This approach leads to better business results by 5 focusing on delivering consumer value. In the traditional product 6 management approach, single products were pushed in a non- 7 harmonized manner through the channels. 8 By considering a category as measurable and manageable 9 group of products/services that consumers perceive to be 1011 interrelated and/or substitutable in meeting a consumer need, 1 suppliers, as well as retailers, deliver customer-required solu- 2 tions to the end user. Traditional approaches to characterize the 3111 offer of a retailer remained only on the product-side. 4 This whole business process is managed in close co-operation 5 with retailer and supplier. It allows not only the creation of 6 a commonly accepted language, but also the development 7 of common goals and achievements. Instead of arguing on 8 prices and discounts, the two involved organizations work 9 together on the fulfilment of consumer needs. Following 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 Figure P5.5 8 The Category Management 49111 process (ECRE 1996b)

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1111 Maximow (1997), Category Management will revolutionize the 2 purchasing function of a company by eliminating the purchasing 3 department. 4 5 The changing picture of ECR in Europe 6 7 Since the first introduction of ECR within the European grocery 8 industry, ECR has changed its face (see Figure P5.6). 9 While in the beginning the efforts concentrated more on 1011 the supply side of ECR, the ‘hard ECR work’ of today focuses 1 increasingly on the demand side of ECR. The future themes and 2 topics for ECR in Europe are consumer oriented: they make the 3111 consumer more enthusiastic and increase the consumer’s 4 perceived value! 5 6 Conclusion 7 8 Efficient Consumer Response is the name of a co-operation 9 oriented holistic marketing and distribution strategy in the 20111 grocery industry. ECR includes more strategies than the pure 1 optimization of the product replenishment. Since the first intro- 2 duction of ECR in Europe, ECR-Europe has established 14 3 national ECR initiatives (Austria, Italy, Greece, Finland, Norway, 4 Denmark, Sweden, The Netherlands, Germany, France, UK, 5 Spain, Switzerland and Ireland – based on ECRE 2000). The 6 European grocery industry is known for having extremely low 7 average margins for retailers. These margins can range between 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 Figure P5.6 7 Conference themes and 8 topics from 1996 to1999 49111 (ECRE 1999)

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1111 –1 and +2.5% (Seth and Randall 1999; Shephson 2000). As such, 2 with its assurance of greater efficiency in the channel, the imple- 3 mentation of ECR practices promises to be a powerful tool to 4 improve the business performance within the channel (Troyer 5 1997). Representative results from academia and industry 6 include: 7 8 • Fleury (1997) reported higher margins (8%), faster category 9 turnover (27%) and greater retailer market share (12%) effects 1011 from the implementation of ECR principles within the laundry 1 detergent category in a European country market. 2 • Partch (1995) noted a 50% improvement of distributors’ profits 3111 by eliminating techniques like forward buying. 4 5 • Hven and de Soysa (1998) presented results from an ECR part- 6 nership between their companies, ICA and Lever Sweden. 7 Highlights were an increase in turnover of 9%, a reduction in 8 number of SKUs by 20%, a higher market share of 7% and 9 higher profits of between 3% and 16%. 20111 • Johnson & Johnson representatives disclosed two-digit turn- 1 over increases in their respective business segments (Celada 2 and Mei 1998). 3 4 • Kotzab (1997) reported a somewhat obscure ECR example in 5 his work with the John Menzies Publishing Company. The 6 UK-based magazine and newspaper distributor implemented 7 certain ECR principles during the 1990s by establishing elec- 8 tronic links between its distribution centres and the newspaper 9 stands of 20 of its clients. This partnership resulted in 30111 increased sales volume of 35%, a reduction in inventory levels 1 of 10% and increased margins of 2.1%. 2 3 ECR has started to revolutionize the way business should be 4 done in the grocery supply chain. Indeed, ECR has initiated a 5 lot of change, especially the business culture and the way the 6 partners deal with each other within the grocery supply chain. 7 The next dramatic change expected will be by combining the 8 ideas of ECR with the future technologies, e.g. the Internet. While 9 ECR concentrates on traditional ‘bricks and mortar’ distribution 40111 channels, the Internet with its dot.com shops will change the 1 way of distribution. The first ideas have already been presented 2 at the latest European ECR conference in Turin, Italy. With the 3 Internet, companies do expect to combine convenience and 4 experience, two solid factors for consumer satisfaction. But as 5 for specific consumer interaction, facilitated by the Internet 6 approach, new distribution models have to be established 7 (Henley Research Centre 2000). 8 49111

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1111 References 2 3 Browning C. (1997) Efficient Consumer Response: Its Lessons for 4 Everyone. Presentation, 1997 Council of Logistics Manage- 5 ment Annual Conference, Chicago. Celada R. and Mei S. (1998) Category Management at Johnson 6 rd 7 & Johnson. Presentation at the 3 Official ECR Europe 8 Conference, Hamburg, 1–2 April 1998. 9 Efficient Consumer Response Europe (ECR) (1996b) Category Management Best Practices Report. 1011 Efficient Consumer Response Europe (ECRE) (1996a) European 1 Value Chain Analysis Study. Final Report. 2 Efficient Consumer Response Europe (ECRE) (1997) CEO 3111 Overview – Efficient Consumer Response. 4 Efficient Consumer Response Europe (ECRE) (1998) How to 5 Create Consumer Enthusiasm – Roadmap to Growth. 6 Efficient Consumer Response Europe (ECRE) (1999a) Consumer 7 Value Measurement. 8 Efficient Consumer Response Europe (ECRE) (2000) Welcome 9 to Efficient Consumer Response Europe. http://www.ecrnet. 20111 org/ECR/ecr.home. 1 Fleury D. (1997) Best Practices Category Management – Category 2 Tactics. Presentation at the 2nd official ECR Europe 3 Conference, Amsterdam 13 and 14 March 1997. 4 Henley Research Centre (2000) Drivers and Barriers of Future 5 Channels. Presentation at the 5th official ECR Europe 6 Conference, Turin, 22–23 March 2000. 7 Hven N. and De Soysa J. (1998) Joint ECR-Europe Project 8 Lever/ICA. Presentation at the 3rd official ECR Europe 9 Conference, Hamburg, 1–2 April 1998. 30111 Joint Industry Project on Efficient Consumer Response (JIPOECR) 1 (1995) ECR Alliances. A Best Practices Model. 2 Kalmbach U. (1999) ECR Europe und ECR Deutschland – Ein 3 Überblick. In Heydt A. (ed.), Handbuch Efficient Consumer 4 Response. Konzepte, Erfahrungen, Herausforderungen. Munich: 5 Vahlen, pp. 24–40. 6 Karch N. (1997) Trends, Opportunities and Threats in Retailing. 7 Presentation to students at the Kellogg Graduate School of 8 Management, Northwestern University, 7 April. 9 Kotzab H. (1997) Neue Konzepte der Distributionslogistik von 40111 Handelsunternehmen. Wiesbaden: Gabler. 1 Martin A. (1994) The Ultimate ECR Strategy. In Annual 2 Conference Proceedings, Cincinatti, Ohio, 16–19 October 1994, 3 Council of Logistics Management (ed.). Chicago: Council of 4 Logistics Management. 5 Maximow J. (1997) Internationales Einkaufs- und Beschaffungs- 6 management im Handel. Presentation, Internationaler 7 Deutscher Handelskongress, Bad Homburg. 8 Partch K. (1995) A procedural dilemma for ECR? Supermarket 49111 Business, April, pp. 17–20.

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1111 Salmon K.A. (1993) Efficent Consumer Response. Enhancing 2 Consumer Value in the Grocery Industry. Washington, DC: Food 3 Marketing Institute. 4 Seth A. and Randall G. (1999) The Grocers. The Rise and Fall of 5 the Supermarket Chains. Kogan: London/Dover. 6 Shephson C. (2000) 3rd Party Logistics and Relationship 7 Management. Presentations to Students of the Copenhagen 8 Business School Supply Chain Management Master 9 Programme, 9 March. 1011 Stalk G., Evans P. and Shulman L. (1992) Competing on capa- 1 bilities: the new rules of corporate strategy. Harvard Business 2 Review, 70 (2), pp. 57–69. 3111 Tietz B. (1995a) Effiziente Kundenpolitik als Problem der 4 Informationspolitik. In Handelsforschung 1995/96. Informations- 5 management im Handel. Jahrbuch der Forschungstelle für den 6 Handel (FfH) Berlin (ed. V. Trommsdorff). Wiesbaden, pp. 7 175–186 8 Tietz B. (1995b) Efficient Consumer Response (ECR). Das 9 Wirtschaftswissenschaftliche Studium, 23 (10), pp. 529–30. 20111 Töpfer A. (1995) Efficient Consumer Response – Bessere 1 Zusammenarbeit zwischen Handel und Herstellern. In 2 Handelsforschung 1995/96. Informationsmanagement im Handel. 3 Jahrbuch der Forschungstelle für den Handel (FfH) Berlin (ed. V. 4 Trommsdorff), Wiesbaden, pp. 187–200. 5 Troyer C. (1997) ECR Past, Present and Future. Carrying the 6 Learning Forward. Presentation 1997 Council of Logistics 7 Management Annual Conference, Chicago. 8 Wiezorek H. (1997) Efficient Consumer Response – Koperation 9 statt Konfrontation. In Joachim Zentes (ed.), Marketing und 30111 Management-Transfer, 4, pp. 2. 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 280 1111 PERSPECTIVE 2 ●●●●●● 6 3 4 5 6 The marketing of 7 8 9 1011 seafood in New 1 2 3111 4 South Wales, 5 6 7 8 Australia: the 9 20111 1 2 impact of 3 4 5 6 deregulation 7 8 9 30111 Rayka Presbury 1 2 3 4 5 6 7 8 Fish has been a major source of protein food since the begin- 9 ning of history. The early civilizations were established on 40111 river systems and their cultures and populations thrived 1 because of the abundance of food from the surrounding 2 waters. Fish was a staple and constantly available food. The 3 earliest Australian settlers supplemented their meagre provi- 4 sions with fresh fish caught in the rivers and seas. The settlers 5 ate an amazing array of fish and when they caught more than 6 they could eat, the excess was salted and kept for later use. 7 Turtles were caught for sweet tasting eggs and cuttlefish was 8 used to make wonderful soup (Bannerman 1998). 49111 Food Supply Chain Management

1111 The Island continent of Australia is surrounded by over 2500 2 species of fish. From these fish the Australian economy benefits 3 by approximately $A9 billion through its domestic as well as 4 export sales. More than 110 000 people are employed in this very 5 important primary industry (Australian Seafood Industry 6 Council 2000). Any traveller to Australia would not leave without 7 sampling the huge variety of seafood, especially lobsters, cray- 8 fish, oysters and crabs. In fact most tourists seek Australian 9 quality seafood as a priority in their travels. The Australian 1011 tourism industry has grown to 3 million visitors a year and with 1 it have emerged a number of sophisticated celebrity-chef restau- 2 rants that have made Australian seafood a tourist attraction. 3111 As the Australian food industry takes a huge leap forward 4 from the traditional ‘meat and three veg’, the demand for 5 Australian seafood is showing strong economic growth both 6 domestically and overseas. As Australians learn of the health 7 and nutritional value of fish, to reduce cholesterol in the blood, 8 they demand an increasing amount of fresh seafood products. 9 The Australian Seafood Industry Council (ASIC) reports that 20111 Australian consumers eat around 12 kg of fish and seafood per 1 year, 9 kg of which is consumed as fresh and frozen product 2 eaten outside the home, representing a 13% increase in consump- 3 tion from 1991 to 1999. As our ageing population increases and 4 older Australians watch their diet and cholesterol levels, this 5 percentage is bound to increase. Only 4.9% of Australians do 6 not eat seafood and around 36% actively seek Australian seafood 7 (ASIC 2000). While Australians are at a middle ground in the 8 consumption of fish, they are well behind the Pacific Island 9 nations. However, Australia is a major exporter of fish, espe- 30111 cially whole fresh fish to Japan, who will pay a premium price 1 for fish caught in Australian waters. 2 Fresh food is the challenge of the future. The frozen and 3 dried markets are eroding, as consumers demand a greater 4 number of fresh food products. As this demand increases so 5 does the challenge of delivering fresh seafood products to 6 consumers. The success of this endeavor will require a greater 7 co-operation among all participants in the foodservice chain, 8 including, fisherman, wholesalers, retailers, consumers and 9 governments. 40111 In the 1800s selling required little skill. Settlers brought their 1 produce to market and hoped to receive a good price. The price 2 was determined by negotiation between individual buyers and 3 sellers. In the 1900s fisherman sold their catch individually, either 4 locally, or to private agents, who sold fish to retailers and the 5 public through the central fish market in Sydney. In 1963 as a 6 result of unco-ordinated attempts in sending fish to market and 7 gluts and shortages of fish in New South Wales, the government 8 stepped in and established the New South Wales Marketing 49111 Authority to control the marketing of fish.

●●● 282 The marketing of seafood in New South Wales, Australia: the impact of deregulation

1111 Licences were issued to fishermen who then had to sell fish 2 to the fisherman’s co-operatives or the Sydney Fish Market. 3 Fishermen could not sell directly to the public. Even though the 4 majority of fish were caught in the regional coastal areas of New 5 South Wales, the major market for fish was in Sydney. The 6 Sydney Fish Marketing Authority for the first time was able to 7 enforce regulations onto the suppliers (size of fish and type of 8 fish caught), as well as regulate health control. 9 As well as the Sydney Fish Market, over 20 co-operatives 1011 were formed along the coast of New South Wales. The co- 1 operatives were responsible for receiving the fish and packaging 2 the fish to transport to Sydney. Some also ran their own retail 3111 fish shops to sell to the local community, retailers and restau- 4 rateurs. For over three decades most fish marketing in New 5 South Wales has taken place through this system of fishermen’s 6 co-operatives and the Sydney Fish Market that operated under 7 the Fisheries Act 1935. These regulations have prohibited fish- 8 ermen from selling their catch directly to consumers or retailers. 9 In some instances this has caused a loss of profits to the 20111 fisherman due to the cost of transport and extra costs involved 1 with having a middle man to sell the catch, as well as lower 2 prices being paid to fishermen as a result of monopoly pricing 3 practices. 4 With the general move to deregulation as a better way of doing 5 business in Australia, the management of the Sydney Fish Market 6 was handed over to the fishing industry in 1994. It was evident 7 that restricting trade was not in keeping with general thinking 8 about government agencies and that cutting one leg in the supply 9 chain would translate into benefits for both consumers, retailers 30111 and fisherman. 1 On 1 November 1999, the marketing of fish in New South 2 Wales was deregulated. Commercial fishers are no longer 3 required to market their catch through the Sydney Fish Market 4 or a fishermen’s co-operative. The old system has been replaced 5 by one where wholesalers, retailers, fish shops or any persons 6 who wishes to purchase fish direct, can do so by buying from 7 a commercial fisher (who holds a permit) or a Registered Fish 8 Receiver (RFR), as seen in Figure P6.1. 9 To become a RFR, the person or company must hold a permit 40111 issued under the Fisheries Management Act 1994. Fish receivers 1 are assessed against criteria that look at any convictions for 2 fish marketing offences and are required to pay an annual 3 fee of $2500. Deregulation has also meant that anyone can get 4 a fisherman’s licence and try their luck in the fishing industry. 5 Control of fishermen is done through normal trading law and 6 fishermen need to follow the same regulations of health, hygiene 7 and safety as any other business would. New South Wales 8 Fisheries Inspectors control the issues of illegal fishing, catch size 49111 and protected species.

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1111 2 3 4 5 6 7 8 9 1011 1 2 Figure P6.1 3111 The marketing of sea food 4 in New South Wales 5 6 7 The registration of fish receivers allows for fish caught by 8 commercial fishers to be tracked, so that data can be collected 9 as to how much fish is caught and sold. The RFRs are required 20111 to keep records concerning the purchase and sale of all fish and 1 to make monthly returns of those records to the NSW Fisheries 2 Department. This system also assists in controlling black market 3 sales and pushes operators on the black market to make their 4 businesses legitimate. 5 According to the fishing industry, deregulation makes good 6 business sense. Whilst there are certain fishing areas at risk, most 7 are well managed and fishermen should be allowed to sell 8 to whomsoever they choose in order to make the best deals. 9 Deregulation will mean more fishermen selling directly to the 30111 public and to retailers. This will mean more relationship building 1 between the supplier and the end user and much less reliance 2 on the services of fishermen’s co-operatives or the Sydney Fish 3 Markets. The general feeling is that the fish marketing authority 4 was not providing good service because it was a monopoly. 5 Deregulation will create competition, which will drive improve- 6 ment in the services offered, for both the fisher and the registered 7 fish receivers. 8 For the marketplace this will mean a greater choice for the 9 purchasing of fish. For example, fish shops and restaurants will 40111 be able to purchase fish from a registered fish receiver with no 1 obligation to become permit holders. However, they will also be 2 able apply for a permit and buy direct from any licensed commer- 3 cial fisher. Whilst commercial fishers have the choice of selling 4 their catch directly to anyone with a permit to buy, a fishermen’s 5 co-operative or through the Sydney Fish Markets. 6 7 8 49111

●●● 284 The marketing of seafood in New South Wales, Australia: the impact of deregulation

1111 References 2 3 Anon. (1996) The future is fresh in wholesaling. Inside Dining, 4 July, p. 13. 5 Australian Seafood Industry Council (2000) Facts about the Seafood 6 Industry. 7 Bannerman C. (1998) Acquired Tastes: Celebrating Australia’s 8 Culinary History. National Library of Australia. 9 Bolles S. (1996) Courting success in food. Inside Dining, October 1011 1996, p. 5. 1 NSW State Fisheries (1986) Fisheries and Fish Marketing in New 2 South Wales. 3111 NSW Fisheries (1999) Discussion Paper: Fish Receivers 4 Registration. 5 NSW Fisheries (1999) A Fisheries Policy Consultation Paper for 6 Fishers. 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 285 1111 PERSPECTIVE 2 ●●●●●● 7 3 4 5 6 Supply chain 7 8 9 1011 restructuring in 1 2 3111 4 economies 5 6 7 8 in transition: 9 20111 1 2 a case study of 3 4 5 6 the Hungarian 7 8 9 30111 dairy sector 1 2 3 4 Matthew Gorton and Ferenc Z. Guba 5 6 7 8 9 40111 1 2 Introduction 3 Since the downfall of communist regimes in Central and 4 Eastern Europe, one of the most widely discussed issues has 5 been the nature and impact of the transformation process. 6 After early optimism that transformation could be achieved 7 quickly and relatively painlessly, it soon became apparent that 8 the necessary changes in institutions, linkages between agents 49111 Supply chain restructuring in economies in transition: a case study of the Hungarian dairy sector

1111 and attitudes would take considerably longer (Buckwell and 2 Davidova 1999). This perspective presents a case study of supply 3 chain restructuring, focusing on the Hungarian dairy sector. 4 The dairy sector is the second most important branch of the 5 agri-food sector in Hungary and the food industry overall makes 6 a significant contribution to national employment, trade and 7 income (Szabó and Tóth 1998). The next section outlines the 8 nature of supply chains prior to transition. The following section 9 considers the post-communist period, focusing on restructuring 1011 at the farm, processing and retail levels and the linkages between 1 these stages. The final section concludes with a discussion of the 2 emergence of dual food supply chains in Hungary. 3111 4 Supply chains in the pre-transition period 5 6 Under communism, Hungary pursued an agri-food policy 7 which involved three main strands: (i) collectivization and agro- 8 industrial integration, (ii) controlled prices and margins, (iii) high 9 border protection. The state was the dominant actor in pursuing 20111 these policies and the agricultural and food processing sectors 1 received hefty subsidies (Szabó 1996); the provision of cheap 2 food to the masses being perceived as a requirement for the 3 maintenance of regime control. Prices were set according to what 4 central planners thought reasonable and rarely reflected marginal 5 costs. 6 In contrast to the sectoral division of agriculture, where co- 7 operative production and private sector plots were important, 8 food processing was almost entirely accomplished by state enter- 9 prises (Csizmadia 1977) (Figure P7.1). In 1974 the private sector 30111 produced the following shares of total physical production: 62% 1 of the potato crop, 50% of fruit, 59% of meat and bacon, 40% of 2 poultry and 43% of milk (Elek 1980). Food processing plants 3 were co-ordinated by industry-wide trusts. Legal barriers of 4 entry were set in wholesaling and foreign trade so that they were 5 controlled by specialist state companies. State processors were 6 in practice obliged to purchase all produce offered to them by 7 primary producers. 8 In the Hungarian dairy industry, until 1990, the Dairy Trust 9 oversaw 15 state owned companies, almost all of which each 40111 had between four and six processing units. These plants were 1 organized on a strict regional base with hardly any overlap. 2 These state owned companies accounted for between 85 and 90% 3 of all processing, under the control of the Dairy Trust. As such, 4 the Trust held an almost complete monopoly on processing 5 with hardly any competition between state owned firms. The 6 ‘competitive fringe’ consisted around 30 small and rather weak 7 co-operative processors which typically lacked sufficient capital 8 to develop the expansion of their processing capacities, which 49111 had to be financed out of retained profits (Szabó and Tóth 1998).

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1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 Figure P7.1 7 Hungarian food chains 8 under communism 9 20111 1 Moreover, the Trust fought to maintain its monopolistic position 2 by opposing the ‘too-rapid expansion’ of joint or co-operative 3 enterprises (Wädekin 1982). 4 Despite the heavy subsidies and border protection the 5 Communist government found it increasingly difficult to deliver 6 high quality, cheap food to consumers. Supply chains were char- 7 acterized by low productivity, high shrinkage rates and erratic 8 deliveries. In an attempt to deal with these problems the lead- 9 ership relaxed restrictions on private production and retailing 30111 (albeit within strict limits) and improved co-ordination by 1 rationalizing the number of state enterprises. As a consequence, 2 the number of plants in the Hungarian food industry fell from 3 3256 in 1960 (an average of 39 workers per industrial plant) 4 to 2166 plants in 1973 (average of 86 workers) (Csizmadia 1977). 5 This had a major effect on the nature of the privatization process 6 and contemporary market structures, which are typically char- 7 acterized by highly concentrated, oligopolisitc (or in a few cases, 8 monopoly) competition. 9 40111 Evolution of dairy supply chains 1 2 Restructuring has occurred at every stage of the agro-food supply 3 chain and these trends are summarized in Figure P7.2. 4 5 Agriculture 6 7 Agricultural production in the initial post-communist era was 8 characterized by a shrinkage in both supply and demand. Supply 49111 fell due to the cost-price squeeze, restructuring which has led to

●●● 288 Supply chain restructuring in economies in transition: a case study of the Hungarian dairy sector

1111 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 Figure P7.2 The restructuring of agro-food supply chains in Hungary 4 5 6 higher average costs and a decrease in real government support. 7 Demand fell as real incomes declined and unemployment rose 8 throughout the region. Milk production was no exception to this 9 trend, declining by 33% between 1990 and 1997, and during the 30111 same period, the stock of milking cows decreased even more 1 (–36%). This meant that milk production fell from 1763 million 2 litres in 1990 to a low of 1854 million litres in 1997, with a slight 3 recovery in 1998 and 1999 (KSH 1998/9). 4 Significant structural changes have occurred during transition 5 as many state and collective farms have been split up and/or 6 downsized as a consequence of financial troubles and bankrupt- 7 cies. This has reduced the importance of these farm structures in 8 milk production (Table P7.1). In contrast, private farms, on 9 average, have increased their herds with some 300 family farms 40111 emerging with 20–50 cows. It is these larger private and co- 1 operative farms which are most attractive to dairy processors, in 2 that the quality of milk produced by these units tends to be much 3 higher, involving lower procurement costs. 4 In contrast, the very small scale producers (one to two cows) 5 have been increasingly marginalized. These producers have 6 suffered from low payment terms, forcing them to leave the 7 business or turn to subsistence farming and/or direct marketing 8 by selling the milk to neighbours or small scale operations. 49111 However, a great number of elderly and poor rural people are

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1111 1989 1997 2 Share of Average Share of Average 3 total milk herd size total milk herd size 4 production production 5 6 State farms/Corporations 21.1 1300.0 27.6 948.0 Collective farms (production co-ops) 55.5 300.0 39.4 221.0 7 Private farms (mostly household 23.4 1.4 33.0 8.9 8 farms of co-operative members) 9 Total 100.0 100.0 1011 1 Source: Data from KSH; own depiction 2 3111 4 Table P7.1 Structural change in milk production 5 6 7 unwilling to give up dairy farming, even with just one or two 8 cows, if it is their only source of revenue. It was estimated that 9 in 1996 there were approximately 30 000 individual farmers 20111 (accounting for 15% of milk processed), in contrast to 1048 collec- 1 tive and corporate farms which accounted for 85% of production 2 sent for processing. 3 The price paid to farmers for milk is based on milk quality. 4 The grading system used has been in place since the early 1980s 5 and classification is based on the physical purity of milk, its acid 6 content, bacterial and somatic cell counts and the level of 7 inhibitory substances (Fenyvessy and Kiss 1996). Milk is graded 8 as extra, 1, 2 and 3 as well as ex-class. In 1996, just under 80% 9 of all milk supplied to dairies was classified as of extra and class 30111 1 standard (up to EU quality). 1 In an attempt to improve the quality of milk big price gaps 2 between Class 1 and Class 2 milk (18% of the average price) as 3 well as between Class 2 and Class 3 milk (15.4% of the average 4 price), have been instigated. 5 The only differentials fixed centrally are those for the minimal 6 premiums to be paid on extra protein and fat content. However, 7 government subsidies for milk production are available to dairy 8 companies which pay a set minimum price to producers for extra 9 class milk although the actual level of subsidies available have 40111 varied significantly from one year to the next. 1 2 Food industry 3 4 The dairy industry is the second largest sector of the food 5 industry, accounting for 12% of total food production. A major 6 reform in 1990 resulted in the disappearance of the state- 7 controlled Dairy Trust and elimination of controlled prices. The 8 15 state owned companies were broken down to 36 new firms. 49111 In 1997 there were 164 companies involved in dairy processing

●●● 290 Supply chain restructuring in economies in transition: a case study of the Hungarian dairy sector

1111 of which 103 employed less then 11 people, 47 firms employed 2 between 11 and 300 people and 14 employed more than 300 3 people. All these enterprises, however, found the initial period 4 of transformation especially tough as state subsidies were elim- 5 inated, real prices increased and incomes shrunk. As a result, 6 the quantity of milk procured and processed by dairies dropped 7 by over 33% between 1990 and 1997, from 2262 million to 1504 8 million litres (KSH 1998/9). However, dairies still procure almost 9 80% of total milk production with the remainder being used as 1011 fodder, or directly marketed/consumed by farmers. 1 In response to this sharp downturn, processors reduced their 2 staffing levels, between 1990 and 1997 employment in the dairy 3111 processing sector falling from 19 600 to 12 400. A significant 4 proportion of these reductions was accounted for by structural 5 changes in the sector (acquisitions and bankruptcies). Despite 6 these financial difficulties, by mid-1997 privatization of the 7 industry had been completed and the share of (EU-based) foreign 8 capital reached 60% (Table P7.2). 9 Foreign ownership in the dairy industry is concentrated in 20111 larger enterprises and these enterprises have sought to increase 1 their share of the market. Between 1995 to 1999 the joint share 2 of the four market leaders (the C4 ratio) grew from 27% to 60% 3 through internal growth, mergers and acquisitions. 4 The new foreign owners have had a dramatic impact on 5 supply chains in Hungary. The larger processors that relied on 6 large numbers of small producers for raw milk have rational- 7 ized the number of players they deal with. More formal contrac- 8 tual arrangements have tended to emerge to ensure supply, 9 reduce transaction costs or to concentrate on core competencies. 30111 Frequently dairies ensure their supplies via long term skeleton 1 contracts with the larger milk producers, agreeing annually 2 prices and quantities to be supplied. In a number of cases 3 their relationships with producers have become more entwined 4 by extending credits, handing over assets and the provision of 5 technical advice. 6 7 8 Company Home Main subsidiaries % share of 9 country Hungarian 40111 market 1 Nutricia Netherlands Hajdutej, Szabolcstej, 18.3 2 Gala Italia Italy Szegedtej, Gala Paszto 17.3 3 Danone France Danone Bp. 11.5 4 Bongrain France Veszpremtej, Pannontej 12.5 5 Parmalat Italy Fejertej 5.5 6 Table P7.2 Total 65.1 7 Share of the Hungarian dairy 8 market controlled by non- Source: Agra Europe, 1999) p. 34; interviews 49111 Hungarian based firms, 1999

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1111 Foreign investors have developed stronger brand names 2 and trade marks backed by significant advertising campaigns. 3 Nationwide distribution networks have been established by firms 4 that market fresh dairy products (Danone, Parmalat). Foreign 5 owned processors have also been instrumental in the drive to 6 improve the quality of raw milk produced. The processors 7 determine quality requirements and enforce them through the 8 procurement system. Foreign owned dairies have also introduced 9 internal systems guaranteeing quality levels in contrast to smaller 1011 dairies which have been unable to introduce ISO systems due to 1 lack of capital. This has limited the latter’s ability to export and 2 they will face increasing difficulties on the domestic market as 3111 Hungary adopts EU food laws as part of the process of accession. 4 However, accession to the EU may present problems even 5 for the larger foreign-owned dairies. Dairy firms and plants in 6 Hungary are still small in comparison to the EU. The largest 7 dairy company in Hungary processed a mere 155 million litres 8 of milk in 1995, while in the EU more than half of all milk is 9 being processed by firms larger than this and there are fourteen 20111 European companies which are bigger than the whole Hungarian 1 dairy industry (Szabó and Tóth 1998). 2 3 Retail and catering sectors 4 5 The importance of multiple retailers has grown in Hungary. This 6 has been driven by foreign investors, the most important of 7 which are: Metro (Switzerland), Csemege-Julius Meinl (Austria), 8 Tesco (UK), Cora (France), Auchan (France), Tengelmann 9 (Germany), Rowe Group (Germany), Delhaize Group (Belgium) 30111 and Spar (Austria/Netherlands). These companies account for 1 approximately 45% of the food retail market (Gábor and Stauder 2 1999) and have put considerable pressure on AFEOSZ (the orga- 3 nization of traditional retail co-operatives in Hungary) which 4 has a network of about 5500 small general consumer-goods 5 outlets and other Hungarian owned firms. 6 Multiple retailers have sought to develop along Western lines 7 by introducing and developing warehouse point distribution, 8 consolidating or reducing the number of suppliers they deal 9 with, developing own brands and concentrating on larger sized 40111 stores. The foreign owned stores primarily target wealthier 1 segments of the population and the stratification of incomes in 2 the population has largely removed the bottom segment of the 3 economic pyramid from the institutional food trade channels 4 (Fennesz-Berka 1998). In response to high taxes and lower real 5 incomes, the black market assumes an increasing percentage of 6 the purchases of low income families with a growth in subsis- 7 tence farming and unregistered farm food sales. 8 In the hotel, restaurant and food service market (HRS), the 49111 biggest growth rate has been in fast food (USDA, 1999). This

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1111 sector has grown through inward investment and the develop- 2 ment of franchise networks. By June 2000, McDonald’s had 73 3 restaurants in Hungary (mostly company owned), while other 4 fast-food chains have sought to develop franchise led networks 5 (Burger King, Kentucky Fried Chicken, Wendy’s). With central 6 procurement of ingredients and determination of menus, these 7 firms largely deal with the larger, predominantly foreign owned 8 processors and wholesalers (Kovrig 2000). 9 1011 Conclusions 1 2 A considerable degree of structural change has occurred during 3111 transition. Supply chains have evolved and two distinct types of 4 channel have emerged. First, formal channels have increasingly 5 become dominated by larger producers, processors and retail 6 chains. The linkages between larger farms and processors 7 have become stronger, with more stringent quality requirements, 8 complex payment terms and in some cases the provision of 9 credit, physical assets and technical advice. These dairies in turn 20111 are dealing increasingly with centralized retail buyers. In these 1 regards Hungarian supply channels increasingly mirror practices 2 in Western Europe. From these channels small farms, processors 3 and low income consumers have become increasingly marginal- 4 ized. These agents are involved in much more informal channels, 5 with the smallest farmers typically producing for self-consump- 6 tion or sale to neighbours and small processing enterprises. These 7 small processors have found it difficult to adjust to changing food 8 laws or become suppliers to the multiple food retailers. 9 30111 References 1 2 Agra Europe (1999) Stakes in Hungarian dairy bought by 3 Friesland. East European Agriculture and Food, June, p.34. 4 Buckwell A. and Davidova S. (1999) The Progress in Transformation 5 of CEEC Agriculture and in Integration with the EU. Ashford, 6 Kent: Wye College, University of London. 7 Csizmadia E. (1977) Socialist Agriculture in Hungary. Budapest: 8 Akademiai Kiado. 9 Elek P.S. (1980) The Hungarian experiment: in search of prof- 40111 itability. In R.A. Francisco, B.A. Laird and R.D. Laird (eds), 1 Agricultural Policies in the USSR and Eastern Europe. Boulder, 2 CO: Westview Press, pp. 165–84. 3 Fennesz-Berka A. (1998) Annual Marketing Plan for Hungary. 4 Washington, DC: USDA, mimeo. 5 Fenyvessy J. and Kiss J. (1996) A Tiszantulon termelt tej 6 minosege. Elelmezesi Ipar, 50 (3), pp. 86–9. 7 Gábor J. and Stauder M. (1999) A kereskedelmi láncok es az 8 elelmiszertermelok kapcsolatának valtozasai [Change of rela- 49111 tion between the retail chains and food producers]. AKII, Bp.

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1111 Kovig M. (2000) Golden arch-enemies. Budapaest Business Journal, 2 19 June. 3 KSH (1998–1999) Published and unpublished agricultural statis- 4 tics, Budapest, mimeo, May. 5 Szabó M. (1996) A magyar tejipar versenykepesseget befolyasolo 6 tenyezok [Facts that determine the competitivness of the 7 Hungarian dairy industry]. Working paper, Budapest 8 University of Economic Sciences. 9 Szabó M. and Tóth J. (1998) Agricultural market development 1011 and government policy in Hungary: the case of the dairy 1 sector. Budapest 2 USDA (1999) Hungary Exporter 1999. Gain Report No. 9021. 3111 Wädekin K-E. (1982) Agrarian Policies in Communist Europe: a 4 Critical Introduction. The Hague: Martinus Nijhoff. 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 294 1111 PART 2 ●●●● 3 3 4 5 6 Supply Chain 7 8 9 1011 Perspectives 1 2 3111 4 The Future of the Supply Chain 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3111 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111 1111 PERSPECTIVE 2 ●●●●●● 8 3 4 5 6 Future issues in 7 8 9 1011 European supply 1 2 3111 4 chain management 5 6 7 8 Michael A. Bourlakis 9 20111 1 2 3 4 5 6 Introduction 7 Over the past decades, the concept of ‘distribution manage- 8 ment’ has been replaced by ‘logistics management’ and lately, 9 by ‘supply chain management’. Supply chain management 30111 is nowadays of major significance to the strategic decision 1 making activity of most companies and is a key function 2 for food channel members, such as food retailers and manu- 3 facturers, especially when they compete in an increasingly 4 turbulent environment. 5 The focus of this perspective is upon future developments 6 in European food supply chain management. First, the exter- 7 nalization process of supply chain operations is discussed. 8 The externalization of supply chain operations refers to the 9 case where food firms utilize a specialist (logistics) firm to 40111 perform a supply chain function on their behalf. Subsequently, 1 the internationalization process of logistics firms is analysed 2 across European markets. In the final part, supply chain net- 3 works and the factors that will enhance supply chain network 4 formation activities in future years are examined. 5 6 7 8 49111 Food Supply Chain Management

1111 The externalization of supply chain operations in 2 European markets 3 4 There has been a considerable shift of power within food- 5 marketing channels, with retail firms becoming the dominant 6 members in most European markets. It is not surprising that 7 European food retailers command a significantly higher volume 8 of sales, as compared to their food manufacturer counterparts. 9 For example, Metro, the largest European food retailer in 1994, 1011 achieved a volume of European sales in that year that was at 1 least twice the relevant sales volume for Unilever, the largest 2 European food manufacturer (Fiddis 1997). 3111 In the supply chain, European food retailers opted to become 4 personally responsible for warehousing and transportation by 5 operating their own independent warehouses (regional distrib- 6 ution centres) and their own fleet for transportation. Therefore, 7 manufacturers were delivering products to retail warehouses and 8 not to retail stores and these products were transported to retail 9 stores by retailers’ own vehicles. As a consequence, food retailers 20111 committed themselves to a substantial investment in capital for 1 warehouses and lorries instead of investment into retail store 2 renovation and expansion. At that particular time, the need for 3 a specialist firm that would undertake the transportation and 4 warehousing operations on retailers’ behalf started to emerge. 5 Table P8.1 outlines the evolution of major logistics innovations 6 in UK food retailing. Similar developments took place for the 7 rest of Europe at a later stage. The table suggests that specialist 8 logistics firms came into existence, and more specifically, compa- 9 nies such as Exel (UK), Hays Distribution Services (UK) and 30111 Tibbett and Britten Group (UK). As a result, food retailers and 1 manufacturers had the option either to carry the logistics func- 2 tion on their own and/or to outsource – externalize – it to a 3 specialist logistics firm. According to Dawson and Shaw (1990), 4 externalization of operations (and supply chain operations) is 5 more likely to replace a firm’s/own account operations when no 6 specific assets are required, many competitive specialist firms 7 are available, when tasks are repetitive, the environment is stable 8 and not complex and, finally, when performance outcomes for 9 that operation can be easily and accurately assessed. 40111 Initially, logistics firms were utilized by manufacturers and 1 retailers in specific circumstances. Following Fernie (1989), such 2 occasions occurred: 3 4 1. during periods of rapidly growing demand for products 5 (e.g. Christmas) and therefore, a need for extra supply chain 6 services; 7 2. for certain product categories (e.g. frozen); 8 49111 3. for delivery of goods to remote geographical areas.

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1111 Period Problem Innovation Consequences 2 3 1960s and Disorderly delivery Introduction of (1) Strict timing of supplier 4 1970s by suppliers to warehouses – regional deliveries to RDC imposed 5 supermarkets and distribution centres by retailer 6 queues of vehicles (RDCs) to channel (2) Retailer builds and led to both inefficiency goods from suppliers to operates RDC 7 and disruption supermarkets operated (3) Retailer operates own 8 by retailer delivery fleet between RDC 9 and supermarkets within its 1011 catchment area 1 Early 1980s Retailers becoming Operation of retailer- (1) Retailer can 2 too committed to owned RDCs and vehicle concentrate on ‘core 3111 operating logistics fleets to specialist logistics business’ of retailing 4 services in support firms (2) Retailer achieves better 5 of retail activity financial return from capital 6 invested in supermarkets 7 than in RDCs and vehicles 8 Mid-1980s Available floorspace at Conversion of storage (1) Better sales revenue 9 retail outlets being floorspace at supermarkets potential at retail outlets 20111 under-used and too to sales floorspace (2) RDCs absorb products 1 much floorspace used formerly kept in-store at 2 for storage supermarkets 3 (3) Just-in-time (JIT) delivery used from RDC to 4 replenish supermarket 5 shelves 6 7 Source: Cooper et al. 1991 8 9 30111 Table P8.1 Major logistics innovations by UK food multiple retailers 1 2 3 4 Nowadays, logistics firms are employed to a greater extent 5 and offer a full range of services, including strategic planning, 6 warehouse and inventory management, information systems 7 development and other consulting services to both manufac- 8 turers and retailers. These were named ‘value added services’ 9 in order to differentiate them from the traditional transportation 40111 and warehousing services offered so far. Therefore, logistics 1 externalization encompasses a wide range of services and with 2 Western European food manufacturers and retailers making use 3 of logistics firms (externalization), to a considerable extent. For 4 example, British firms externalized around 34% of their supply 5 chain activities in 1996 (based on spending), that is the highest 6 percentage in Europe with the lower spending taking place in 7 Greece, where only 11% was spent on such supply chain 8 activities (Marketline International 1997). Most surveys predict 49111 a rise in supply chain externalization across Europe (McKinnon

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1111 1999), and this is supported by the fact that supply chain 2 externalization is in its infancy in Eastern Europe and at its 3 ‘introduction’ stage in most Southern European countries. 4 To conclude, there is strong future potential for supply chain 5 externalization all over Europe, especially when specialist logis- 6 tics firms offer a vast range of services and there is an increasing 7 demand for these services from other channel members. 8 9 Internationalization of logistics firms across Europe 1011 1 European food manufacturers and retailers have been expanding 2 to overseas markets (internationalization), with various market 3111 entry methods, and as a result of domestic market saturation. 4 As a consequence, these firms have become gradually respectable 5 players in the host markets they entered as foreign competi- 6 tors. In food retailing, the French firms Carrefour and Auchan 7 are major corporations in the Iberian peninsula (Spain and 8 Portugal) food retail market, whilst other European food retailers 9 such as Tesco (UK), Metro (Germany), Julius Meinl (Austria) 20111 and Spar (Netherlands) have expanded rapidly into Eastern 1 Europe. 2 As a result, the growing firms’ internationalization has created 3 opportunities for a simultaneous international expansion to logis- 4 tics firms as well (Fernie 1998). For example, when the British 5 retailer Marks & Spencer entered the French market, it brought 6 with it Exel Logistics, a major British logistics firm, to run its 7 logistics operations as there were no suitable domestic logistics 8 companies to accommodate the retailer for such operations 9 (Laughlin et al. 1993). 30111 Currently, there are very few, most probably none, logistics 1 firms that are able to handle all European supply chain activi- 2 ties on manufacturers’ and retailers’ behalf. Nevertheless, 3 logistics firms will benefit from the European Union’s deregu- 4 lation of markets and also from the complete harmonization of 5 supply chain standards that will take place in the aftermath of 6 the European Monetary Union (EMU). It is expected that full 7 European economic and monetary integration will be followed 8 by increased presence of logistics firms’ operations (Bamford 9 1999). Hence, logistics firms that will be part of retailers’ and 40111 manufacturers’ internationalization process will be able to offer 1 a large range of services (and ‘value added services’) to their 2 client base all over Europe. 3 Finally, Browne and Allen (1999) argue that most users of 4 supply chain services are increasingly demanding ‘one-stop 5 shopping’. In other words, they are in favour of dealing with 6 one or very few logistics firms that meet their needs at both 7 domestic and international level. The aim of the latter is to facil- 8 itate further their current internationalization process via the use 49111 of specialist logistics firms.

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1111 European food supply chain networks 2 3 Most food manufacturers and retailers used to purchase services 4 from logistics firms on a short term basis, through a typical 5 market transaction exchange. At a later stage, they entered into 6 long term contracts with logistics firms as they were satisfied 7 by their performance, although they had to spend time and 8 resources for vetting and monitoring such performance 9 (McKinnon 1999). This led most food companies to develop a 1011 working partnership with a few logistics firms and, gradually, 1 a close relationship was formed based on co-operation and trust. 2 This is the main characteristic of the network approach (Jarillo 3111 1993), something not in line with the traditional market trans- 4 action exchange (Table P8.2). 5 The network approach has been applied in the food retail 6 supply chain (Bourlakis 1998), where, under a collaborative 7 manner, a food retailer takes the role of ‘central controller’ and 8 organizes the flow of product and information among itself 9 and logistics firms. 20111 In the fast food sector, this approach is evident in the co- 1 operation between the franchiser, its franchisees and its closely 2 tied suppliers who provide raw materials and specialized equip- 3 ment (Jarillo 1993). In general, food supply chain networks 4 consist of the major channel members, like the case of Efficient 5 Consumer Response (ECR). This movement, which was initiated 6 in the United States in the early 1990s and commenced in 7 Europe in 1993, is based on efficient co-operation between 8 leading European food manufacturers and retailers with the 9 aims of increasing savings in the food supply chain and also 30111 1 2 3 Market transaction exchange Network approach 4 5 Shorter term Longer term 6 Multiple logistics firms who are played off Fewer logistics firms (maybe even one) who 7 against one another for concessions are treated as valued partners 8 Price dominates Value added services dominate 9 Little dedicated investment from logistics firm Specialized investment can be high for both 40111 partners 1 Firms are independent Much sharing of every kind of information 2 Formal, infrequent communication Frequent formal and informal communication 3 Little interaction between respective functional Many functional areas may interact across 4 areas the partners 5 6 Source: Bowersox et al. 1992 7 8 49111 Table P8.2 Market transaction exchange and network approach

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1111 meeting the changing demands of the European grocery 2 consumer. Since 1993, ECR has clearly changed the attitude 3 towards relationships and has promoted a greater collaboration 4 of channel member participants in Europe. Its success so far, 5 indicates that it will accelerate the formation of similar food 6 supply chain networks across Europe with food retailers, 7 food manufacturers and logistics firms, forming the triangle of 8 the network members. 9 Finally, apart from ECR, two more factors further support the 1011 network’s formation: 1 2 1. the anticipated internationalization of logistics firms in Europe 3111 which will enable them to meet sufficiently food manufac- 4 turers and retailers’ demands for supply chain services all 5 over the continent; and 6 7 2. the increasing importance of information technology systems 8 that are the major facilitators for an effective communication 9 and co-ordination between food supply chain network 20111 members (Bowersox and Daugherty 1995), e.g. Electronic Data 1 Interchange (EDI), which allows the transmission of data (such 2 as product sales data, product inventory data) between the 3 computer systems of food retailers, manufacturers and logis- 4 tics firms. 5 6 Therefore, it is expected that numerous European food supply 7 chain networks will be created in the years to come and will be 8 supported by information technology capabilities that allow 9 network members to respond faster and more cost-effectively to 30111 the needs of European consumers. 1 2 Conclusions 3 4 The three trends that already have engineered changes in the 5 European food supply chain have been discussed. As far as 6 the externalization of supply chain operations is concerned, it 7 has been suggested that specialist logistics firms will be utilized 8 to a larger extent in the future, especially when these firms are 9 able to offer a full range of services. Internationalization of logis- 40111 tics firms is another trend that is facilitated by food firms’ 1 internationalization and is expected to be intensified, following 2 deregulation and harmonization of supply chain standards 3 within the European Monetary Union as well as firms’ prefer- 4 ence for ‘one-stop shopping’. 5 Finally, it is anticipated that food channel members (manu- 6 facturers, retailers and logistics firms) will become more active 7 in network formation that will increase the welfare of European 8 consumers in terms of lower prices accompanied by a higher 49111 quality and variety of services.

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1111 Acknowledgements 2 3 I would like to thank Dr C. Bourlakis for his helpful suggestions 4 and Ms A. Tregear for her support during the development of 5 this viewpoint. 6 7 References 8 9 Bamford C.G. (1999) The internationalization of logistics in the 1011 UK. In Donald Walters (ed.), Global Logistics and Distribution 1 Planning. London: Kogan Page, pp. 301–13. 2 Bourlakis M. (1998) Transaction costs, internationalization and 3111 logistics: the case of European food retailing. International 4 Journal of Logistics: Research and Applications, 1 (3), pp. 251–64. 5 Bowersox D.J. and Daugherty P.J. (1995) Logistics paradigms: 6 the impact of information technology. Journal of Business 7 Logistics, 16 (1), pp. 73–91. 8 Bowersox D.J., Daugherty P.J., Droge C.L., Germain R.N. and 9 Rogers D.S. (1992) Logistical Excellence: It’s not Business as Usual. 20111 Burlington, USA: Digital Press. 1 Browne M. and Allen J. (1999) Developments in Western 2 European logistics strategies. In Donald Walters (ed.), Global 3 Logistics and Distribution Planning. London: Kogan Page, pp. 4 324–42. 5 Cooper J., Browne M. and Peters M. (1991) European Logistics: 6 Markets, Management and Strategy. Oxford: Blackwell. 7 Dawson J.A. and Shaw S. (1990) The changing character of 8 retailer–supplier relationships. In John Fernie (ed.), Retail 9 Distribution Management. London: Kogan Page. 30111 Fernie J. (1989) Contract distribution in multiple retailing. 1 International Journal of Physical Distribution and Materials 2 Management, 19 (7), pp. 1–35. 3 Fernie J. (1998) The internationalization of the retail supply chain. 4 In John Fernie and Leigh Sparks (eds), Logistics and Retail 5 Management. London: Kogan Page, pp. 47–66. 6 Fiddis C. (1997) Manufacturer Retailer Relationships in the Food 7 and Drink Industry: Strategies and Tactics in the Battle for Power. 8 London: FT Retail and Consumer Publishing/Pearson 9 Professional. 40111 Jarillo J.C. (1993) Strategic Networks: Creating the Borderless 1 Organization. Oxford: Butterworth–Heinemann. 2 Laughlin K.A., Cooper J. and Cabocel E. (1993) Reconfiguring 3 European Logistics Systems. Oak Brook: Council of Logistics 4 Management. 5 Marketline International (1997) EU Logistics. London: Marketline 6 International. 7 McKinnon A.C. (1999) The outsourcing of logistical activities. In 8 Donald Walters (ed.), Global Logistics and Distribution Planning. 49111 London: Kogan Page, pp. 214–39.

●●● 303 1111 PERSPECTIVE 2 ●●●●●● 9 3 4 5 6 The future of the 7 8 9 1011 food supply chain: 1 2 3111 4 a perspective 5 6 7 8 looking up the 9 20111 1 2 chain 3 4 5 6 Sean Beer 7 8 9 30111 1 2 3 4 Introduction 5 The food supply chain will be governed by three key issues 6 in the future. These are globalization, consolidation and 7 power, each of which is considered in this perspective. These 8 issues give rise to a whole series of ethical considerations 9 which, depending on the position that is adopted, could be 40111 regarded as either positive or negative. 1 2 3 Globalization and integration 4 Globalization transcends all areas of society. The growth of 5 the Internet and the concept of the global village fuel the 6 idea that the world is shrinking. In the future the develop- 7 ment of a global economy will continue, which, in terms of 8 the food industry, will be characterized by consolidation, 49111 The future of the food supply chain: a perspective looking up the chain

1111 i.e. the evolution of fewer and larger companies. This trend will 2 occur in all areas of the food chain. Within the grocery industry 3 the concept of concentration is well documented (e.g. Bates and 4 Whittinton 1997; Jørgensen 1997, Jørgensen 1999), while a similar 5 trend is evident in the catering industry. 6 Jørgensen (1999) maintains that the concentration in the food 7 retail sector will result in a concentration of food suppliers and 8 that this will counterbalance power in the chain. While concen- 9 tration of suppliers is certain, whether this will affect the power 1011 balance is debatable, given the existing power of the retailers. 1 These companies will control an ever increasingly integrated 2 supply chain, which will produce substantial economic advan- 3111 tages for them. Typical benefits from integrating the supply 4 chain in non-food systems have been indicated by Gould (1998). 5 These are: 6 7 • 16%–18% improvement in delivery performance 8 9 • 25%–60% improvement in inventory reduction 20111 • 30%–50% improvement in fulfilment cycle time 1 2 • 25%–80% improvement in forecast accuracy 3 • 10%–16% improvement in overall productivity 4 5 • 25%–50% improvement in supply-chain costs 6 • 20%–30% improvement in fill rates 7 8 • 10%–20% improvement in capacity realization 9 30111 Application of these principles would obviously have benefits 1 for the food supply chain, although the application of such 2 figures as those put forward by Gould (1998) to the food industry 3 really needs examination (Poole 1997). Questions arise with 4 regard to who this will benefit the most – producers, retailers 5 or consumers; and the question as to whether these principles 6 can be applied to a product such as a lettuce, with a limited 7 shelf life, or a beef animal that takes two years to produce, is 8 worthy of investigation. 9 With regard to the European Union, it is probable that there 40111 will be a total redevelopment of the agriculture and food industry 1 based on fewer, larger farms and firms. Changes in agriculture 2 will result in the development of a new landscape based on three 3 geographical areas (J.R. Edwards 1999, personal communication): 4 5 • Intensive agricultural production areas producing food at 6 world prices. This will be hampered unless regulations 7 on animal welfare and the environment are relaxed, which is 8 unlikely and undesirable, or restrictions are put on the way 49111 in which imports are produced.

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1111 • Areas characterized by extensive production and environ- 2 mental/heritage support, where farmers are supported for 3 producing goods other than food and fibre. 4 • Areas of diversified agriculture near to conurbations. 5 6 The concern about large farms is obviously a key issue in this 7 debate. In the United States there are dairy units with thousands 8 of cows and beef finishing feedlots with tens of thousands of 9 animals produced per year. This is occurring at a time when 1011 society is starting to question the ethics of large scale factory 1 farming, for example, with regard to the intensive husbandry of 2 poultry. It is ironic therefore, that other areas of food produc- 3111 tion are being forced down the intensive route. One could, 4 however, consider that this merely reflects a food culture that is 5 obsessed with cheap food irrespective of quality. 6 Increasingly around the world, producer countries will add 7 value to food products before exporting them. Food retailers in 8 importing countries may fund some of this. If you can import the 9 lettuce why not the sandwich? There will be a need for very 20111 highly developed quality assurance, involving high tech solutions 1 such as genetic fingerprinting to maintain product authenticity. 2 This could give rise to some very interesting alliances. If a British 3 farming co-operative was to bid for a contract to supply chicken, 4 for example, and could not fulfil the order, why should it not 5 outsource the supply to another producer in another country 6 and take a reduced percentage on the outsourced component of 7 the deal? They may even lose money on the outsourced compo- 8 nent simply to secure a large order where they will make money 9 on their own share. In this way companies may move from being 30111 commodity suppliers to international food businesses, particu- 1 larly as they move to add value. For many in the food industry 2 these are revolutionary ideas. 3 Will this give rise to greater choice for consumers? Again this 4 is debatable. Greater regulation appears to be ‘limiting’ home 5 production, especially small scale production, giving rise to 6 greater use of large scale, factory farming and associated declines 7 in culture, heritage and environment. The decline in small 8 abattoirs in the UK is an example of this. Changing the regula- 9 tions about meat inspection is proving too expensive for many 40111 small slaughterhouses. Closure results in animals having to 1 travel further for slaughter, and many small scale specialist 2 food producers, using rare breeds or farming organically, may 3 find their production systems compromised. 4 In some ways this represents the destruction of food culture, 5 with the development of ‘cyber food’ and a new pseudo food 6 culture where the whole world ends up eating the same food. 7 This has become known as the ‘McDonaldization’ of food society 8 (see also Ritzer 1993, 1996; and Germov and Williams 1999). 49111 How far will this process continue?

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1111 Alternatively, this could be viewed from a different perspec- 2 tive. All industries have to move on. The modern food industry 3 has succeeded in providing high quality, cheap food to the 4 masses. Again, there are debates about whether the food is of 5 better quality and whether it is cheap. Certainly people in the 6 developed world seem well fed, perhaps even too well, given 7 the high levels of obesity found in modern society. Yet today 8 24 000 people will die across the world through starvation and 9 starvation-related disease. Many people in developing countries 1011 look in disbelief at our supermarkets and the food they contain. 1 So may be we have not got it completely right. Whether the 2 proposed developments in the food chain will help them or 3111 the shareholders of the multi-national companies that control the 4 food industry is another question. 5 There are a whole series of other issues facing the food supply 6 industry in the UK that will influence its ability to respond to 7 future developments. There are continuing arguments about 8 level playing fields. It is debatable whether consumers are eating 9 imported food in the UK that is produced using techniques 20111 that might be considered illegal in this country. For any country, 1 discrimination against its home industry needs to be addressed 2 in the global food chain, if indigenous industries are to be main- 3 tained. Failure to address such issues will result in the exporta- 4 tion of jobs and associated social deprivation. 5 6 Power 7 8 This whole process is really about consolidation and power. The 9 situation at present is one of oligopoly with regard to food 30111 retailers, i.e. there are a large number of food producers, few 1 suppliers and many consumers. In many ways this is the clas- 2 sical ‘figure of eight’ syndrome, with retailers controlling the 3 narrow part of the chain, as Figure P9.1 shows. 4 The key question is how this situation will develop in the 5 future. It could be argued that there are two levels here. Within 6 7 8 9 40111 1 2 3 4 5 6 7 Figure P9.1 8 The power base of the 49111 food supply chain

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1111 the UK there is a process of consolidation, but this could be 2 offset by the process of globalization opening up new players 3 in the industry. However, the global industry is simultaneously 4 consolidating and so the process continues. One often-neglected 5 player in this is the catering industry. Evidence indicates that 6 more and more food is being consumed outside the home. 7 Indeed, allegedly some new homes in larger cities are now being 8 built without kitchens! Food retailers are often heavily criticized 9 for problems in the food chain. Caterers are in many ways less 1011 accountable than retailers in that meals do not have to be labelled 1 with regard to their origin. Regulations with regard to declara- 2 tions about the presence or otherwise of genetically modified 3111 organisms are stepping in this direction. More will come. As will 4 the Internet. The implications of new technology are second only 5 to those of biotechnology. In the future more of us will be 6 ordering our food on-line for it to be delivered to our special 7 secure wall refrigerators. Or possibly our smart fridges will order 8 them for us. The question is not if it will happen, but to what 9 extent and how quickly; and also how will this affect the whole 20111 of the supply chain? Again, there are two dimensions to this: 1 not only will it allow large retailers to sell direct to homes but 2 also, via the mail, specialist food producers, who were previ- 3 ously reliant on limited direct sales. 4 5 Conclusions 6 7 This perspective emphasizes that the processes of consolidation 8 and integration will dominate the future of the food supply chain. 9 The background to this is a continuing conflict between consumer 30111 inspired regulation and a cheap food culture. This conflict will 1 have a direct effect on the home based food supply chain giving 2 rise to more jobs being exported to less regulated countries with 3 cheaper factors of production. The UK industry will need to 4 come to terms with this and innovate to survive. Producing 5 generic products is no longer a real option. Some businesses may 6 develop niche markets for products. Ten per cent of the popu- 7 lation may well spend an extra 10% on products with an 8 alternative quality dimension associated with fair trade, culture, 9 the environment or animal welfare, for example. The remainder 40111 will buy the cheapest options. Whether one thinks the future of 1 the food supply chain is bright may depend on whether one 2 belongs to the 10% or the 90%. 3 4 References 5 6 Bates K. and Whittinton M. (1997) Intense competition, revised 7 strategies and financial performance in the UK food retailing 8 sector. In J. Nilsson and G. Van Dijk (eds), Strategies and 49111 Structures in the Agro-Food Industries. Assen: Van Gorcum.

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1111 Germov J. and Williams L. (1999) A Sociology of Food and Nutrition. 2 The Social Appetite. Oxford: Oxford University Press. 3 Gould L. (1998) Rethinking supply chains. Managing Automation 4 13 (32), pp. 35–46. 5 Jørgensen N. (1997) Quality certification is a key success factor 6 in international marketing of food products. In J. Nilsson and 7 G. Van Dijk (eds), Strategies and Structures in the Agro-Food 8 Industries. Assen: Van Gorcum. 9 Jørgensen N. (1999) The Future Structure of Grocery Retailing 1011 in Western Europe. In Proceedings of the 10th International 1 Conference on Research in the Distributive Trades, Institute 2 for Retail Studies, University of Sterling, pp. 623–30. 3111 Poole N.D. (1997) Changes in the European food industry: a 4 research agenda for marketing economists. Journal of Inter- 5 national Food and Agribusiness Marketing, 9 (1), pp. 1–17. 6 Ritzer G. (1993) The McDonaldization of Society. Newbury Park, 7 CA: Pine Forge Press. 8 Ritzer G. (1996) The McDonaldization of Society, rev. edn. Newbury 9 Park, CA: Pine Forge Press. 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 309 1111 PERSPECTIVE 2 ●●●●●● 10 3 4 5 6 E-shopping: the 7 8 9 1011 Peapod grocery 1 2 3111 4 experience 5 6 7 8 Denis Towill 9 20111 1 2 3 4 5 6 Introduction: a vision of the new world of 7 E-shopping 8 One vision of the future envisages an end to pushing heavy 9 shopping carts up and down the aisles, loading up with the 30111 weekly groceries, dragging tired and reluctant children 1 behind, waiting in line at the checkout, unloading into the 2 boot of the car, driving home amid heavy traffic, unloading 3 from the car again and reloading into kitchen cupboards or 4 the fridge–freezer. The shopping chores of the future will 5 all be done electronically. The standard weekly food and 6 household order will be set up with a local home delivery 7 company. E-mail, a phone call or fax quoting a reference 8 number will automatically trigger a reorder to be delivered 9 at a pre-agreed time. Specials for the week will be added by 40111 ticking off the electronic order form. Payment will automati- 1 cally be deducted from the bank account through a secure 2 encrypted payment network. The frustrations of shopping 3 for staple and basic items will be a thing of the past. So, how 4 are retailers meeting these new challenges? One company at 5 the vanguard of E-shopping is Peapod, whose operations are 6 described here. 7 8 49111 E-shopping: the Peapod grocery experience

1111 Peapod approach to E-shopping 2 3 In E-shopping there seem to be as many ways to manage the 4 supply chain as there are online grocers. Peapod have specifi- 5 cally designed their supply chain to maximize flexibility for 6 the customers, who select day and time of delivery. If orders are 7 placed by 4p.m. on Monday, delivery can be arranged between 8 7a.m. and 1p.m. on Tuesday. Orders placed by midnight on 9 Monday can be delivered between 4p.m. and 10p.m. on Tuesday. 1011 Customers may also nominate to receive groceries for delivery 1 within the next seven days. To achieve cost-effective delivery 2 coupled with flexibility, Peapod logistics and marketing act as 3111 a seamless supply chain, i.e. ‘to think and act as one’. So once 4 a customer link has been established, marketing cultivates the 5 neighbourhood in the expectancy of building up the client 6 base. Hence the delivery routes will become more dense, thus 7 increasing capacity and making the drops more cost-effective. 8 This process is further enhanced by drop-offs at homes, car 9 parks and central pick-up points, including retail stores or even 20111 church halls. 1 2 E-shopping logistics 3 4 E-shopping logistics differs from traditional operations in three 5 important ways: quantities, timing and demand management. In 6 terms of quantities, single item picking is required by dot.com 7 companies, which means an operator scans an SKU, not a pallet. 8 As items are not protected by boxes, greater care must be taken 9 when handling. Timing pressures mean that previously accept- 30111 able shipment times of 24–72 hours must be reduced to 12 hours 1 and to meet a specific time window selected by the customer. 2 This constrains the routeing flexibility and puts extra pressure 3 on van drivers to meet deadlines. Finally, rapidly changing 4 demand patterns place tremendous pressure on corporate 5 resources. Frequently, the setting up of a website business leads 6 to substantial orders being placed which cannot be fulfilled 7 within the expectancy time frame of the customer. So costs rise 8 trying to satisfy demand but business is irrevocably lost due to 9 poor delivery performance. 40111 1 Use of specialist E-centres 2 3 Over the past 10 years Peapod has experienced substantial 4 growth. Until 1998 operations were essentially based on 5 mirroring consumer behaviour experienced in supermarkets. 6 Hence individual customer orders were ‘picked’ in separate areas 7 of Peapod supermarkets just as the individual customer would. 8 Peapod employed a replenishment manager responsible for 49111 stock control, plus the pickers who made up the orders. This

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1111 old operations model had low fixed costs and flexibility to 2 expand, low inventory and no facilities management issues 3 to resolve. The new operations model has required a novel 4 approach to inventory control, warehousing, order fulfilment, 5 route planning and scheduling. It is firmly based on the concept 6 of Peapod being a fulfilment and distribution business, devel- 7 oped specifically to satisfy customer demand within the 8 12-hour lead time and definitely not an adapted shopping busi- 9 ness. Deliveries are made seven days a week, are ordered on 1011 www.peapod.com and typically consist of around 40 to 50 items 1 collectively valued at around £80 per transaction. There is usually 2 a mix of dry, refrigerated and frozen products. 3111 4 E-centre operations 5 6 Consumers are fussy about their groceries. So the Peapod picker 7 acts as eyes, nose and hands in the setting of perishable product 8 quality standards. If the customer is dissatisfied via poor quality, 9 they are also unhappy if a product ordered is not delivered as 20111 requested. Out-of-stocks are therefore completely unacceptable, 1 especially since just one SKU short in the order can ruin the 2 complete delivery. To minimize stockouts, Peapod are moving 3 to a distribution operations model incorporating stand-alone 4 centres dedicated to E-shopping with separate inventory and 5 replenishment systems. Hence supermarkets and E-centres are 6 no longer competing for the same stock. The E-centre takes 7 responsibility for its own ordering, receiving, stocking and 8 replenishment based on their customer SKU usage, which may 9 be quite different from supermarket consumption. The E-centre 30111 also determines from sales patterns which products are not 1 moving quickly and should therefore be discontinued from being 2 offered by the Peapod marketing facility. 3 4 Further E-shopping time compression 5 6 Peapod are aggressively working to reduce the delivery lead 7 time still further, since they firmly believe this is the next market 8 winner and want to be first in the frame. Tools used to achieve 9 this goal includes best-of-class routing software, which incorpo- 40111 rates maps and travel time to determine how many stops each 1 vehicle can make the next day. Sophisticated website technology 2 applies airline reservation principles to consumer-direct delivery 3 and supply to minimize transportation costs. This is achieved 4 whilst meeting the target time window and levelling orders 5 across days and shifts. The output from the route-planning soft- 6 ware creates a route and stop number for the driver plus 7 point-to-point directions and time standards for each drop. To 8 support this delivery activity and improve the ‘picking’ process 49111 considerable thought is given to the design and layout of the

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1111 distribution centre, designed to maximize performance of the 2 pickers. This is distinct from store layout, which is targeted at 3 merchandising to consumers. Consequently, Pareto analysis is 4 used on a continuing basis to organize products into A–B–C cate- 5 gories based on frequency of ordering. 6 7 Likely future developments 8 9 The purpose of Peapod E-shopping is to create and keep a 1011 customer. To do that they feel they must do the things that will 1 make people want to do business with them by providing value- 2 added services that will reduce the consumer’s overall cost, 3111 increase the consumer’s productivity and make the consumer’s 4 job of buying groceries easier. Groceries are the cornerstone of 5 Peapod’s business, but they are just the beginning. Some day in 6 the future Peapod may offer one-stop or no-stop shopping for 7 a wide range of products including groceries, pharmacy prod- 8 ucts, pet supplies, toys, stationery and so on. They aim to be 9 the company that delivers to the household between two and 20111 three times every month. If Peapod decide to move into this 1 particular marketplace and handle these other products, it would 2 essentially be through partnerships and using cross-docking 3 arrangements. Service and product go hand in hand; continual 4 improvements in warehousing and distribution are a key 5 ongoing element of Peapod business strategy. 6 7 Acknowledgements 8 9 The viewpoint has been developed based on J.A. Caltagirone 30111 (2000) Peapod’s virtual supermarket, Supply Chain Management 1 Review, March–April, pp. 44–50; J. Holström, K. Tanskanen, V. 2 Kämäräinen (1999) Redesigning the supply chain for Internet 3 shopping – bringing EC to the household, Proceedings, 1999 4 LRN Conference, Newcastle, pp. 261–7; and M. de Kare-Silver 5 (2000) E-Shock 2000. London: Macmillan Business Books. 6 7 8 9 40111 1 2 3 4 5 6 7 8 49111

●●● 313 1111 PERSPECTIVE 2 ●●●●●● 11 3 4 5 6 Changes in supply 7 8 9 1011 chain structure: 1 2 3111 4 the impact of 5 6 7 8 expanding 9 20111 1 2 consumer choice 3 4 5 6 Stephen Allen 7 8 9 30111 1 2 3 4 Introduction 5 The period from the 1960s to the present day has been a time 6 of considerable change, which has had a significant impact 7 on the supply chain within the food sector (Shutt and Clark 8 1995; IGD 2000a). This change has been led by the rise of the 9 big multiples, their commitment to convenience, quality and 40111 speed in a one-stop shop environment (IGD 2000a) and their 1 keen interest in the reduction of product costs, cost cutting 2 strategies and central distribution systems. 3 These trends have proved to be largely incompatible with 4 traditional food sectors such as fresh produce wholesaling. It 5 is evident, that less than 10% of the retail food market (Mintel 6 1999a) will be available to the wholesale markets, as the multi- 7 ples expand through convenience retailing. There is clear 8 evidence that 80% of produce sourced to retailing and even 49111 Changes in supply chain structure: the impact of expanding consumer choice

1111 catering will be from the top five global food manufacturers or 2 processors (Hughes 2000). This will result in the continued 3 decline of regional and national suppliers and may affect the 4 range of produce available to the consumer, e.g. species of apples. 5 Yet at variance with this trend, consumers are increasingly 6 concerned with produce choice and the provenance of food they 7 consume. In addition, farmers, horticulturalists and the whole- 8 sale sector are looking for alternative customers to the major 9 supermarkets. These trends appear to be resulting in the emer- 1011 gence of an alternative supplementary food supply chain. 1 2 The state of play within the supply chain 3111 4 The continued consolidation of suppliers and retailers within the 5 food sector has led to the decline in the numbers of wholesalers, 6 abattoirs and other traditional food suppliers (Mintel 1999a). The 7 emerging strategies of Category Management, in which essen- 8 tially one supplier is promoted, has led to further de-listing of, 9 in some cases, companies of corporate status (Fyffe) (Nicholson 20111 1998). 1 In Category Management a single supplier takes the lead and 2 thus administrative burden of organizing the supply of product 3 types to the retailer. They select ‘appropriate’ products from 4 portfolios of sister companies. In theory, the benefits of Category 5 Management are gained through the marriage of skills and 6 knowledge of major retailers and suppliers. Suppliers to the 7 sector have specific information on consumer consumption 8 trends whilst retailers provide information regarding the type 9 of person who shops at their stores (Anon 1997b). However, in 30111 reality Category Management could be said (Anon 1999) to offer 1 the retailer the opportunity to reduce the cost burden of 2 managing the supply chain still further. In conjunction with 3 ECR, Category Management enables the retailer to pass the cost 4 of managing supplies and the supply base further down the 5 supply chain. Companies who formally supplied the retail sector 6 are therefore required to fit into the new role of sub-contractor, 7 the preferred Category Management supplier. The rise of systems 8 based on the criteria of price will continue to be of detriment to 9 the UK agricultural, horticultural, processing, wholesale and 40111 retail sectors. 1 Unwillingness of suppliers to accept the terms and conditions 2 of uncertainty placed upon them by the category leaders, even 3 as a preferred Category Management supplier, could lead to a 4 change in the future structure of the food chain. Ultimately this 5 could result in the emergence of an alternative supply chain 6 (Younger 1998; Hughes 2000). 7 In its simplest form this will be the redirecting of the busi- 8 ness into new markets and the targeting of new customer groups. 49111 It is likely that wholesalers will cease supplying the multiple

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1111 retail sector and focus more on the fast growing foodservice 2 market (IGD 1998). This in itself is not radical; any business 3 taking a strategic view would re-evaluate their customer base. 4 Yet a change in customer base and decisions to not supply to 5 retail multiples may result in a chain of events that will in effect 6 change the food supply chain and the structure of the national 7 food economy. This is particularly significant for the local and 8 regional supply chains. Those companies who obtain preferred 9 category status, otherwise known as Category Captains (Anon 1011 1997a) will be of national/international standing. Local and 1 regional supply chains will be hardest hit by the de-listing exer- 2 cise (Nicholson 1998), thus causing local suppliers to identify 3111 alternative markets and concentrate more upon the foodservice 4 sector. 5 In this event there may be still a role for wholesaling within 6 the supply chain. The wholesaling sector could emerge as either 7 an intermediary, or in instances in which flexible delivery of 8 fresh produce to local outlets is required. This is of particular 9 significance for the catering/eat out market where the nature of 20111 the product, the location and size of outlets means that caterers 1 need flexibility from their suppliers. The continued existence 2 and sustained growth of the wholesale market may be through 3 recognizing the key opportunities presented by catering and food 4 service markets. 5 6 The fickle consumer and their changing desires – diametric 7 scenarios 8 9 Yet it is here we are met with a paradox. Time-poor, money-rich 30111 consumers (Beard et al. 1999) have sought more efficient ways of 1 purchasing, moving to weekly shopping expeditions. Their 2 increased affluence has led to consumers demanding seasonal 3 ‘luxury’ food, i.e. strawberries, all the year round. These con- 4 sumer demands have at least in part contributed to the develop- 5 ment of the current structure of the food sector. Whilst 6 supermarkets are said to have increased choice (Dawson 2000; 7 Wroe 2000), their strategies have led to a real lack of product 8 range and lack of individuality of their product offer (Wroe 2000). 9 Recent findings (Mintel 1999b) demonstrate changes in 40111 consumer needs. The average number of shopping expeditions 1 per week has increased (Mintel 1999b). Consumers are looking 2 for meals ready for consumption, i.e. meal solutions, home meal 3 replacement, and meals out of the home on the one hand, whilst 4 on the other they have become more aware of the environmental 5 and health implications of food provenance (Tregear et al. 1994), 6 resulting in the growth in organic food and the popularity of 7 farmers’ markets. 8 Consumers are also apparently aware of the impact on local 49111 communities of the major multiples. SAVE, Sainsbury’s scheme

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1111 of providing Sainsbury products to rural community shops, was 2 a response to the consumer’s attitude to the impact of super- 3 markets on the rural commercial infrastructure. 4 5 Local economies and the supply base 6 7 In the 1980s (Cannon 1986), the development of a global supply 8 chain was considered to be a mechanism by which food could 9 be delivered more efficiently to a post-industrial society. At 1011 this stage little attention was paid to the impact of this strategy 1 on regional economies. More recently, there has been consider- 2 able concern as to the ability of the biggest retailers to ‘enter 3111 new areas and lay waste to existing retailers’ (Lang 1994). Lang’s 4 concern related to the inaccessibility of food for the non-car- 5 bound consumer, others (Westlake 1993; Ellaway and Macintyre 6 2000) talk about the increasing division between the rich and 7 poor and the higher price paid by consumers who have no access 8 to private transport. In some circles, areas that have suffered 9 from the decline in local retailers are described as food deserts 20111 (Gannaway 1999). 1 There is, however, a further concern. Calculations have been 2 made as to the respective multiplier effect of local retailers as 3 against multiple retailers (Macdonald and Swales 1991). Such 4 research clearly indicates that whilst multiples generate jobs, the 5 actual jobs created do not offset the number of jobs lost through 6 the failure of local businesses. Such failures are not isolated to 7 the retail sector but span a whole series of other service sectors 8 (DETR 1998). 9 In addition, greater levels of revenue are leaked from an area 30111 within a food supply structure dominated by public limited 1 companies than through their traditional counterparts (Harris 2 1997). This is particularly evident in rural areas. It is suggested 3 that the SME, including those within the food sector, have an 4 important role in sustainable economic growth (Marsden 1995). 5 6 The alternative supply structure – a dual system or a new era? 7 8 Drawing from recent consultancy work within the food sector, 9 it is evident that many SMEs within a number of regions across 40111 the UK are turning away from multiple retail supply. The recip- 1 ient of their renewed attentions is the foodservice market. This 2 may prove to be of great concern to the food retailer if the food- 3 service market ultimately merges with or outgrows the food 4 retail market – a development that is not beyond credibility given 5 current trends in the United States (IGD 2000b). 6 Within the fresh produce sector, there are some 17 600 players 7 (Mintel 1999a), 30% of whom are responsible for 70% of the busi- 8 ness. The remaining players are often family owned operators 49111 with a low-level technological input who traditionally sourced

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1111 the local green grocer sector. Their ability to source catering 2 organizations such as the brewery and leisure chains will 3 depend upon their capacity to adapt operating procedures to 4 meet the criteria demanded of reliability, flexibility, consistency 5 and volume. The central purchasing departments are increas- 6 ingly looking for single suppliers, yet catering organization 7 operate extensively in small local outlets. A national distribution 8 or regional distribution centre due to the minimum order cost 9 structures may not effectively meet single deliveries. 1011 The solution would appear to be the development of inte- 1 grated partnerships between fellow market traders both within 2 and across product ranges. The pulling together of resources, 3111 product ranges and market information, would facilitate the 4 introduction of: 5 6 1. A physical distribution system matching the requirements of 7 the customer base. 8 2. An IT system which would facilitate flexible deliveries and 9 reduce supply chain costs. 20111 1 3. A multi-product delivery structure. 2 3 In some cases there may be a need for numerous supply tiers 4 to the ultimate customer, resulting in a dynamic sub-contracting 5 culture. The development of such initiatives, particularly within 6 the food sector, cannot be described as widespread. In the case 7 study below we can gain an insight into how this might look. 8 9 30111 Case study – Sheffield Wholesale Market food supply chain project 1 2 This case study considers the impact of glob- The need for change 3 alization and polarization on the local fresh The subsequent report (PKF World-wide 4 produce supply chain within Sheffield and 2297 RF Sheffield Parkway Wholesale 5 its wholesale market. Market, 14 July 1997) set down the following 6 Sheffield Wholesale Market opened in 1961. options: 7 At that time there were numerous fresh pro- 8 duce businesses operating within the market. • Do nothing. 9 Since then the number of businesses has • Develop a food industry park. 40111 declined continuously; in 1984 alone, 31 went • Develop alternative uses, which would 1 out of business (Shaw et al. 1994). There are best fulfil the council’s objectives and 2 currently 16 surviving businesses, although most economic use of the council’s land 3 turnover remains at 1984 figures of £50m. asset. 4 Due to their concern for the future survival 5 of the market, the local authority commis- The council’s ultimate decision was to sell 6 sioned a study, the purpose of which was to off the land asset that was home to the 7 review the future of the wholesale market wholesale market to a private developer, 8 and decide on the most advantageous strate- encouraging the developer to re-provide 49111 gic option. the wholesale market as part of its own

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1111 industrial redevelopment plans. Given this overhaul of operating procedures of resident 2 action, there was concern for the market’s wholesalers on the basis of supply chain 3 continued existence and also concern for the management principles. 4 following issues: 5 The project 6 • Support for the traditional wholesale A strategy for evolving an effective 7 businesses and services to the local programme across 42 businesses in the 8 retailers within the city. market was established. This recognized 9 • Support for the retail markets produce three distinct groups: 1011 supply. 1 Group 1: defined as lead or primary whole- • Support for policies relating to a ‘Healthy 2 sale businesses having direct customer Sheffield’ and access to fresh produce by 3111 and supplier relationships, good opera- lower income social groups. 4 tional management and an organization 5 • The cost of missed opportunity in and structure – turnover at a minimum 6 providing a leading regional food distri- of £1 million. 7 bution park. Group 2: defined as secondary wholesale 8 businesses in the majority serving as 9 Beginnings of the change process sub-contractors to the lead wholesaler 20111 As these issues were evolving, a parallel and having predominantly customer and 1 piece of work was taking place, examining supplier relationships within the whole- 2 the food chain and future developments sale market itself. 3 within the food sector, particularly the Group 3: defined as secondary wholesale 4 declining wholesale market sector. This business. Primarily involved in the func- 5 independent work, led by Stephen Allen of tion of 6 Optimal Consulting combined with research 7 into the relationship between wholesalers (a) inter-trade, i.e. selling exclusively to 8 and independent caterers (Eastham 1998, other businesses within the wholesale 9 1999), acted as a catalyst for the develop- market or 30111 ment of a supply chain project to bring (b) speciality produce and related multi- 1 about change in and modernization of the product delivery requirements such as 2 practices of the Sheffield Wholesale Market dairy or bakery products. 3 businesses. 4 The change management model 5 An evolving project The change management model adopted for 6 In the early stages a partnership was estab- this project originated as a manufacturing 7 lished between the private sector developer industry supply chain initiative. The model, 8 and the local authority. This was seen as the ‘The Customer and Supplier Relationship 9 best way of ensuring continuity of business Improvement Process’ (Supply Chain Mana- 40111 within the wholesale market and facilitating gement Group, Glasgow) has been adapted 1 the redevelopment of the buildings whilst and evolved into a service driven five-phase 2 simultaneously fulfilling the needs of the productive supply chain model where: 3 local retailers, retail markets and other users Phase I deals with internal business 4 within the food supply chain. commitment to the project and structuring 5 This led to the modernization pro- teams to work on activities. 6 gramme of the fresh produce wholesaling Phase II deals with performance analysis 7 sector in Sheffield Wholesale Markets, of the businesses’ customer and supplier 8 which included a physical regeneration of relationships and determines effective future 49111 the wholesale market site and a complete targets of either.

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1111 Phase III deals with joint internal business sharing the investment into the multi- 2 commitment between the project business temperature transport. 3 and its chosen customers and suppliers or • A more focused approach to product spe- 4 targeted customers and suppliers. cialisms and a greater integration between 5 Phase IV deals with action orientated traders as to the overall product ranges 6 assessment of joint customer and supplier stocked within the wholesale market. 7 relationships and targeted improvements in 8 a measured and planned way. The traders have also become suppliers to 9 Phase V deals with a continuous method a facilitating organization, which operates 1011 of progress review and action for activities as a single first tier supplier to the catering 1 and responsibilities agreed in Phase IV. sector, subcontracting the sourcing of fresh 2 The model was further adapted to meet produce across regions to co-ordinated inde- 3111 the specific needs of the sector and the pendent traders. A summary of the pri- 4 project activity. The headline sector-specific mary and secondary business performance 5 activities of the model are described below. improvements follows. The list is not exhaus- 6 The supply chain project strategy sup- tive, nor indeed have all businesses achieved 7 ported the following activities: equally across all areas. 8 • Primary research: the decline of the 9 Project results: a wider perspective wholesale markets and the supply chain. 20111 The change programme continues to develop 1 • Diagnostic work: review of the wholesaler a competitive and sustainable food business 2 business position. environment for the wholesale market busi- 3 • Mapping the supply chain – both local ness. It has also provided a catalyst for 4 and regional. change in the regional food chain and the 5 • Developing a ‘Business Success Model’ development of supplier partnerships to 6 for regeneration of the wholesale sector. facilitate supply to the corporate foodservice 7 sector. 8 • Building productive supply chain activity In reality, the project has instigated 9 within the wholesaler business, i.e. focus- changes in the attitudes and developed 30111 ing on business development style supply knowledge and skills of the wholesale 1 chains. traders. These changes are more difficult to 2 • Building cost saving and co-operative measure in pure quantitative terms. Sheffield 3 supply chains by recognizing and under- wholesalers have built up a greater under- 4 standing common business functions. standing of the strategic dimension of busi- 5 • Developing a ‘marketing concept’ or ness operations within the current market 6 ‘theme’ in the form of a Regional Produce place. They recognize: 7 Centre or Food Supplier Park. 8 • The need to develop a parallel local and regional supply chain alongside the 9 Project group results centralized system instigated by the 40111 The project on the whole has proved multiple retail sector. 1 extremely successful and could be a valu- 2 able model for future developments in this • The market potential of the catering sector. 3 sector. Key improvements have included: Freshness and daily delivery systems can 4 present attractive options to major cus- 5 • The adoption of technological systems tomer groups such as the breweries and 6 such as tele-sales, temperature control and leisure chains with extensive local outlets, 7 IT systems. as single deliveries cannot be met by cen- 8 • The development of delivered service to tral distribution or regional distribution, 49111 customers, which in certain cases involved due to the minimum order cost structures.

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1111 Improvements 2 3 Business 1 The introduction of: 4 development (a) Tele-sales, delivered service, catering supplies, product preparation 5 activity and packing 6 (b) The reduction of product ranges (c) The extension of product ranges 7 (d) Development of niche or specialisms for smaller trader 8 9 Facilities Development of: investment 1 Chill storage 1011 2 IT systems 1 3 Quality systems and product inspection 2 Customer 1 The generation of promotional material to: 3111 relationship (a) increase awareness 4 (b) change attitudes of non-customers 5 (c) build and retain loyalty 6 2 Development of Codes of Practice to guarantee standards of hygiene, 7 product handling and trading standards (e.g. supplier bonds) 8 3 Retailer–wholesaler buying groups: bulk purchasing, advice on product 9 and retail format, shelf layouts and promotion (thus improving information 20111 flow and commitment) 1 4 Links to other retail outlets 2 5 Information flow on product requirements 3 6 Bonus schemes for market purchases on volume discount basis 7 Cash and carry businesses joint development 4 8 Multiple retail: specialist product and top up 5 6 Supplier 1 The establishment of stronger supplier relationships 7 relationships: 8 growers/suppliers: 9 Supplier 1 Increased sales through collaboration with other companies on key lines 30111 relationships: 2 Adoption of an umbrella marketing organization to facilitate access to 1 wholesalers/ larger catering multiples 2 traders 3 Shared transportation systems 4 Branded market delivery service: collaborative trader activity on transport 3 4 5 Table P11.1 Improvements at Sheffield Wholesale Markets 6 7 8 • The importance of developing a delivery • The benefits inherent in the ‘local’ supply 9 service to the catering sector may facilitate chain (in comparison to Central or 40111 their survival within the current food Regional Distribution centres) which has 1 sector. encouraged them to promote ‘local’ deliv- 2 ery structures. 3 • The value of participating in joint activities 4 with fellow traders to provide a broader • That in improving the frequency of deliv- 5 product range. eries and quality/availability of product, 6 • An appreciation of the value of the devel- smaller supermarkets have been 7 opment of a subcontracting culture to persuaded to return to the wholesale 8 facilitate market access. markets. 49111

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1111 Conclusion: future developments 2 3 Within this case study we have illustrated a change programme 4 in the Sheffield Wholesale Market which was designed to find 5 alternative markets for the declining wholesale sector. In essence, 6 this is an example as to how the markets and multiple retailers 7 can co-exist. It is seen as a potential model of development for 8 other wholesaler markets, particularly in the light of the gath- 9 ering momentum for alternatives to multiple retailers led by both 1011 consumers and businesses alike. The project will be implemented 1 as part of the City of Manchester regeneration programme with 2 the lead up to the 2001 Commonwealth Games. 3111 Perhaps the most surprising of developments has emerged 4 from Italy, north of Verona. Dissemination of the success of the 5 Sheffield project has brought a request to help implement a 6 similar change management process in Italy, where again the 7 regional food economies are suffering decline due to the impact 8 of the fast growing large food retailers. 9 This could be the start of a change process that will see the 20111 large retailers forced into more local sourcing, therefore 1 preventing the effects of globalization in the European commu- 2 nity. Who knows, we may see one or two North Yorkshire 3 farmers, or apple growers in Kent, surviving! 4 5 References 6 7 Anon (1997a) The danger to our SME base. The Grocer, 4 October, 8 p. 37. 9 Anon (1997b) Teamwork. The Grocer, 12 July, p. 32–3. 30111 Anon (1999) The Grocer, 19 June, p. 6. 1 Beard J. et al. (1999) Grocery Retailing 1999: Market Review. IGD, 2 p. 30. 3 Cannon T. (1986) Marketing problems in the food chain: the 4 issues. In B. Beharrell and I. Goulding (eds), Marketing Problems 5 in the Food Chain. Sheffield City Polytechnic. 6 Dawson J. (2000) Viewpoint: retailer power, manufacturer power, 7 competition and some questions of economic analysis. 8 International Journal of Retail and Distribution Management, 28 9 (1), pp. 5–8. 40111 DETR (1998) The Impact of Large Foodstores on Market Towns 1 and District Centres. 2 Executive summary, Department of the Environment, Transport 3 and the Regions, published 8 October 1998. 4 Eastham J. (1998) Is catering culture different? Issues for the 5 development of inter-firm relationships. ICCASS, Conference, 6 Bournemouth University. 7 Eastham J. (1999) A Longitudinal Study of the Development of Inter- 8 firm Relationships in the Fresh Produce Supply and Catering 49111 Sectors. CHME Conference, Surrey.

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1111 Ellaway A. and Macintyre S. (2000) Shopping for food in socially 2 contrasting locations. British Food Journal, 102, pp. 52–9. 3 Gannaway B. (1999) Desert bloom. The Grocer, 3 April, pp. 24–6. 4 Harris P. (1997) Limitations on the use of regional economic 5 impact multipliers by practitioners: an application to the 6 tourism industry. Journal of Tourism Studies, 8 (2), pp. 50–61. 7 Hughes D. (2000) Challenges for the fresh produce industry in 8 the twenty-first century. Conference paper, Wye College, 9 University of London, pp. 1–10. 1011 IGD (1998) The Catering Wholesaler. IGD Executive Briefing, 1 conference proceedings 11 May 1998. 2 IGD (2000a) The Food Project Conference, 29 March 2000. 3111 IGD (2000b) The Future of Foodservice. Executive Briefing, 4 conference proceedings 19 April 2000. 5 Lang T.(1994) Feeding the captive stomach: supermarkets, the 6 consumer and competition policy. Paper for XIV International 7 Home Economics and Consumer Studies Research Conference, 8 Sheffield 21–3 July. 9 Macdonald R. and Swales J. (1991) The local employment impact 20111 of a hypermarket: a modified multiplier analysis incorporating 1 the effect of lower retail prices. Regional Studies, 25 (2), pp. 2 1155–62. 3 Marsden T. (1995) Beyond agriculture? Regulating the new rural 4 spaces. Journal of Rural Studies, 11 (3), pp. 285–96. 5 Mintel (1999a) Wholesaling and Cash and Carry. Mintel 6 International. 7 Mintel (1999b) The convenience shopper. Convenience Retailing, 8 April. 9 Nicholson A. (1998) Sunday Telegraph, 4 October, p. 78. 30111 PKF Worldwide (1997) Sheffield Parkway Wholesale Markets. July. 1 Shaw S.A., Gibbs J. and Gray V. (1994) The Strathclyde Wholesale 2 Markets Study. Main report, University of Strathclyde, 3 October 1994. 4 Shutt J., Clark R. and Blanchard S. (1995) Developing Leeds 5 Wholesale Market for the 21st Century. European Regional 6 Business Development Unit, pp. 1–3. 7 Tregear A., Bent J.B. and McGregor M.J. (1994) The demand for 8 organically grown produce. British Food Journal, 96 (4), pp. 9 21–25. 40111 Westlake T. (1993) cited in A. Ellaway and S. Macintyre (2000) 1 Shopping for food in socially contrasting locations. British Food 2 Journal, 102, pp. 52–9. 3 Wroe M. (2000) National Don’t Shop at Supermarkets Day, 4 Sunday Express, 12 August, p. 33. 5 Younger R. (1998) New structures will be required. The FT 6 management report: supply chain challenges of electronic 7 shopping. The Financial Times, 1 December, p. 3. 8 49111

●●● 323 1111 2 3 4 5 6 7 8 Glossary 9 1011 1 2 3111 4 5 611 Activity based costing (ABC) 7 The principle of activity based costing is to analyse actual 8 product costs by specifically identifying all those activities asso- 9 ciated with a product, at each step in the flow of that product, 20111 through the manufacturing or service centre supply chain. In 1 practice, this will not only identify those costs associated with 2 the change process but all other costs, e.g. the use of technology, 3 bottlenecks, inventory storage, material delays inspection costs 4 etc. 5 6 Back hauling 7 A return load taken after the delivery has been made. Back 8 hauling is a major development, to support the reduction of lead 9 time and costs within the supply chain. 30111 1 Business process 2 Can be defined as a set of activities that, taken together, produce 3 a result of value to a customer, or add value to a product, e.g. 4 ‘serving a customer’. 5 6 Business process re-engineering 7 Focuses on the redesigning basic or core business processes and 8 not organizational units. It is designed to force managers to think 9 about the relationship between core process, resources and the 40111 capability and competence required within the process. 1 2 Buying groups 3 These are formed by independent wholesale operators in order 4 to improve trading terms with suppliers and offer their members, 5 through the power of bulk buying and significant price benefits. 6 The main distinguishing feature compared to symbol groups is 7 that it allows members to trade under their own name, fascia or 8 group identity. 49111

●●● 324 Glossary

1111 Category 2 A measurable and manageable group of products/services, that 3 consumers perceive to be interrelated and/or substitutable (see 4 Kotzab page 276). 5 6 Category Management 7 Category Management involves organizing a multi-functional 8 team around customer orientated categories and giving these 9 teams responsibility for the strategy, operations and performance 1011 of the category across the different functions of the business. 1 2 Centralization 3111 In logistics terms, relates to the process of bringing products 4 from a variety of sources to a central depot for redelivery else- 5 where. 6 7 Composite distribution 8 This is multi-temperature distribution system, including ambient, 9 chilled and frozen products. A composite distribution centre is 20111 a multi-temperature distribution centre, which can handle prod- 1 ucts in a variety of on-site chambers each operating at a specific 2 temperature. 3 4 Confidential rebate 5 A sum of money paid by the second tier supplier to the catering 6 organization. The sum represents the difference between the 7 agreed price and the actual price charged through the catering 8 supply company. 9 30111 Consolidation 1 A trend for reducing the number of players within the market 2 place. This is characteristic of mature markets. 3 4 Continuous Replenishment Programme (CRP) 5 Essentially another name for VMI (q.v.) and emphasizes the 6 passive information sharing role of customers, leaving the EDI- 7 enabled vendors to directly manage store inventories. Two major 8 benefits then accrue: the cost of ordering is reduced greatly, and 9 inventory levels may be reduced by up to 25%. 40111 1 Demand management 2 Demand management refers to the development of a customer- 3 focused strategy, such as, optimizing promotions and introducing 4 new products. 5 6 E-commerce 7 The use of the Internet as a sales tool has offered a great oppor- 8 tunity for many businesses. E-commerce offers the small, medium 49111 and large business, the possibility of, on-line delivery of services

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1111 directly to the consumer, and direct marketing. All internet sites 2 are equally accessible through the Web, thus offering all organi- 3 zations an equal opportunity to compete in a global market. 4 5 E-markets 6 Electronic markets are where buyers are connected through a 7 website, which functions as a network of buyers and sellers. 8 These sites are expected to create greater efficiencies through the 9 reduction of administration costs, greater information and to 1011 enhance supplier/buyer relationships. 1 2 Efficient Consumer Response (ECR) 3111 ECR is a global movement in the fast moving consumer goods 4 industry, focusing on the total supply chain, suppliers, manufac- 5 turers, wholesalers, retailers and third party service providers 6 working closely together to fulfil the changing demands of the 7 consumer better, faster and at less cost – working to break 8 down barriers between trading partners. This is a broadening 9 of the QR concept to become the basis of collaborative working 20111 in the grocery supply chain. ECR is again an umbrella term 1 that seeks to enable superior consumer value in shorter time 2 frames and at least cost. The key terms include: demand man- 3 agement, supply management and enabling technologies 4 (Christopher 1998). 5 6 Efficient Foodservice Response (EFR) 7 This is the foodservice initiative parallel to ECR. It is distinctive 8 from ECR as it more specifically reflects the needs of the 9 hospitality sector. Initiated in the United States in 1994 by 30111 the International Foodservice Manufacturers Association and the 1 International Foodservice Distributors Association. It is currently 2 being heavily promoted through the IGD (Institute of Grocery 3 Distribution) in the UK. 4 5 Electronic Data Interchange (EDI) 6 This is a computer to computer system which transmits infor- 7 mation between two trading partners in the supply chain. The 8 data is usually organized in specific standards and formats for 9 ease of transmission and validation. 40111 1 Electronic funds transfer at point of sale (EFTPoS) 2 As with EpoS (q.v.), information is electonically recorded. The 3 system in addition enables automatic transfer of customer funds 4 with card payments. 5 6 Electronic point of sale (EpoS) 7 This is a method of recording store sales by either scanning 8 product bar codes at the store’s tills or by inputting sales through 49111 a keyboard.

●●● 326 Glossary

1111 Enabling technologies 2 Enabling technologies covers EDI, electronic fund transfer, 3 activity based costing, product coding and database manage- 4 ment (Christopher 1998). 5 6 Ethics 7 Ethics is a branch of philosophy that investigates morality and 8 in particular the varieties of thinking by which human conduct 9 are guided and may be appraised. (Fontana Dictionary of Modern 1011 Thought) 1 2 Food miles 3111 Food miles are used to denote the fact that little of UK food is 4 grown locally (Food Miles campaign) and food travels great 5 distances to the consumer. SAFE indicate that food miles come 6 in two varieties, the mileage built up within countries as food 7 is packaged, processed, taken to distribution centres, on to shops 8 and finally to the consumer; and the distance between the 9 country where food is grown and where it is eaten. 20111 1 Horizontal integration 2 A growth strategy, which involves the acquisition of one or more 3 competitors, or fusion of firms of similar products, in order to 4 access new markets or maintain market share. However at times 5 this term is used loosely (see horizontally integrated networks). 6 7 Horizontally integrated networks 8 This is distinctive from horizontal integration, it refers to busi- 9 nesses that remain independent, but combine forces in order to 30111 access new markets or maintain market share. Horizontally inte- 1 grated networks materialize in a number of forms and have 2 generated numerous models of classification. One of the simplest 3 depicts the distinctions as ‘objects of exchange’, (Rosenfeld 1996) 4 and distinguishes between ‘hard’ groups of firms who tangibly 5 co-operate e.g. co-produce, and ‘soft’ groups of firms who share 6 information or collaboratively solve common problems. 7 8 Just-in-time (JIT) 9 Just-in-time is a system which enables the movement of merchan- 40111 dise or part finished stock to the next point of the supply chain 1 at the point in time it is required for use or consumption. A just- 2 in-time system has a number of supply chain benefits: reduced 3 inventory, increased quality, reduced lead time, reduced scrap 4 and rework and reduced equipment downtime. In broad terms, 5 it is also used to describe the philosophy of short lead times and 6 low inventory levels across the supply chain. 7 8 49111

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1111 Logistics 2 The organization of moving, lodging and supplying materials. 3 This is a more general term than supply chain management. 4 Supply chain management is one method of handling logistics. 5 6 Loi Royer 7 In 1973, the Loi Royer was introduced in France in order to 8 constrain the development of stores of between 1000 m2 and 9 1500 m2 and extensions over 200 m2. The law was the result of 1011 political pressure from strong small shopkeeper organizations. 1 2 Organizational theories of supply chain management 3111 States that collaborative activities within the supply chain or 4 supply chain networks emerged as a competitive strategy, 5 enabling organizations to operate entrepreneurially, adapt 6 product and services rapidly within in highly dynamic envi- 7 ronments. 8 9 Outsourcing 20111 In the past few years, with increased global competition, pres- 1 sures to reduce costs, downsize and concentrate on core 2 businesses, has encouraged businesses to seek outside suppliers 3 for products or services previously provided in-house. This is 4 known as outsourcing. 5 6 Over-riders 7 A prearranged sum of money paid by manufacturers to retail 8 central purchasing departments, which is based on agreed 9 thresholds of product volumes ordered. 30111 1 Padlock Law 2 Belgian planning regulation of 1975 restricting the development 3 of large stores in Belgium. It would appear that given the 4 slow growth of large stores, this measure has been relatively 5 successful. 6 7 PESTE (Political, Economic, Social, Technological and 8 Environmental) 9 Analytical framework which enables one to evaluate holistically 40111 impacts of the environment. 1 2 Process driven integrated information systems (PDIIS) 3 Integrated information systems which bring together informa- 4 tion associated with a given process from across organizational 5 functions. 6 7 Quasi-vertical integration 8 See vertically integrated networks (see also Fearne p. 79). 49111

●●● 328 Glossary

1111 Quick Response (QR) 2 The umbrella term for the information systems and the JIT logis- 3 tics systems that combine, to provide the right product, in the 4 right place, at the right time (Christopher 1998). The basic idea 5 behind QR is that, in order to reap the advantages of time-based 6 competition, it is necessary to develop systems that are respon- 7 sive and fast. 8 9 Relational contract theory 1011 One of a number of theories which attempts to explain why strate- 1 gic alliances and supply partnerships have emerged as an area of 2 importance. In relational contract theory, relational contracts are 3111 regulated through ‘norms beyond those centred on the exchange 4 and its immediate process’. Emergence of recurrent relational 5 contracts results from, the recognition of dependence or interde- 6 pendence, and the pervasive use of coercion given the power 7 asymmetries between members of the supply chain. 8 9 Retailer distribution centre (RDC) 20111 A warehouse operated on behalf of or by a retailer that serves a 1 number of stores in a specific area with a range of product types. 2 3 Sales based order (SBO) 4 A system of building a store’s replenishment by using EPoS sales 5 data to produce a forecast of future stock level requirements. 6 Shelf frills and lead times can all be included in order to generate 7 calculations. 8 9 Social network analysis/Sociological approach to networks 30111 One of a number of theories, which attempts to explain why 1 strategic alliances and supply chain partnerships have emerged 2 as an area of importance. This was borrowed from anthropo- 3 logical and sociological studies of communities. In essence, the 4 theory suggests that all business interactions, all economic 5 actions, are embedded in social relations (Granovetter 1985). The 6 individual involved in business transactions has also a place in 7 society and the two cannot be disassociated. 8 9 Stock keeping unit (SKU) 40111 A uniquely identifiable line within a store. Products may have 1 different variations, e.g. 20% extra free. Each of these variations 2 are individual SKUs. 3 4 Strategic alliances 5 In the main, retail organizations which operate as one buying 6 group, thus increasing their purchasing power and market pene- 7 tration. They are an alternative to the process of concentration 8 among the grocery retail multiples and a point of contact for 49111 multi-national manufacturers.

●●● 329 Food Supply Chain Management

1111 Supply chain 2 Encompasses all of those activities associated with moving 3 goods from raw materials stage through to the end user. This 4 includes sourcing and procurement, product design, production 5 planning, materials handling, ordering, processing and inven- 6 tory management. 7 8 Supply chain management 9 Seeks to break down the barriers that exist between each of the 1011 units in the supply chain in order to achieve higher levels of 1 service and substantial savings in costs. Successful supply chain 2 management co-ordinates and integrates all of these activities 3111 into a seamless process. It embraces the different partners in the 4 chain. In addition to the departments within the organization, 5 these partners include suppliers, distributors and transportation 6 carriers, third party logistics companies and information systems 7 providers (see Horizontally integrated networks and Vertically 8 integrated networks). 9 20111 Supply management 1 Supply management refers to the establishment of operational 2 procedures, issues, such as, synchronized production, contin- 3 uous replenishment, cross docking and automatic ordering. 4 5 Symbol groups 6 A voluntary association; formed when a wholesale firm enters 7 into an agreement with independent or small chains of retailers. 8 In exchange for a guarantee to purchase a certain volume of 9 goods per week, the retailer receives: a group identity, discounts, 30111 software for computer systems, own brands and umbrella 1 national advertising and promotional campaigns. 2 3 Total cost management approach 4 A means of analysing costs through the value chain, by focusing 5 upon the cost of value adding activities across the entire chain, 6 both internal and external to the organization. Total cost 7 management contains three key elements: activity based costing, 8 process value analysis and performance measurement. 9 40111 Transaction costs 1 Transaction costs have been described as the economic equiva- 2 lent of friction in a physical system. In real terms they are costs 3 other than production costs. They may include costs of drafting 4 contracts, costs of negotiation, set of costs, the cost of risk and, 5 indeed, social costs. 6 7 Transaction cost economics 8 Advances the proposition that organizations have for their main 49111 purpose the economizing of transaction costs. Transaction cost

●●● 330 Glossary

1111 economics focuses on the relative cost efficiencies of internally/ 2 externally managed productive activities. This theory suggest 3 that collaborative activities have emerged as a result of seeking 4 reductions in transaction costs in the current dynamic economic 5 climate. 6 7 Vendor Managed Inventory (VMI) 8 Under VMI the customer (say a supermarket) no longer places 9 orders with a supplier. Instead, it shares EPoS information (q.v.) 1011 with the vendor, together with knowledge of levels of current 1 on-hand inventory, plus advice on anticipated additional 2 marketing activity including special promotions. The customer 3111 also indicates upper and lower stock limits. Given access to all 4 of this information, it is then the responsibility of the vendor to 5 maintain the customer’s inventory within the specified stock 6 bands (Christopher 1998). 7 8 Vertical integration 9 A growth strategy, in which an organization acquires organiza- 20111 tions upstream i.e. suppliers/distributors or downstream, i.e. 1 customers, in order to gain or maintain a competitive advantage. 2 Again, this term may be used loosely. 3 4 Vertically integrated networks 5 This, not a generally accepted term, refers to the long-term 6 contractual agreement between members of a supply chain, e.g. 7 suppliers, distributors, customers. It is distinctive from vertical 8 integration – businesses retain their independent status, but 9 combine forces through sharing knowledge/information for the 30111 purpose of maintaining or increasing market share. It is perhaps 1 distinctive from quasi-vertical integration as it attempts to char- 2 acterize the change in forms of business activity found in supply 3 chain management. 4 5 Win–win 6 A term brought into common academic usage from Game theory, 7 which indicates the state of affairs where two parties equally 8 benefit from a given circumstances or transaction. 9 40111 References 1 2 Christopher M.M. (1998) Logistics and Supply Chain Management. 3 London: Pitman. 4 Granovetter M. (1985) Economic action and social structure: the 5 problem of embeddedness. American Journal of Sociology, 91 6 (3), pp. 481–510. 7 Rosenfeld, S.A. (1996) Does co-operation enhance competitive- 8 ness? Assessing the impacts of inter-firm collaboration. 49111 Research Policy, 25, (2), pp. 247–63.

●●● 331 1111 2 3 4 5 6 7 8 Index 9 1011 1 2 3111 4 5 6 Index of hospitality, Best Western, 105 7 retail, related and other Bestway, 16, 104 8 BhS, 161 organizations and divisions Bibby Distribution, 100 9 Bidvest SA, 48 20111 A&P, 235 Big Steak, 11 1 ABF, 65 Birds Eye-Walls, 45, 102, 272 2 AC Nielson Europe, 62 Bluecrest, 49 3 Accor, 228 BOC Distribution Services, 100 ADM, 65, 246, 251 Body Shop, 235 4 Ahold, 58, 105, 235, 238, 239, 240 Bongrain, 291 5 Albert Heijn, 272 Booker, 45, 48–9 6 Aldi, 12, 13, 57, 108, 237, 239, 240 Boots, 6 7 Alldays, 12 Bothams, 14, 107 8 Allied Bakeries, 102 BP, 12 Allied Domecq, 11, 45, 66, 98 Brake Brothers, 49, 98 9 Allinson, 49 Brewer’s Fayre, 11 30111 Anheuser-Busch, 65, 66 British Grassland Society, 35 1 Apetito, 102 British Hospitality Association (BHA), 9, 18 2 Archer Daniels Midland (ADM), 248 BT, 192 3 Asahi Breweries, 65 Burger King, 11, 50, 293 Asda, 5, 12, 14, 50, 97, 119 Business Express, 102 4 Associated Cold Stores & Transport, 100 5 Associated Marketing Services, 105 Cadbury Schweppes, 45, 48, 65, 66 6 Astra Zeneca, 248 CAFOD, 115 7 Auchan, 240, 292, 300 Campbell, 66 8 Australian Seafood Industry Council (ASIC), Campbell’s Soups, 65, 153–4 282 Cargill, 65, 246, 248, 251 9 Avebury Taverns, 102 Carrefour, 57, 58, 236, 237, 238, 239, 240, 251, 40111 Aventis, 248 300 1 Avon Foods, 102 Casino, 105, 240 2 Cearns and Brown, 98 3 Bahlsens Keksfabrik, 66 Cendant, 228 Barilla, 66 Cereal Partners World-wide, 68 4 Bass, 11, 45, 52, 66, 98, 134 Choice Hotels International, 228 5 Bass Hotels and Resorts, 228 Christian Aid, 115, 123 6 Baylis Distribution, 100 Christian Salvesen, 99, 100, 102 7 Beefeater, 7, 11 Ciba Geigy, 248 8 Ben & Jerry’s Homemade, 45 City Centre Restaurants, 11 Benetton, 235 Club Direct, 106 49111 Best Foods, 45, 65, 68, 98 Coca-Cola, 47, 48, 65, 66, 68, 69, 229, 269, 272

●●● 332 Index

1111 Coca-Cola-Nestlé Refreshment Co, 68 Forte, 229 2 Comet, 14 Forum, 128 3 Committee on World Food Security, 119, 123 Fosters, 66 Competition Commission, 26, 40, 45, 108 Four Square, 196 4 Conagra, 65 Fowler Welch, 100 5 Co-op Bank, 113 Fresh Fruit Services, 102 6 Cora, 292 Frigoscandia Distribution, 100 7 Costcutter, 12, 104 Fullers Logistics Group, 100 8 Crown/BBK, 269 CRS (Co-operative Retail Society), 12, 50, 105, Gala Italia, 291 9 119 Gardner Merchant, 52 1011 CRTG (Co-operative Retail Trading Group), 12, General Mills, 65, 68 1 105 General Motors, 76, 198 2 Csemege-Julius Meinl, 292, 300 Granada, 11, 15, 16, 50, 52, 192, 228 3111 Cuisine Foodservice, 98 Grand Metropolitan, 45, 66 Currys, 14 Grandes Etapes, 106 4 CWS (Co-operative Wholesale Society), 12, 105 Grattans, 14 5 Green King, 11 6 Dagab, 105 Greenalls, 11 7 Daimler Chrysler, 198 Greggs, 11 8 Dalgety, 45 Gregory Distribution, 100 Danone, 65, 66, 68, 246, 291 Grocery Logistics, 100 9 DBC Foodservice, 98 Grupo Cressida, 45 20111 Delhaize Le Lion, 58, 235, 236, 251, 292 Guinness, 45, 66 1 Department of Health (DOH), 53 Gunstone, 129 2 Diageo, 65 3 Direct Wine, 102 Haagen Dazs Café, 102 Dohle, 240 Hakon, 105 4 Dominos, 15, 162–3 Hannaford Bros, 61 5 Douwe Egberts, 66 Hays Distribution Services, 100, 298 6 DuPont, 248 Hays Food Logistics, 102 7 H.E. Butt, 61 8 E3 United Kingdom Ltd, 98 Heineken, 65, 66 ECR-Europe, 272–5, 277 Heinz, 129 9 Eddie Stobart, 100 Henkel, 272 30111 Edeka, 105, 239 Henley Centre, 7 1 Efdex.com, 107 Heritage Fine Foods, 106 2 Effelunga, 251 Hillsdown, 45 3 Elf, 12 Hilton International, 229 Empire, 14 H.J. Heinz, 65, 66 4 Eridania, 45, 65 Holiday Inn, 229 5 Esso, 12 Holroyd Meek, 50 6 Ethical Consumer Research Association Honda, 76 7 (ECRA), 115 Hospitality Training Foundation (HtF), 7, 19 8 Euromadis Iberica, 105 Hotel and Catering Research Centre (HCRC), European Economic Community, 38 10, 11, 18 9 European Marketing Distribution, 105 Hyatt, 230 40111 European Union, 123, 253–4, 258–9, 265 1 Exel Logistics, 99, 100, 102, 161, 298, 300 IBP, 65 2 ICA, 105, 272 3 Fairtrade Foundation, 115–16, 119, 123 Iceland, 12, 14, 97, 247, 250–1 Fegro/Selgros, 272 Independent Dairy Company (IDC), 103 4 Ferrero, 66 Industrial Marketing and Purchasing Group 5 Fiege Merlin, 100 (IMP), 135–6, 168 6 First Quench, 7, 12 Initial Transport Services, 100 7 Fitch and Sons, 49 Innovative Supply Chain and Networks 8 Food Service Intelligence, 8, 9 (ISCAN), 18 Food town stores, 235 Institute of Grocery Distribution (IGD), 10, 12, 49111 Ford, 168, 198 16, 18, 19, 50, 51, 53, 97, 98, 104

●●● 333 Index

1111 Intermarché, 239, 240 Ministry of Agriculture Fisheries and Foods 2 International Foodservice Distributors (MAFF), 13, 19, 25, 34, 38, 39, 40, 41, 42, 3 Association (IFDA), 97 44, 46, 50, 51, 53 International Foodservice Manufacturers Mintel, 12, 13, 19, 104 4 Association (IFMA), 97 Monsanto, 120, 246, 248, 251 5 International Standards Organization (ISO), Morrisons, 12, 50 6 114 Movenpick, 228 7 ITT Sheraton, 228 Mr Q’s, 11 8 Musgrave, 105 Jerinónimo, 240 9 JMR, 105 Nabisco Food, 269 1011 John Menzies Publishing, 278 National Freight Company, 98 1 Johnson and Johnson, 272, 278 NCB, 103 2 Julius Meinl, 300 Nestlé, 44, 45, 63, 64, 65, 66, 68, 246, 250 3111 Netto, 5, 12, 13, 108 K-Group, 105 New South Wales Marketing Authority, 282 4 Kearley and Tonge, 49 New World, 228 5 Kellogg, 65 New Zealand Milk, 95 6 Kentish Garden, 43 NFT Distribution, 100 7 Keynote, 34 NISA, 102, 104, 105 8 KFC, 11, 102, 229, 293 Nissan, 207–8 Kinloch, 49 North Yorkshire County Council, 107 9 Kirin, 65 Northern Foods, 129 20111 K-Mart, 269 Novartis, 246, 248, 249 1 Kraft General Foods, 269 Nurdin and Peacock, 48 2 Kraft Jacob Suchard, 63, 66 Nutricia, 291 3 Kroger, 269 Kurt Salmon Associates, 270 Organic Farmers and Growers Ltd, 116 4 Kwiksave, 12 Out of Town Restaurants, 103 5 Oxfam, 115 6 Landmark, 104 Oxford Institute of Retail Management, 57 7 Langdons, 100 8 Larderfresh, 49 Paris, 12 Leclerc, 105, 240 Parmalat, 291 9 Lekkerland UK, 104 Peapod, 163, 311–13 30111 Lidl, 12, 13, 108 Peel Hotels, 229 1 Little Chef, 11 Pepsico, 65, 66 2 Littlewoods, 14, 192 Philip Morris, 64, 65 3 Lloyd Fraser Holdings, 100 Pizza Hut, 7, 11 Londis, 12, 16, 48, 104 Premier Poultry, 98 4 Lovell and Christmas, 49 President’s Choice of Loblaw’s, 68 5 Procter and Gamble, 44, 98, 269, 272 6 M&J Seafoods, 49 Promodès, 68, 237, 239, 272 7 McDonald’s, 11, 15, 116,118, 123, 227, 230–2, Pullman Foods, 49 8 293, 306 Purina, 269 McGregory Cory, 102 Puritan Maid, 49–50 9 McKey Foodservice, 98 40111 Mackie’s, 102 Ralston, 269 1 Manor Bakeries, 102 Ramada, 228 2 Markant Handels, 105 Rank Hovis McDougall (RHM), 11, 66, 98 3 Marks & Spencer, 6, 12, 96, 129–30, 251, Relais Chateau, 106 300 Rewe, 239 4 Marriott International, 228 Ring and Brymer, 52 5 Mars, 45, 48, 65, 66, 272 RJR Nabisco, 65, 66 6 Martins, 240 Ross, 49 7 Mercadona, 105 Rowe Group, 292 8 Metro, 239, 240, 292, 298, 300 MFI, 14 Safeway, 5, 12, 14, 50, 68, 97, 105, 119, 234, 49111 Migros, 251 238, 250, 269

●●● 334 Index

1111 Sainsbury, 5, 12, 14, 47, 50, 58, 68, 96, 97, 119, Tricon restaurant Service, 98 2 192, 246, 250, 251, 316–17 Twin Chef Foods, 49, 50 3 Saison, 228 Tyson Foods, 65 Sales Force, 269 4 San Benedetto, 66 UCI Logistics, 100 5 San Pellegrino, 66 Uniarme, 105 6 Sandoz, 248 Unigate/UNIQ, 129 7 Sara Lee, 65 Unil, 105 8 Scholler, 66 Unilever, 44–5, 63, 64, 65, 66, 68, 246, 250, 298 Scottish and Newcastle Retail, 10, 11 United Biscuits, 45, 66 9 Scriver, 269 United Northwest, 12 1011 Seagram, 65, 66 United Yeast, 49 1 Shaw’s Supermarkets, 269 Unwins, 12 2 Sheffield Wholesale Market, 318–23 3111 Sheraton, 230 Van den Bergh Foods, 98, 272 Sidney Fish Market, 283–4 Virgin, 47 4 Signatory Whisky, 102 Vons, 269 5 SlimFast Food, 45 6 Snowden and Bridge, 49 W&P Foodservice, 98 7 SNUPI (the Scottish and Northern University Waitrose, 12, 50 8 Purchasing Initiative), 106 Wal-Mart, 25, 50, 58, 239, 269 Sodexho, 52 Watson and Philip, 49 9 Soil Association, 35, 116, 117, 123 Wegman’s, 61 20111 Somerfield, 12, 50, 96, 119 Wendy’s, 293 1 Southern Wine Brands, 102 Westin, 228 2 Spar, 12, 13, 48, 292, 300 Wetherspoon’s, 11, 49 3 Strollers, 11 Whitbread, 7, 11, 15, 52, 98 Struick Food Group, 45 Wimpy International, 11 4 Suntory, 65 Wincanton Logistics, 99, 100 5 SuperQuinn, 105, 251 Wolverhampton and Dudley, 11 6 Supervalue, 269 World Trade Organization (WTO), 28, 30, 254 7 Supervib, 105 W T Maynard, 102 8 Syntrade, 105 Yorkshire pantry, 107 9 T&GWU (Transport and General Workers Yorkshire Purchasing Organization (YPO), 106 30111 Union), 194 Young, 49 1 Target, 269 2 Tate and Lyle, 45, 65 ZEV, 105 3 T&S, 12, 14 Taste of Italy, A, 49 4 Taylor Barnard, 100, 102 Subject index 5 TDG, 100, 102 6 Technomic, 6 Activity based analysis, 207 7 Telfer Foods, 129–30 Activity based costing (ABC), 205, 207, 211, 8 Tengelmann, 58, 235, 239, 292 213, 216, 324 Tesco, 5, 11, 12, 14, 16, 47, 50, 58, 96, 97, 119, Adversarial practice, 73, 76, 77, 78, 80, 81, 82, 9 235, 238, 239, 240, 272, 292, 300 84, 86, 180, 205 40111 Tetley, 98 Agribusiness, 248 1 Texaco, 12 Agriculture and associated trades, 41 2 Three Cooks, 11 Agri-food policy in Hungary, 287 3 3663, 48, 98 Alliances, 57, 67–8, 70, 80, 85, 105–6 Thresher, 7 cross border alliances, 57, 67–8 4 Tibbett and Britten Group, 99, 100, 298 strategic, 78, 91, 103, 105, 175, 205, 248, 330 5 TNT Logistics, 102 American retailers, 55–60, 234–40, 268–72, 6 Today, 104 275–7 7 Toyota, 76 American supermarket model, 58, 60 8 Traidcraft, 115 Animal welfare, 43, 117–18 Travelodge, 11 policy, 116 49111 Tricon International, 11 Assured British Meat (ABM), 44

●●● 335 Index

1111 Auctions, 78 Contract farming, 42 2 Automatic ordering systems, 16 Contracting out, 10, 98–103, 189 3 Contracts, 79 Back hauling, 74, 98, 324 Convenience stores, 5, 12, 13 4 Balanced scorecard, 208 Co-operative ventures, 80 5 Beef supply chain, 42 Co-operatives (Co-ops), 4, 5, 12, 13, 14, 43, 104, 6 Belgium retailers, 58 112–13, 116 7 Box schemes, 42, 43 Core competence paradigm, 71 8 Brands, 7, 10, 11, 15, 46, 47 Corporate social responsibility (CSR), 112, 118 Breeding, 75 Cost drivers, 206–7 9 BSE, 13, 116, 122, 257, 258 Cost management, 213 1011 Bullwhip effect, 161 Cost-oriented catering establishments/sectors, 1 Business ethics, 112, 113–14 6, 8–9 2 Business and industry catering sector, 8, 9 Costing, 211 3111 Business process, 324 Cross docking, 98, 274, 313, 330 Business process re-engineering, 213, 324 Cross functionality, 74–5, 78 4 Buying groups, 104, 324 Customer primacy, 169–70 5 Customers, 181–3 6 Cafes, 5, 8 7 Cash and carry wholesale, 47–8 Dairy industry, 288–92 8 Cash and carrys, 14 Decision support systems (DSS), 154, 157 Catalogue retailers, 14 Delayering, 214 9 Category, 276, 325 Delegated sourcing, 130 20111 Category captains, 84, 316 De-listing, 47, 51, 84, 86, 315, 316 1 Category management, 16, 47, 62, 83, 84, Delivered wholesale, 47 2 268–77, 315, 325 Demand chains, 84 3 Category partnerships, 48 Dependence, 146, 208 Catering: Dependency: 4 definition, 5 mutual, 78, 81, 209 5 industry, 7, 25, 39, 51 reciprocal, 209 6 supply companies, 98 serial, 209 7 Centralization, 10, 96–7, 325 Deregulation, 283–5 8 Centralized distribution systems, 15, 46 Designated producers, 51 Centralized purchasing departments, 15, 16 Diet meals, 46 9 Change management model, 319–20 Discounters/discount stores, 5, 9, 12–13, 51, 57 30111 Channel relationships, 76 Distribution, 75, 101 1 Collaborative: Distribution systems, 15, 16, 18 2 marketing venture, 70 Dominance, 208 3 relationship management and procurement, Due diligence, 50–1, 77 69 Dutch retailers, 58 4 Commission agents, 47 5 Commitment, 192–3, 205 E.centre, 312 6 Commodity brokers, 47 E.coli, 13, 116 7 Common Agricultural Policy (CAP), 13, 30, 41, E-commerce, 16, 98, 107, 132, 325–6 8 42 E-markets, 16, 107, 326 Competition, 45, 56 E-shopping, 310–13 9 Competitive advantage, 69, 80, 207 Education catering sector, 8, 9 40111 Competitive flexibility, 195–6 Efficient Consumer Response (ECR), 16, 47, 56, 1 Composite distribution, 325 73, 83–4, 95–6, 97, 98, 268–80, 301–2, 326 2 Concentration, 24, 45, 50, 51, 63, 65–6, 305 Efficient Foodservice Response (EFR), 17, 91, 3 Confectioners, Tobacconists and Newsagents 97, 98, 326 (CTNs), 13 Electronic Data Interchange (EDI), 16, 17, 83, 4 Confidential rebate, 16, 325 84, 152, 161, 214, 302, 326 5 Consolidation, 98, 134, 308, 315, 325 Electronic funds transfer at point of sale 6 Constructive flexibility, 195 (EFTPoS), 16, 17, 326 7 Consumer, 30, 32, 316 Electronic point of sale (EPoS), 16, 17, 94, 156, 8 Continuous Replenishment Programme (CRP), 159, 161, 326 154, 157, 274, 325 Employee commitment, 193 49111 Contract caterers, 17 Employment regulation and rights, 191–2

●●● 336 Index

1111 Engel’s law, 26 Genetically modified organisms (GMOs), 246, 2 Environmental policy, 118 249, 258 3 Ethical consumerism, 115, 122 German ‘hard’ discount chains, 58 Ethical food, 115, 117–18, 121 Globalization, 27–8, 56–8, 64, 304, 318–21 4 Ethical goods, 115 GM foods, 13, 116, 245–56 5 Ethical Trading Initiative, 119 Grading, 75 6 Ethics, 24, 111, 121, 327, see also Business ethics Grocers/grocery, 10, 13, 50, 57–9, 269–71 7 Euro, 68, 300, 302 8 Every-day-low-price, 270 HACCP, 263–4 Externalization, 298–300 Headquarters, 67 9 Health care catering sector, 8, 9 1011 Farmers’ markets, 13, 25, 42 Healthy eating, 116 1 Farming, 38–9, 72 High commitment management, 190 2 Fashion retailers, 57 Home delivery/shopping, 13, 14, 15, 97 3111 Fast food, 5, 8, 292–3, 301 Home meal replacement, 6 Fast moving consumer goods (FMCG), 63 Horizontal: 4 First tier supplier, 129–30 co-ordination, 70, 90 5 Fishing, 38–9 information systems, 217 6 Flexibility, 189–91 integration, 24, 92, 215, 216, 327 7 Flexible firm, 85, 189 Horizontally integrated networks, 80, 103–6, 8 Flexible specialization, 205 327 Food: Hospitality: 9 chain, 38–9, 246 employees, 8 20111 crises, 116 industry, 227–33 1 deserts, 317 operations, 7–8 2 and drink manufacturing, 44, 63–9 Hotel consortia, 105–6 3 and drink processors and manufacturers, Hotels, 8, 17, 103, 105, 228–30, 257–60 45 Human resource management (HRM), 4 hygiene, 263–5 187–202 5 labelling, 116–17, 245, 253–5 Hypermarkets, 12, 237, 238 6 legislation, 257–8, 260–2, 268 7 miles, 327 Identity preservation (IP) systems, 252 8 politics, 30 Independent negotiants, 103 prices, 26, 31, 40 Independents, 4, 7, 12, 17 9 processing groups, 46 Innovation, see New product development 30111 processing supply chain, 75 Interaction model, 135–6 1 quality definitions, 22–4 Inter-dependency, 80, 146 2 retailing, 234–41, 292, 298 Integration: 3 safety, 50, 257–68 backward, 76 seasonal, 30–1 forward, 76 4 security, 119 horizontal, see Horizontal integration 5 service sector, 98, see also Catering vertical, see Vertical integration 6 service supply chain, 97 Internationalization, 44, 227–41, 300 7 service wholesale, 47–8 Internet, 14, 25, 97, 106, 107, 132, 278 8 supply chain, 247, 304–9 Inventory-driven systems, 40 supply chain definition, 38 Inventory: 9 supply chain evolution, 24–5 levels, 72, 73, 81, 82 40111 supply chain structure, 74–5, 93, 314–23 management schemes, 16, 161 1 Food economics, 25–7 2 Food Labelling Regulations 1996, 117 Japanese culture, 208 3 Food Miles Report, 121 Joint ventures, 79, 80 Food Safety Act, 43 Just-in-time (JIT), 56, 83, 156–7, 161, 208, 327 4 Franchise system, 162–3, 229, 230–3 5 French retailers, 57, 58, 60 Kaizen, 72, 212 6 Full vertical integration, 79 Knowledge transfer, 196 7 Fun foods, 46 Kraljic matrix, 144 8 Functional foods, 46 Lead-times, 72, 92, 151, 155, 158, 159, 160, 49111 Genetic Modification (GM), 22, 117, 120, 261 270

●●● 337 Index

1111 Lean: Organizational theories of supply chain 2 accounting, 208, 220 management, 205, 328 3 manufacturing, 132, 213, 218 Outsourcing, 71, 74, 128, 156, 161, 191, 197, production, 205, 206 198–9, 206, 328 4 supply, 132 Over-riders, 16, 47, 61, 104, 328 5 Leaner organization, 195 Own/private label products, 47, 48, 50, 68, 86 6 Learning organization, 86, 198 7 Leisure, 5, 8 Padlock Law, 236, 328 8 Licensed retailers, 5 Pallet standardization programme, 154 Lifecycle: Partnering, 150 9 costing, 211, 216 Partnerships, 70, 77, 82, 85, 205 1011 product, 40, 74 Performance management, 193, 215–16 1 Linkages: PESTE (Political, Economic, Social, 2 downstream, 70 Technological and Environmental) 3111 upstream, 70 analytical framework, 22–4, 28–30, 131, Listeria, 116 132, 328 4 ‘Lite’ foods, 46 Petrol station forecourts, 12, 13 5 Logistical effectiveness and efficiency, 69 Pizza outlets, 162 6 Logistics, 94, 152, 156, 298–302, 328 Polarization, 318–21 7 Loi Royer, 236, 328 Power, 236, 304, 307–8 8 Look-alikes, 47 Power dependence, 82, 209 Loyalty schemes, 62 Preferred suppliers, 51 9 Prices, 47, 61 20111 McDonaldization, 29, 306 Process driven integrated information systems 1 Make or buy, 74, 206, (PDIIS), 215, 218, 328 2 Management accounting, 204–23 Procurement, 69, 75, 121–47, 153, 198, 212, 215, 3 Management contract, 229, 231 217, 292 Manufacturers, 39, 47 Product replenishment, 83 4 Market qualifiers, 155 Production, 75 5 Market transaction exchange, 301 Profitability, 59–62 6 Market winners, 155 Profit-oriented catering establishments/sectors, 7 Marketing, 75, see also Relationship marketing 6, 8–9 8 Marketing mix, 167–8 Promotions, 83 Merchandising, 75, 76 Pubs, 5, 8, 17 9 Merger and acquisition (M&A), 66–7, 68 Purchasing, 102–3, 128, 131–3 30111 Milk, 290–1 Purchasing positioning tool, 136, 138 1 Ministry of Defence catering sector, 8, 9 Psychological contract, 195 2 Multinationals, 228 3 Multiples caterers/retailers, 4, 14, 15, 16, 17, Quasi-vertical integration, 79, 328 292 Quick Response (QR), 157, 161, 270, 329 4 5 National minimum wage, 192–3 Race for Opportunity (RfO) campaign, 192 6 Network approach, 301 Ready-to-make foods, 6, 37 7 New product development, 69, 72, 73, 74, 83, Re-engineering, 150, 154, 161 8 84, 128, 130, 274 Regional Distribution Centres (RDCs), 10, Niche agricultural markets, 43 16 9 Non-GM foods, 247, 252–3 Registered Fish Receiver (RFR), 283–5 40111 Non-investment management arrangements, Regulation, 259–61, 306 1 228 Relational contract theory, 205, 329 2 Novel Foods and Novel Food Ingredients Relational contracting, 214–15 3 Regulation, 253 Relational exchanges, 173–4 Relationship ladder, 180 4 Off licences, 13 Relationship marketing, 166–85 5 Open book accounting, 101, 206, 207, 211–13 Relationships, 177–80 6 Order cycle times, 129, 131, 151–2, 154, 157, Restaurant meals, 6 7 207, 211, 270 Restaurants, 5, 8 8 Organic crops/foods/production, 117, 120 Retail: Organic growers/suppliers, 117 definition, 4 49111 Organic prices, 122 formats, 5

●●● 338 Index

1111 industry, 25, 39 Supply chain management, 37, 40–1, 71–5, 2 strategies, 64 94–5, 131, 160, 205, 209–10, 211–14, 3 Retailer distribution centre (RDC), 329 297–303, 330 Return on equity (ROE), 59–62 Supply chain management services, 99 4 Rochdale Pioneers, 112 Supply chain partnerships/relationships, 76–85, 5 198–9 6 Sales based order, 16, 18, 329 Supply delegation strategies, 128 7 Salmonella, 116 Supply restructuring/structures, 135, 286–94 8 Sandwiches, 8, 129 Symbol groups, 5, 12, 13, 14, 16, 104, 330 Saturation, 235 9 Seamless operation, 150 Takeaways, 5, 8 1011 Self-rationalization, 29 Tapered vertical integration, 79 1 Self-scanning systems, 16 Target costing, 216 2 Service-driven systems, 40 Technological systems, 16–17, 18 3111 Service sector, 192 30Rs approach to relationship marketing, 175–7 Shared destiny, 208, 214, 217 Time compression, 151, 157, 159 4 Shared vision, 85, 86 Total cost management, 206, 330 5 Sharing: Total cost of ownership, 206 6 information, 16, 75, 83, 107, 161, 205 Total quality management, 197–8 7 risk, 205 Traceability, 44, 51, 53, 77, 245, 254 8 Six markets model, 171–3 Training and development, 140, 198, 231, 260 Slotting fees, 61 Transaction cost economics, 205, 331–2 9 Small and medium-sized enterprises (SMEs), Transaction costs, 330 20111 106, 107, 193, 317 Transactional marketing, 169, 174, 180, 181, 186 1 Social appetite, 21 Transactional relationships, see Adversarial 2 Social differentiation, 29 practice 3 Social network analysis, 329 Transfer pricing, 216 Specialist contract operators in food and drink Travel catering, 5, 8 4 market, 99–100 Trust, 72, 75, 77–8, 83, 85, 130, 190, 205, 206, 5 Spikes, 61 208–9, 218 6 Stakeholders, 112–13, 114 7 Standard Industrial Classification System (SIC), UK grocery market, 96 8 45 UK retailers, 60, see also Index of hospitality, Statistical process control (SPC), 153 retail, related and other organizations and 9 STEEP, see PESTE divisions 30111 Stock keeping unit (SKU), 9, 10, 62, 84, 160, UK retailing model, 58 1 162, 329 Umbrella management, 94 2 Stock levels, 157–61 3 Storage, 75 Vacuum packaging, 8 Strategic: Value added, 40, 46, 50 4 alignment model, 138, 139, 140 Value added chains, 70, 207 5 alliances, 329, see also Alliances Vendor Managed Inventory (VMI), 154, 156–7, 6 cost analysis, 206 331 7 sourcing/supply, 128–9, 133, 134, 136–8 Vertical : 8 transition model, 140–6 co-ordination, 44, 70, 79, 92, Streamlining, 98, 153–4 integration, 24, 78–80, 90, 92, 97, 206, 211, 9 Street money, 61 216, 331 40111 Sub-contracting, 189 Vertically integrated networks, 92–6, 331 1 Supermarkets, 12, 15, 40, 58, 61, 62, 234–40 2 Superstores, 12, 56 Wholesalers/wholesaling, 15, 38–9, 47–8, 92, 3 Supplier–retailer collaboration/partnerships, 316 46–7, 64, 90–108, 173, 181–3, see also Win-win, 205–6, 331 4 Alliances; Partnerships; Horizontal/vertical Workplace employee relations (WERS), 189 5 integration World: 6 Supply chain, 37, 41–52, 69–71, 94, 96–7, 150–2, class manufacturing, 205, 218 7 155–6, 163, 205, 206, 208–10, 231–2, 287–90, debt, 28 8 330 world trade, 28 entrepreneurial, 70–1 49111 operational, 70–1 Zero-sum game, 72, 211

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