April 2014 |

Proxima blog

The European Food & Beverage Market is in a state of turmoil. Increasingly regular headlines are being published around deficiencies in quality standards and growing contamination cases. The reputation and financial damage of these headlines can be critical for any business operating in an already tumultuous industry (as discussed in my previous post).

In the Netherlands specifically, the highest food inspector has signaled a distinct lack of ethical awareness in particular producers of meat and meat products – stating that many producers and manufacturers “face the question of whether we see food as a product or as a purely commercial entity”.

Addressing these very public, supply issues (alongside broader business challenges and aims) requires a fundamentally different perspective on how supply management. As Einstein once said, “you cannot solve the problem with the same mind that created it“.

Disconnected from the board

A recent study by Hitachi Consulting suggests one of the causes for the increasing number of supply failures is (too often) the disconnect between the day-to-day management of the supply chain and the Chief Executive’s agenda.

The study further suggests that the problem lies in the fact that senior executives do not give enough attention to the nuances of their supply operations, failing to appreciate the risks and opportunities that often arise in the far reaching corners of their company.

But perhaps executives responsible for managing business supply may be partly to blame for this disconnect.

The constant focus and communication from procurement teams around savings, cost cuts, discounting – price reduction conversations – has led to a situation where senior executives have come to expect little more outside of such deliverables; and as such, look towards other areas of their business for solutions to problems.

Achieving savings is an entry-level measure of procurement capability. Savings are not a true measure of longer-term success. Most types of savings that are delivered are best seen as defining historic weaknesses. They make little business sense as a stand-alone objective for excellent procurement.

Furthermore, there exists a strange paradox in that focusing on savings will only ever deliver savings (in the short term), however focusing on improving performance will deliver equal (or more) savings, but also many other outcomes such as better risk mitigation, improved visibility, smarter investment decisions, better service for budget holders and increased productivity.

A recipe for success

Putting this into context, the Harvard Business Review published a Deloitte study identifying three rules followed by truly successful companies, which point to the notion of focusing on non-cost related initiatives:

  1. Better before cheaper: in other words, compete on differentiators other than price
  2. Revenue before cost: that is, prioritize increasing revenue over reducing costs
  3. There are no other rules: so change anything you must to follow rules 1 and 2. (read more on these 3 rules here)

The Financieele Dagblad drove these points home by commenting that there needs to be far more attention given to product integrity (over price), particularly in the food industry which is now “treated as a commodity, values and respect for the product are gone.”

Moving from price to value is not easy for many food and beverage manufacturers trying to claw their way out of the vicious ‘commodity trap’ with limited resources. However, change starts with ruthless prioritization. Supply managers need to closer align with senior executives around their burning business challenges to understand where time, energies and resources should be focused – and in what order.

Senior executives on the other hand, should reassess and clearly define the role of procurement in the company philosophy. Is it a process-oriented, savings-obsessed function? Or does it focus on customer service and helping the business achieve its strategy?

Margin pressure will continue to be applied from all sides as competition from global markets increases. Creating long-term, sustainable competitive advantage for many businesses in this industry cannot be achieved unless something dramatically changes. As Einstein eloquently said – the definition of insanity is “doing the same thing over and over again and expecting different results”.

Please add your thoughts in the comment box below.