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Information Technology:

April 16, 2003
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Each year, publications like Information Week, eWeek, and InfoWorld publish lists of who they consider to be the best Information Technology (IT) innovators. Again in 2001, the food industry was not well represented.

Each year, publications like Information Week, eWeek, and InfoWorld publish lists of who they consider to be the best Information Technology (IT) innovators. Again in 2001, the food industry was not well represented.

The InformationWeek 500 included only 18 food related companies. The highest ranking was E&J Gallo (ranked at number 30) and six other companies were placed in the bottom quarter. There were also 18 food-related companies included on the eWeek Fast Track 500. The highest ranking was Alliant Exchange (37) which was sold to the foodservice division of Ahold. Companies appearing on both the InformationWeek 500 and the eWeek Fast Track 500 were Cargill, Inc., Sara Lee Corp., and Coca-Cola Enterprises, Inc.

The Info World 100 list had 21% of its featured companies from manufacturing, but only one food related company, Proctor & Gamble (2), made the list.

The food industry makes up about 34 of the Fortune 500 largest public companies, yet is mentioned just about half in IT innovation surveys. Why don’t food companies make a better showing? Are they below the radar screen of the high tech editors? Or is there another reason?

Historically, the food industry has made major investments in developing new food products and in plants and equipment. The industry has been characterized by low operating margins. In Fortune 500, food production companies averaged 2.2 percent return on revenue. The consumer food sector did better at 6 percent, but the wholesalers food/grocery only averaged 0.8 percent return on revenue. To shore up low operating margins, the food industry has focused on two value propositions: create new, value-added products and lower the costs of existing products.

Food companies are generating new SKUs at a fantastic rate. They have also lowered the costs of existing products, and much of the credit goes to efficient agricultural practices and technological innovation inside food plants.

High tech industry editors may not be impressed with the latest optical sorting machine or high-speed packaging line, but that kind of innovation impacts the supply chain. In the past, the food industry has prioritized internal productivity improvements ahead of supply chain productivity improvements, lowering the industry’s profile in the “new economy.”

Grounded in tradition

Mature and stable are words often used to describe the food industry. The basic technologies used to process food, canning and freezing, both have their roots over a century ago. The supply chain information flow still runs on EDI, e-mail, fax machines, and the telephone. The selling models depend heavily on broker and distributor selling agents and the distribution strategies are primarily based on common carrier LTL (less than truckload) trucks. In comparison to the Internet-based, consumer-direct, FedEx-delivered high tech electronics industry, the food industry seems downright stodgy.

The adoption of EDI throughout the food supply chain has been slow. While most large food manufacturers and brokers have EDI capability, all but the largest distributors use EDI to transmit orders and receive invoices.

Consolidation has been the driving force of change on the selling side of the food industry. Retail broker consolidation is leading to a handful of national brokers and the foodservice broker scene is showing some of the same trends. The grocery retailers and the foodservice distributors are also on a consolidation binge. The top 5 retailers are commanding over half of all grocery sales. The consolidation trend has carried over to the manufacturing sector as the biggest, Nestle, Unilever, and Kraft, continue to gobble up competitive lines. But so far, consolidation has not resulted in any fundamental changes in the way food companies do business.

Food industry established distribution models also remain unchallenged. Nearly all the manufacturers of lightweight pillow packed snacks depend on route delivery to get products to grocery stores and restaurants. Frozen food manufacturers use broker/distributor networks to move their products to the consumer. On the horizon are transportation optimization companies, such as Nistevo, that are pioneering cooperative transportation strategies that match the requirements of diverse companies to establish scheduled routings that reduce delivery time, maximize truck asset utilization, and lower overall transportation costs.

While the industry paradigms persist, it would seem that some of the changes in structure of the industry could lead to a change in the way the industry does business. The question is: how much impact will information technology have in the food industry?

Is IT in our future?

A shift occurred in the InfoWorld 100 Survey last year: the overall representation of manufacturing and distributing companies increased from 12% to 21%, the largest growth of any sector. This change indicates that there may be an IT impact from new technologies in manufacturing and distribution.

The food industry is growing through consolidation, not through expanding markets. Because food industry growth is in line with the growth in population, demand for food will not be an impetus for IT innovation. However, there are several issues facing the industry that rely on IT innovation:

  • The need to track products in the supply chain1.. The food industry trails other manufacturers in tracing its product through the demand chain. As public requirements for safe food increase and concerns over genetically modified foods grow, the industry will be challenged to apply more IT technologies to its trace and recall procedures.
  • Supply chains are becoming more exclusive. There have always been barriers to participate in certain supply chains. For example, in the McDonald’s system, a manufacturer must have the right price, comply with packaging standards, go through specific distribution, and have products that meet uniform, system-wide, requirements. McDonald’s also has IT standards that most manufacturers must meet. As the industry consolidates around larger restaurant chains and larger distributors, there will be growing number of supply chain specific requirements for manufacturers to meet. IT will be a key component in linking back office systems to the requirements of the supply chain.

The pressure to improve IT will also come from external forces, government regulation, the public’s growing awareness of safe food issues and the consolidation of the supply chain. With these new pressures, food manufacturers will look to adding IT innovation to the list of what they do best.

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