Food Engineering

Managing Software<br>Living and thriving with<br> the channel masters

March 8, 2004
Flexibility in both operations and systems is required to meet the demands of giant retailers.

Do you play by the rules? If you are or you want to be a supplier to any of the mass merchandisers or channel masters in our industry, chances are you do. Channel masters are the kingpins of our industry - the major players who, because of their size and buying power, can dictate how you participate in the market. They can be major retailers (Wal-Mart or Kroger), large distributors (SYSCO) or major food service operations (McDonalds).

More is more

Volume, of course, gives them their power. Wal-Mart, for example, is the single largest customer of Kraft, Campbell Soup, and RJR and sells 36% of all the dog food in the US. This kind of buying power enables channel masters to require that: orders be processed using certain technology; suppliers meet prices on paid and retail promotional programs; manufacturers pay for stock-outs or late shipments; and product is packaged and shipped according to their specifications.

Yet, as a food or beverage manufacturer, the volume these outlets offer represents a very real and significant opportunity. But this volume often allows them to determine how you do business with them, demanding various price points and product specifications. And, if you want your product to have a seat at the channel master's table, you'll abide by its rules.

Avoiding margin erosion

Margin erosion is the real impact of the channel master. While the volume opportunity offered by the channel master is great, the kingpin can also set pricing, product and service requirements. The channel master dictates these and other variables that make up revenue and cost and therefore margins. Often the result is margin erosion. Manufacturers can either accept or address margin erosion. Since volume, price, product and service requirements are set, manufacturers must reduce the cost of providing the product and services demanded.

Software advantages

To meet the channel master's increasing demands, food manufacturers must have the right systems and business processes in place. What are the characteristics of the "right system"? You'll need systems that offer operations flexibility to meet the ever-changing demands of the channel masters. For example, a channel master can demand a series of very short runs based upon packaging variations. If a channel master demands shipments on certain days, the plant must somehow juggle scheduling priorities, as well as logistics, to keep all of its customers happy. To avoid margin erosion, programs and systems must play a key role in identifying and analyzing cost reduction opportunities and providing business processes that will reduce the cost of products and service. Investments in procurement, production, warehousing and distribution are often required to maintain margins.

Channel master business is good. Everyone likes increased volume, but the impact of this business can be bad for the bottom line. A manufacturer must proactively increase its ability to satisfy the channel master's demands and continually search for cost reduction to maintain margins.