Giant retailers and foodservice outlets are reshaping the way you do business.

When Burger King Corp. wanted to add individually packaged slices of Hershey's cocoa pie to its restaurant menu in 1997, regional pie manufacturer Edwards Baking Co. shrewdly invested in a proprietary technological advantage.

Atlanta-based Edwards had engineered a high-pressure water jet slicer in 1994, and the Burger King project posed an opportunity to refine the system. Pies frozen to -10

The system outputted 180 slices per minute, allowing significantly faster line speeds than band slicers or other options. Because no other manufacturers had comparable technology, Edwards became the sole supplier of a very successful menu item.

Now a division of the Schwan Food Co., Edwards has continuously refined its single-serve expertise and supplies a wide variety of pies to a number of quick-serve restaurants, including Taco Bell, Pizza Hut, Popeye's and Long John Silver's.

"They basically cornered the market by perfecting a manufacturing capability that a segment of the market required," remembers Tulin Tuzel, who oversaw Burger King's global supply chain from 1998 to 2001. Now the chief operating officer of Pashas restaurants in Miami, FL, Tuzel had a ringside seat to the supply-chain battle that increasingly favors key retailers and foodservice accounts. Before joining Burger King, she served as vice president of engineering and vice president-R&D at Sara Lee Corp.

Speed to market has special urgency in foodservice, and processors who want to serve major restaurant chains must produce new products in weeks, not months, Tuzel says. She contrasts the rapid rollout demands at Burger King with Sara Lee, where a bite-size frozen cheesecake product took a year to move from concept to full production. "Product innovation is driving sales, and a company selling to, say, Burger King needs to be able to provide new product capability," including ideas. Key suppliers are active partners, providing R&D support and even dedicated test kitchens, Tuzel says.

"Our A-list suppliers were key partners, the companies that worked with us day in and day out with teams built around our business," she says. "They understood our business and our customers, and they came to the party with product ideas and consumer trend information." B-list suppliers "can jump in, turn on a dime and bring the manufacturing capability" to get product to thousands of distributors quickly. Finally, with C-list suppliers, "you buy on price only," Tuzel says. "It's the most traditional way to buy," and the one with the bleakest outlook. As the concentrated clout of the largest foodservice accounts grows, sales and profitability for C suppliers will continue to erode.

Price limbo remains a big part of the retail game, with leading supermarkets, club stores and mass merchandisers demanding to know "how low can you go?" before placing a mega-order. But even these customers are demanding more from food processors, and companies are scrambling to reinvent themselves. "Everyone was fat, dumb and happy ten years ago," says Jonathon Knight, CEO and cofounder of JRG Inc., a San Mateo, CA, provider of scheduling services and software. "Now manufacturers are in a tizzy to realign their businesses to respond every day to the changes companies like Wal-Mart and Costco are pushing."

Best face forward

Like many manufacturers, Kar's Nuts created new packaging when it began selling products to club stores in recent years. The suburban Detroit snack-food manufacturer uses an 18-count caddy for roasted nut products sold through vending machines and DSD (direct store delivery) routes. Larger packs were needed for club stores, says Vice President Bill Elam, and the presentation needed to be improved. Many processors have made similar modifications to serve large retailers, and the change necessitated a capital investment in a robotic case packer. "The larger case is usable at a family level," explains Elam, "and it has a great shelf presentation."

The larger cases were fine, Sam's Club buyers informed Kar's, but the pallet configuration didn't work. Club stores merchandise directly from shipping pallets, and product visibility on three sides is desired. Could Kar's redo its pallet packing to accomplish that, Sam's wondered? "Our goal is to make 100 percent of our customers happy," says Elam, and the change was made.

Future modifications may not be as painless, though, as manufacturers in the vanguard of Wal-Mart's radio frequency identification (RFID) initiative can attest. As of the first of the year, cases and pallets from Wal-Mart's 100 largest suppliers were supposed to begin arriving with RFID tags at three Texas distribution centers. Compliance is a work in progress, however, with most manufacturers attaching tags to only a handful of their SKUs.

Read rates for the tags range from reasonably good to terrible. Reliability issues forced European retailer Metro to back off a similar initiative last year. Instead of requiring RFID tags on cases, Metro is content with pallet tagging for now, according to Steve Banker, a supply chain management analyst with ARC Advisory Group, Dedham, MA. "Why make people do it if the technology isn't there yet?" is Metro's reasoning, Banker says.

For Wal-Mart, there is no downside to poor read rates. Besides tossing all the costs of RFID onto suppliers, the chain will only pay for cases successfully scanned. Barring dramatic improvement in the technology, the Bentonville, AR, channel master stands to gain a windfall in freebies.

"If people did their physics studies correctly, 97 to 99 percent of individual cases were being read in pilot tests," says Banker, who completed a study on emerging RFID deployment practices recently. "But some people who manufacture dense, frozen or liquid items were getting read rates in the 20 to 30 percent range." Reliability issues with the tags themselves also surfaced, with some firms reporting defects in half the tags they purchased.

The RFID grace period for small- and mid-sized food and beverage manufacturers could end as early as "the beginning of next year," he warns.

Tower of Babel

Automated data exchange between manufacturers and mega-retailers has been a financial sinkhole of much longer duration than RFID, and industry efforts to establish a common standard have only added to costs. For example, the Grocery Manufacturers of America estimates $1 billion was spent (mostly by manufacturers) between 2001 and 2003 to develop standards and registries built around UCCnet. A year ago, the data synchronization project "risked coming to a complete stall," warned Pam Stegeman, GMA's vice president, supply chain & technology. Since then, the risk has been removed.

Collaborative approaches are doomed because the biggest customers are indifferent. "Wal-Mart already has forced a standard on suppliers; why should they change?" asks Steve Phelan, founder and senior vice president of Southborough, MA-based Formation Systems. "I suspect it's going to be hard to get any kind of industry standard because it's not clear there is anything in it for retailers like Wal-Mart and Costco."

Distinctive purchase-order requirements and extensive label-information demands are hallmarks of the mass merchandisers, and customizing data interchange for them is costly and complex. Product descriptions running 30 pages or more often are demanded by Wal-Mart, Phelan says. Writing code for all that information is time consuming, and reconciling terminology differences between buyers and sellers is an onerous task. The process is being simplified, however, with web-based middleware solutions helping provide a technical standard while programs such as Phelan's Optiva preempting the need to write code and allowing firms to provide data in XML to customers.

Huge customers place huge orders, and they are quick to punish suppliers who accept those orders but fail to fill them. Better warehouse management offers a partial solution, but if production scheduling and raw materials are not tied to finished goods availability, food companies are destined to have high spoilage rates, order shortfalls or both. Enterprise resource planning (ERP) programs are touted as a solution, but too often these have failed to deliver, notes Mike Kopetski, a scheduling expert currently serving as director of logistics for Wise Foods Inc., a Berwick, PA, snack-food manufacturer.

"We do considerable amounts of direct ship private-label work for Giant Foods and Wal-Mart, and the reward structure is based on price and service," says Kopetski. "If you're not completely filling orders, you're going to get dinged." Daily production scheduling to support those shipments was a cumbersome process, and efficiency often was sacrificed to order fulfillment. "It was customer service at any cost in our company, and the ‘any cost' will eat your lunch," he adds.

Last April, Wise began using JRG's Factory Scheduler after a 12-week installation. Less customization of daily schedules is needed, and when changes are made, a software engineer isn't needed. Kopetski says other scheduling programs aren't as flexible: "The algorithms you had to enter to make changes were so complicated, you ended up calling in a consultant."

Daily shipments were short thousands of cases in 2003; today's customer service rates are 99.5 percent. At the same time, warehouse inventory has tumbled from 125,000 cases to less than 100,000, which means dramatic reductions in stales. And when the 26-truck order that wasn't in any of the forecasts crops up, schedulers can quickly calculate what the cost of meeting that order will be. "Nobody is going to say no to a huge order, but at the same time if the cost of overtime and other factors are going to make it unprofitable, this gives you the best possible way to make an informed decision and the ability to suggest an alternative that benefits both you and your customer," says Kopetski.

Sensitivity training

The larger an organization becomes, the more protective it is of its reputation and brand, and that means fewer supplier claims are taken as an article of faith. Key retail and foodservice customers increasingly are demanding in-plant audits and inspections, and the scope of those verification visits is expanding.

Plant inspections by customers were a new concept in 1993 when Jack in the Box Inc. began the practice in the wake of an E. coli 0157:H7 outbreak linked to its restaurants. "Some of the auditors were held up, but usually they were invited in for a one-snapshot look that dealt with housekeeping but not the critical control points of a food plant," recalls David M. Theno, senior vice president-quality & logistics. "Now, inspectors are validating that HACCP and other programs are actually being done, they're going into storage and receiving areas that used to be ignored or were off limits, and they're reviewing pre-op microbiological scores that really tell you what is going on in the plant. Processors used to refuse to share that data, but the best relationships have no surprises."

McDonald's Corp. takes the social accountability concept further than any other customer. Approved suppliers must adhere to a code of conduct that is posted in a prominent place in their plants. They also must agree to animal welfare principles and the phase-out of antibiotics for livestock growth promotion.

When major buyers speak, even the largest food companies listen. IBP Inc. instituted an animal welfare program in 1999 in response to McDonald's demands, and those practices are being extended to the poultry side of Tyson Foods Inc., which acquired IBP in 2001. "We've had to fire people only because of their violation of welfare rules," says Kelly Pfalzgraf, director of Tyson's office of animal well-being.

Keeping the customer satisfied is a business fundamental, and the bigger the customer, the greater the desire to please. But the concentration of buying power in the hands of mega-retailers and foodservice operators is putting issues on the negotiating table that few would have imagined a decade ago. How well food manufacturers respond to those pressures will determine which ones thrive in the years ahead.

For more information:

Steve Banker, ARC Advisory Group,
781-471-1116

Steve Phelan, Formation Systems,
508-303-6200

Jonathon Knight, JRG Inc.,
866-574-7638