Like any industry, the agricultural and food sector must contend with usual price fluctuations, but it also has to face the entirely unexpected – harvest failures, freak weather events and changing consumer preferences over safety or quality concerns.
“The pressure on food and agricultural or F&A supply chains is unrelenting and is showing no signs of easing up,” says Rossella Schiavini, regional head of global corporate clients, Europe, at specialist food and agricultural bank Rabobank. “The drivers have ebbed and flowed but, wherever they are in the supply chain, businesses feel that pressure every day. Despite this, companies with well-run supply chains are able to manage the pressure and find growth.”
Justin Sherrard, global strategist, F&A supply chains in Rabobank’s food and agri-business research team, identifies a number of pressures on agricultural and food supply chains, all of which have an impact on how organisations operate.
“In developed markets, such as the UK, retailers talk about low prices or value for money in every promotional campaign,” says Mr Sherrard. This emphasis on cost spreads all the way down the chain to manufacturers and farmers, he says.
In recent years the pressure to improve cash flow has made life difficult for suppliers, and this has been exacerbated recently by the trend to new ownership structures in F&A. Mr Sherrard gives the example of the recent merger between Kraft Foods and Heinz. “This is a great example of where a new owner comes in, strips out a lot of cost and tries to make profit that way,” he says. “In that process, the pressure to maintain positive cash flow becomes evermore demanding.”
Linked with the issue of cash flow, the pressure is on businesses throughout the supply chain to avoid tying up cash in stock, yet still be able to cope with the flexibility required by retailers and customers.
The rapid developing of online food shopping has made this even more important. “You have all sorts of different demands around flexibility, stocking levels and delivery models,” he explains. “Everyone wants flexibility, but no one wants to hold the inventory that enables this flexibility.”
Globally and locally there are exciting opportunities for companies that can adjust their supply-chain models
The food and agricultural sector is regularly hit by external events, whether that’s disruption to supply, or volatility in commodity prices or currency exchange rates. “You also see external shocks in the form of trade barriers with governments opening or closing borders to particular trades or changing tariff structures,” says Mr Sherrard.
Shocks can come in the form of food safety and product integrity issues, which can have a huge impact on customer behaviour, as seen in the horse meat scandal and, more recently, the substitution of cumin in the United States by ground peanut meal.
Despite these pressures on their supply chains, companies in F&A remain focused on growth and with good reason – globally and locally there are exciting opportunities for companies that can adjust their supply-chain models.
There are a variety of ways in which organisations can strengthen their supply chains and derive competitive advantage as a result. “The first is to accept complexity,” says Mr Sherrard. “Supply chains are no longer simple linear constructions that link a single producer to a food retailer. They are complex webs of interactions, involving producers, processers, traders, distributors and retailers.” Organisations that manage accordingly will be at an advantage, he says.
Another focus should be building mutually valuable partnerships with suppliers and partners, moving away from a sole focus on price and focusing instead on creating value.
The logical conclusion of this is a relationship which is not only effective but can deliver innovation. “Innovation is a litmus test of the strength of buyer-supplier relationships,” says Mr Sherrard. “When buyers and suppliers start doing things differently – to cut costs, enter new markets or reduce risk – you really know they have harnessed co-operation to achieve growth.”
A particular focus of buyer-supplier co-operation should be improving inventory management, he adds. “A better appreciation of who is carrying risk and how they can be rewarded for that together really starts to change things,” says Mr Sherrard. “You’ve got to be careful how much pressure or risk you’re asking farmers, for example, to bear.”
Those organisations which accept volatility and build effective relationships with partners in the supply chain should be able to not only survive but thrive. “Ultimately companies are looking for efficiency gains, improved resilience, greater transparency and better margins,” he says. “Those getting this right are finding strong competitive advantage.”
Rabobank is the world’s leading financial services provider for the F&A sector – a role made possible in part by the bank’s extensive knowledge of the many links in the food chain, such as the stresses and the solutions in the supply base.
“Feeding nine billion people requires a vision and solutions that do not stop at the gate of a farm or the turnstiles of a supermarket,” Ms Schiavini concludes. “Accordingly, the Banking for Food vision of Rabobank encompasses all links in the food chains, in and outside the Netherlands, from farmers and horticulturists and their suppliers to businesses processing agricultural products, and transport businesses and supermarket chains.”
Some organisations in the food and agricultural sector are already combining to help devise more effective and collaborative supply chains, says Justin Sherrard, global strategist, food and agricultural supply chains, at specialist food and agricultural bank Rabobank.
He gives the example of a partnership between the retailer Morrisons, dairy processor Arla Foods and genetics business Cogent International, where Morrisons has helped to introduce different genetics into a dairy herd, to help eliminate disease and improve the productivity of animals. “Everyone is getting something out of it, all the way through to Morrisons, which benefits from improved access to supply and better quality milk,” he says.
Other examples include Sainsbury’s, which is working closely with smallholder farmers to help secure supply of commodities, such as coffee, cocoa and tea, and family firm Mars, which is developing similar relationships with farmers in West Africa.
For more information visit far.rabobank.com