InformationWeek

Food Processing:IT Helps Integrate The Food Chain

By Philip J. Gill
Issue date: Sept. 9, 1996

ew industries are under-going as profound a change as food and beverage processing. This sector's decades-old business model is changing dramatically. The agent of this change--Efficient Customer Response (ECR)--is having widespread influence up and down the supply chain, not just in the way companies do business, but also in the information systems that support these busi nesses.

Food and beverage processors use ECR to provide better customer service and improve responsiveness. ECR helps them monitor customers' warehouses and point-of-sale retail data, and automatically supply goods according to preset thresholds. Also, ECR lets food and beverage processors give retailers and wholesalers the food and beverage products they want, when they want them, and with the packaging they prefer. In some ways, ECR is akin to the just-in-time approach used in discrete manufacturing industries, applied to the distribution side of the manufacturing house.

"The whole food and beverage industry is challenged by the implementation of ECR," says Rich Sherman, director of supply-chain management research at Advanced Manufacturing Research, a Cambridge, Mass., consulting firm. "It's driving the need for integrated supply-chain management."

'Wake-Up Call'
In response to an industrywide movement to ECR, the IS department of Superval u Inc., a $16 billion-plus food wholesaler with a 300-store grocery retail chain, is leaving no stone unturned. "ECR was a wake-up call," says H.S. "Skip" Smith, Supervalu's senior VP of IS in the company's Eden Prairie, Minn., headquarters. "We're taking a look at the company from top to bottom and redoing everything. Every single system we have is going to bereplaced, rewritten, or modified."

In the past, the business model for the food and beverage processing industry centered on the manufacturers. They set manufacturing priorities and targets based on the demand they anticipated from retail grocery-store chains and wholesalers. Based on these assumptions, food and beverage processors ordered raw materials--mostly commodities such as cornstarch, flour, sugar, cocoa, and so on--that go into pro- cessed goods.

The processors packaged and stored those foodstuffs and beverages in their warehouses, then waited for customer orders to come rolling in. At that point, processors shipped the goods to the cu stomers' warehouses. In case their forecasts were wrong, food processors built warehouses of inventory to guard against shortfalls from unusually high demand. "Food processors used to build inventory to protect themselves from uncertain forecasts," says Stanley Elbaum, chief operating officer of Benchmarking Partners, a Cambridge, Mass., IT consulting firm.

Today it's the customers--food industry retailers and wholesalers--who are in charge. They expect and demand that food and beverage processors track their needs and automatically supply goods according to preset thresholds. Many retailers and wholesalers also expect food processors to warehouse inventory so that they don't have to, ship goods directly to retail stores rather than warehouses, and in some cases prepackage shipping pallets with goods from several product lines. These demands are being felt all the way up the supply chain--from the food and beverage processor's distribution, logistics, packaging, and manufacturing operations all the way to the commodity suppliers.

Successful implementation of ECR has two payoffs. The first is higher customer satisfaction and responsive. But the bigger payoff is reduced waste and excess inventories. That, in turn, reduces costs for both commodities and warehouse space.

That's important, says Advanced Manufacturing Research's Sherman, because, he adds, "by the time the product is ordered, the food processor has already incurred 85% to 90% of the costs."

Food and beverage processors are deploying a series of key technologies to meet the demands of industry ECR initiatives, says Cynthia Moore, a senior analyst at Dataquest Inc., a research firm in Westboro, Mass. These include enterprisewide, integrated, client-server manufacturing and distribution systems, coupled with electronic data interchange for electronic purchasing; bar-coding for collecting retail sales data; relational database management systems for collecting inventory, sales, shipping, and customer information, and building data warehouses ; and fourth-generation languages for customizing in-house systems.

Structural Changes
Elbaum of Benchmarking Partners says the biggest issue food processors face is converting their installed base of disjointed point solutions--applications and systems that tackle a single business task or process--into integrated top-to-bottom supply-chain management systems.

Elbaum says merely integrating their own systems won't be enough: food and beverage processors need to extend that integration beyond the confines of their own business operations and processes. At the front end, that means processors need to establish links between their internal distribution, warehouse, logistics, and manufacturing systems with the purchasing and ordering systems of their wholesalers and retailers.

At the back end, food and beverage processors need to extend links from their own inventory and ordering systems to the ordering and purchasing systems of their suppliers--the companies that make and market the pack aging and basic commodities that go into processed foods.

One company working toward that goal is Anheuser-Busch Cos., the nation's largest brewer. The St. Louis company is more than halfway through converting its core operational applications from legacy systems to an integrated client-server environment. "We went live with two modules--general ledger and accounts payable--on January 1st," says Bob Mason, VP and CIO of Anheuser-Busch. "We're currently working on three other modules--logistics, purchasing, and human resources--that will go live on Jan. 1, 1997."

Mason says those applications will integrate Anheuser-Busch operations, but the company will continue to rely on EDI and the value-added networks that typically carry the transactions that interact with its wholesalers. The company does not sell directly to retailers.

More Net Usage
In the future, however, Internet and intranet technologies are likely to take on an added, complementary role for the 1,000 or so companies Anheuse r-Busch considers its key partners and suppliers, he says. "We're running an intranet that we use to exchange company information internally," Mason explains. "We think we will eventually extend that to our suppliers as well."

But most food and beverage processors aren't set up for across-the-board integrated supply-chain management systems, analysts say. "The structure of these companies generally doesn't easily allow for the integration of disparate business operations and units," says Benchmarking Partners' Elbaum.

Elbaum and others note that most food-processing companies are not run as a single company, but as a series of independent operating units organized around product lines or brand names.

In most food-processing companies, these operating units are so independent that they each have an IT organization that sets its own goals and objectives. So, instead of a complete reengineering of the entire company, says Elbaum, "they start one operating unit at a time."

That is precisely what i s happening at H.J. Heinz Co. in Pittsburgh, the worldwide food products conglomerate probably best known for its ketchup. Heinz also owns Ore-Ida Inc., one of the world's largest makers of frozen potato products, and tuna packager StarKist Foods Inc. In fact, Heinz has 16 operating companies worldwide, some of which comprise two or more operating companies or business units.

Philip Lichtenfels, the senior executive consultant who oversees all of Heinz's data center and data communications operations, says the IT department in each unit sets the technological priorities that best meet the needs of its particular business' competitive environment. Such independence permeates the IT culture at Heinz. "Every year," he says, "each IT organization does a strategic plan that reflects the business needs of that operating unit."

And that's not going to change. IT executives in the food and beverage processing industry say the biggest challenges they face are not structural or technological. Indeed, says Licht enfels, "there's probably too much technology out there."

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