There is a need for more efficient supply chain logistics, technologies, and systems to help alleviate the economic and social ills associated with rising and volatile food prices in emerging markets and less-developed countries.
Over the last three decades U.S. and world food prices have trended upward while becoming increasingly volatile (see Figure 1). This trend highlights the need for more efficient supply chain logistics, technologies, and systems to help alleviate the economic and social ills associated with rising and volatile food prices in emerging markets and less-developed countries.
Why food prices are rising
Several key factors have been behind the rise in average global food prices since 2004. These include misguided macroeconomic, monetary, and other government policies. For example, policies that promote the use of biofuels (such as ethanol, which typically is made from corn) have created new links between food and energy supply.
It is generally believed when world oil prices reach the US $70 to $80 per-barrel range, biofuels production becomes more competitive and several types of grains are diverted to the production of biofuels. According to the U.S. Energy Information Agency and the U.S. Department of Agriculture, in 2011 the United States produced nearly 14 billion gallons of fuel ethanol from approximately 5 billion bushels of corn, or approximately 39 percent of national production. Similarly, in 2011 Brazil produced about 6.5 billion gallons of ethanol from approximately 325 million metric tons of sugar cane, or 50 percent of national production, according to IHS Agricultural Services estimates.
There is a downside to that shift: the diversion of a substantial amount of corn production toward fuel has led to shortfalls in the production of corn-based food staples. Moreover, because grain's byproducts are major ingredients of livestock feed and such food necessities as bread and flour, the large-scale use of grain for biofuels has contributed to malnutrition in some less-developed nations. On the upside, second-generation fuel sources like ethanol have made modest progress in contributing to global fuel supplies. But they have yet to become a significant factor, as evidenced by the fact that Brazilian and U.S. fuel ethanol production combined accounted for approximately 90 percent of global ethanol production in 2011.
In addition to government policies, other important elements contributing to rising food prices include a growing middle class in emerging markets, rising world urbanization rates, sensitivity to bad harvests and supply chain disruptions in agricultural markets, and higher costs for fuel and fertilizer.
Improved living standards in many parts of the world, including Brazil, Russia, India, and China (BRIC), are raising the demand for fuels and food (see Figure 2). Moreover, as people become wealthier, they consume more meat. Increased demand for meat, in turn, affects overall food costs.
For one thing, it boosts demand for livestock feed, which is mostly grain. According to some estimates, it takes approximately 10 calories of grain to produce one calorie of meat. For another, more deliveries of meat to consumer markets means greater demand for expensive fuel. Adding to the upward pressure on food prices is the combination of 1) rising food transportation costs due to higher petroleum and other energy prices, and 2) rising fertilizer prices caused by increasing demand for products that enable the higher grain yields required to meet the ever-increasing demand for meat.
The German statistician Ernst Engel (1821-1896) discovered that as income increases, the percentage of household income spent on food declines, even though the total amount spent on food actually rises. Thus, as countries transition to more-developed economies, households tend to dedicate a smaller share of their budgets to food and other necessities—even though the absolute level of food consumption increases.
Over the last decade, American consumers spent a smaller percentage of their household incomes on food than consumers in any other country. And although the North American and Western European middle classes are struggling with declining median household income (adjusted for inflation), their counterparts in many emerging markets have made consistent income gains over the last decade. India in particular has made tremendous strides on this front. In 2000, the average Indian family spent 41.7 percent of its outlays on food; 10 years later, this share had decreased to 27.7 percent. During the same period, Chinese consumers' spending on food as a percentage of total outlays dropped less dramatically, from 29.2 percent in 2000 to 22.3 percent in 2010. As predicted by Ernst Engel, the total dollar amount of food spending per capita has increased while the percentage of household outlays devoted to food has decreased.
Parallel with the growth of the middle class in many large countries, the global urbanization rate for the first time in history surpassed the 50-percent mark sometime between 2001 and 2004. As urbanization rates increase, the pressure on farm productivity and supply chain efficiency increases as well.
The food supply chain: A call to action
Global and domestic food supply chains are complex and heterogeneous within or among countries. In general, agriculture, fisheries, and aquaculture are the furthest upstream; manufacturing and packaging of processed food occupy an intermediate space, with trade (wholesalers and retailers) and services (such as restaurants) further downstream. There have been considerable gains in recent years in emerging countries related to their food-supply networks. Recent advances in Internet and mobile communications have greatly enabled market mechanisms to improve food supply chain dynamics and assist in the monitoring and mitigation of food-price volatility.
There are several areas that can help many emerging countries improve the delivery of food to end users, either domestically or globally, thus reducing food-price volatility while simultaneously increasing supply:
Supply chain expertise, such as efficient consumer response (ECR), that assists the entire food supply chain in monitoring consumers closely while providing food at a lower price;
Implementation of food safety, hygiene, and quality standards;
Government infrastructure projects that promote efficiencies in delivering food to domestic or global end markets;
"Cold" logistical and supply chain systems to improve the quality of perishables during transportation; and
Opening up domestic markets to Western products and multibrand retailers.
Accelerating global economic integration over the last 30 years continues to elevate per-capita incomes in the developing world. Consistent with economic theory, as incomes rise the share of expenditures dedicated to necessary goods, such as food, follows a path of continuous decline while the absolute levels of consumption continue to rise. In turn, increases in food consumption, in conjunction with global financial and macroeconomic policies, have been putting increasing pressure on the price of food staples, inputs to meat production, biofuels, and other energy components. Consequently, the importance of efficient supply chain mechanisms for delivering food within and across borders has become more important than ever. To ensure efficient distribution of food supplies, supply chain managers worldwide will be faced with unique challenges and opportunities to ensure that consumers receive an adequate supply of food to meet their needs, thus helping to sustain, nourish, and further grow the global economy.
We may be living in a world full of technology, but strategy and focus remain the top priorities when it comes to managing a business and its supply chains. So says Roberto Isaias, executive vice president and chief supply chain officer for toy manufacturing and entertainment company Mattel.
Isaias emphasized the point during his keynote presentation on day two of EDGE 2024, a supply chain conference sponsored by the Council of Supply Chain Management Professionals (CSCMP), being held in Nashville this week. He described Mattel’s journey to transform its business and its supply chain amid surging demand for Barbie-branded items following the success of the Barbie movie last year.
Isaias discussed the transformation on two fronts: Commercially, through the revitalization of its brands that began years ago, and logistically, through a supply chain strategy focused on effectiveness and cost leadership.
Today, Mattel makes millions of toys and is steadily moving beyond the toy aisle with its franchise mindset, becoming a major entertainment company as well. Isaias told the audience Mattel currently has two films in production and 14 others in development, and its television studios business has 13 series’ in production with more than 35 in development.
And as for those supply chain gains? The company has saved millions, increased productivity, and improved profit margins—even amid cost increases and inflation. For the full story on Mattel’s transformation, see our feature story from this past summer.
And Isaias left the EDGE audience with five lessons he learned from his experience in leading change:
The business is our boss;
Don’t delegate complexity;
Take bad news well;
Be fair and take care of people;
Lead the execution.
CSCMP’s EDGE 2024 conference runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Convention Center.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.